[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Proposed Rules]
[Pages 96704-96990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29483]



[[Page 96703]]

Vol. 81

Friday,

No. 251

December 30, 2016

Part III

Book 2 of 2 Books

Pages 96703-97110





 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. 81 , No. 251 / Friday, December 30, 2016 / 
Proposed Rules  

[[Page 96704]]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 15, 17, 19, 37, 38, 140, 150 and 151

RIN 3038-AD99


Position Limits for Derivatives

AGENCY: Commodity Futures Trading Commission.

ACTION: Reproposal.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or 
``CFTC'') is reproposing rules to amend part 150 of the Commission's 
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 reproposal would establish speculative position limits for 25 
exempt and agricultural commodity futures and option contracts, and 
physical commodity swaps that are ``economically equivalent'' to such 
contracts (as such term is used in section 4a(a)(5) of the CEA). In 
connection with establishing these limits, the Commission is 
reproposing 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 is also reproposing appendices to 
part 150 that would provide guidance on risk management exemptions for 
commodity derivative contracts in excluded commodities permitted under 
the revised 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 definition of location basis 
contract; describe and analyze fourteen fact patterns that would 
satisfy the reproposed definition of bona fide hedging position; and 
present the reproposed 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. Furthermore, the 
Commission is reproposing processes for DCMs and SEFs to recognize 
certain positions in commodity derivative contracts as non-enumerated 
bona fide hedges or enumerated anticipatory bona fide hedges, as well 
as to exempt from position limits certain spread positions, in each 
case subject to Commission review. Separately, the Commission is 
reproposing to delay for DCMs and SEFs that lack access to sufficient 
swap position information the requirement to establish and monitor 
position limits on swaps.

DATES: Comments must be received on or before February 28, 2017.

ADDRESSES: You may submit comments, identified by RIN number 3038-AD99, 
by any of the following methods:
     CFTC 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 
http://www.cftc.gov. You should submit only information that you wish 
to make available publicly. If you wish the Commission to consider 
information that may be exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the procedures established in 
CFTC regulations at 17 CFR part 145.
    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, 
(202) 418-5452, [email protected], Riva Spear Adriance, Senior Special 
Counsel, (202) 418-5494, [email protected], Hannah Ropp, Surveillance 
Analyst, 202-418-5228, [email protected], or Steven Benton, Industry 
Economist, (202) 418-5617, [email protected], Division of Market 
Oversight; or Lee Ann Duffy, Assistant General Counsel, 202-418-6763, 
[email protected], Office of General Counsel, in each case at the 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

Table of Contents

I. Background
    A. Introduction
    B. The Commission Construes CEA Section 4a(a) To Mandate That 
the Commission Impose Position Limits
    C. Necessity Finding
II. Proposed Compliance Date
III. Reproposed Rules
    A. Sec.  150.1--Definitions
    B. Sec.  150.2--Position limits
    C. Sec.  150.3--Exemptions
    D. Sec.  150.5--Exchange-set speculative position limits and 
Parts 37 and 38
    E. Part 19--Reports by persons holding bona fide hedging 
positions pursuant to Sec.  150.1 of this chapter and by merchants 
and dealers in cotton
    F. Sec.  150.7--Reporting requirements for anticipatory hedging 
positions
    G. Sec.  150.9--Process for recognition of positions as non-
enumerated bona fide hedging positions
    H. Sec.  150.10--Process for designated contract market or swap 
execution facility exemption from position limits for certain spread 
positions
    I. Sec.  150.11--Process for recognition of positions as bona 
fide hedging positions for unfilled anticipated requirements, unsold 
anticipated production, anticipated royalties, anticipated services 
contract payments or receipts, or anticipatory cross-commodity hedge 
positions
    J. Miscellaneous regulatory amendments
    1. Proposed Sec.  150.6--Ongoing responsibility of DCMs and SEFs
    2. Proposed Sec.  150.8--Severability
    3. Part 15--Reports--General provisions
    4. Part 17--Reports by reporting markets, futures commission 
merchants, clearing members, and foreign brokers
    5. Part 151--Position limits for futures and swaps, Commission 
Regulation 1.47 and Commission Regulation 1.48--Removal
IV. Related Matters
    A. Cost-Benefit Considerations
    B. Paperwork Reduction Act
    C. Regulatory Flexibility Act
V. Appendices
    A. Appendix A--Review of Economic Studies
    B. Appendix B--List of Comment Letters Cited in this Rulemaking

I. Background

A. Introduction

    The Commission has long established and enforced speculative 
position limits for futures and options contracts on various 
agricultural commodities as authorized by the Commodity Exchange

[[Page 96705]]

Act (``CEA'').\1\ The part 150 position limits regime \2\ generally 
includes three 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, individual month, and all months 
combined,\3\ (2) exemptions for positions that constitute bona fide 
hedging transactions and certain other types of transactions,\4\ and 
(3) rules to determine which accounts and positions a person must 
aggregate for the purpose of determining compliance with the position 
limit levels.\5\
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    \1\ 7 U.S.C. 1 et seq.
    \2\ See 17 CFR part 150. Part 150 of the Commission's 
regulations establishes federal position limits (that is, position 
limits established by the Commission, as opposed to exchange-set 
limits) on certain enumerated agricultural contracts; the listed 
commodities are referred to as enumerated agricultural commodities. 
The position limits on these agricultural contracts are referred to 
as ``legacy'' limits because these contracts on agricultural 
commodities have been subject to federal position limits for 
decades. See also Position Limits for Derivatives, 78 FR 75680 at 
75723, n. 370 and accompanying text (Dec. 12, 2013) (``December 2013 
Position Limits Proposal'').
    \3\ See 17 CFR 150.2.
    \4\ See 17 CFR 150.3.
    \5\ See 17 CFR 150.4.
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    In late 2013, the CFTC proposed to amend its part 150 regulations 
governing speculative position limits.\6\ These proposed amendments 
were intended to conform the requirements of part 150 to particular 
changes to the CEA introduced by the Wall Street Transparency and 
Accountability Act of 2010 (''Dodd-Frank Act'').\7\ The proposed 
amendments included the adoption of federal position limits for 28 
exempt and agricultural commodity futures and option contracts and 
swaps that are ``economically equivalent'' to such contracts.\8\ In 
addition, the Commission proposed to require that DCMs and SEFs that 
are trading facilities (collectively, ``exchanges'') establish 
exchange-set limits on such futures, options and swaps contracts.\9\ 
Further, the Commission proposed to (i) revise the definition of bona 
fide hedging position (which includes a general definition with 
requirements applicable to all hedges, as well as an enumerated list of 
bona fide hedges),\10\ (ii) revise the process for market participants 
to request recognition of certain types of positions as bona fide 
hedges, including anticipatory hedges and hedges not specifically 
enumerated in the proposed bona fide hedging definition; \11\ and (iii) 
revise the exemptions from position limits for transactions normally 
known to the trade as spreads.\12\
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    \6\ See generally December 2013 Positions Limits Proposal. In 
the December 2013 Position Limits Proposal, the Commission proposed 
to amend its position limits to also encompass 28 exempt and 
agricultural commodity futures and options contracts and the 
physical commodity swaps that are economically equivalent to such 
contracts.
    \7\ The Commission previously had issued proposed and final 
rules in 2011 to implement the provisions of the Dodd-Frank Act 
regarding position limits and the bona fide hedge definition. 
Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 2011); 
Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 18, 2011). 
A September 28, 2012 order of the U.S. District Court for the 
District of Columbia vacated the November 18, 2011 rule, with the 
exception of the rule's amendments to 17 CFR 150.2. International 
Swaps and Derivatives Association v. United States Commodity Futures 
Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 2012). See generally 
the materials and links on the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/DF_26_PosLimits/index.htm. The Commission issued the December 2013 Position Limits 
Proposal, among other reasons, to respond to the District Court's 
decision in ISDA v. CFTC. See generally the materials and links on 
the Commission's Web site at http://www.cftc.gov/LawRegulation/DoddFrankAct/Rulemakings/PositionLimitsforDerivatives/index.htm.
    \8\ See CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5) (providing that 
the Commission establish limits on economically equivalent 
contracts); CEA section 4a(a)(6), 7 U.S.C. 6a(a)(6) (directing the 
Commission to establish aggregate position limits on futures, 
options, economically equivalent swaps, and certain foreign board of 
trade contracts in agricultural and exempt commodities 
(collectively, ``referenced contracts'')). See December 2013 
Position Limits Proposal, 78 FR at 75825. Under the December 2013 
Position Limits Proposal, ``referenced contracts'' would have been 
defined as futures, options, economically equivalent swaps, and 
certain foreign board of trade contracts, in physical commodities, 
and been subject to the proposed federal position limits. The 
Commission proposed that federal position limits would apply to 
referenced contracts, whether futures or swaps, regardless of where 
the futures or swaps positions were established. See December 2013 
Positions Limits Proposal, at 78 FR 75826 (proposed Sec.  150.2).
    \9\ See December 2013 Position Limits Proposal, 78 FR at 75754-
8. Consistent with DCM Core Principle 5 and SEF Core Principle 6, 
the Commission proposed at Sec.  150.5(a)(1) that for any commodity 
derivative contract that is subject to a speculative position limit 
under Sec.  150.2, a DCM or SEF that is a trading facility shall set 
a speculative position limit no higher than the level specified in 
Sec.  150.2.
    \10\ See December 2013 Position Limits Proposal, 78 FR at 75706-
11, 75713-18.
    \11\ See December 2013 Position Limits Proposal, 78 FR at 75718.
    \12\ See December 2013 Position Limits Proposal, 78 FR at 75735-
6. CEA section 4a(a)(1), 7 U.S.C. 6a(a)(1), permits the Commission 
to exempt transactions normally known to the trade as ``spreads'' 
from federal position limits.
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    On June 13, 2016, the Commission published a supplemental proposal 
to its December 2013 Position Limits rulemaking.\13\ The supplemental 
proposal included revisions and additions to regulations and guidance 
proposed in 2013 concerning speculative position limits in response to 
comments received on that proposal, and alternative processes for DCMs 
and SEFs to recognize certain positions in commodity derivative 
contracts as non-enumerated bona fide hedges or enumerated anticipatory 
bona fide hedges, as well as to exempt from federal position limits 
certain spread positions, in each case subject to Commission review. In 
this regard, under the 2016 Supplemental Position Limits Proposal, 
certain of the regulations proposed in 2013 regarding exemptions from 
federal position limits and exchange-set position limits would be 
amended to take into account the alternative processes. In connection 
with those proposed changes, the Commission proposed to further amend 
certain relevant definitions, including to clearly define the general 
definition of bona fide hedging for physical commodities under the 
standards in CEA section 4a(c). Separately, the Commission proposed to 
delay for DCMs and SEFs that lack access to sufficient swap position 
information the requirement to establish and monitor position limits on 
swaps at this time.
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    \13\ Position Limits for Derivatives: Certain Exemptions and 
Guidance, 81 FR 38458 (June 13, 2016) (``2016 Supplemental Position 
Limits Proposal'').
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    After review of the comments responding to both the December 2013 
Position Limits Proposal and the 2016 Supplemental Position Limits 
Proposal, the Commission, in consideration of those comments, is now 
issuing a reproposal (``Reproposal''). The Commission invites comments 
on all aspects of this Reproposal.

B. The Commission Preliminarily Construes CEA Section 4a(a) To Mandate 
That the Commission Impose Position Limits

1. Introduction
a. The History of Position Limits and the 2011 Position Limits Rule
    As part of the Dodd-Frank Act, Congress amended the CEA's position 
limits provision, which since 1936 has authorized the Commission (and 
its predecessor) to impose limits on speculative positions to prevent 
the harms caused by excessive speculation. Prior to the Dodd-Frank Act, 
CEA section 4a(a) stated that for the purpose of diminishing, 
eliminating or preventing specified burdens on interstate commerce, the 
Commission shall, from time to time, after due notice and an 
opportunity for hearing, by rule, regulation, or order, proclaim and 
fix such limits on the amounts of trading which may be done or 
positions which may be held by any person under contracts of sale of 
such commodity for future delivery on or subject to the rules of any 
contract market as the Commission finds are necessary to

[[Page 96706]]

diminish, eliminate, or prevent such burden.\14\
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    \14\ 7 U.S.C. 6a(a) (2006).
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    In the Dodd-Frank Act, Congress renumbered a modified version of 
CEA section 4a(a) as section 4a(a)(1) and added, among other 
provisions, CEA section 4a(a)(2), captioned ``Establishment of 
Limitations,'' which provides that in accordance with the standards set 
forth in CEA section 4a(a)(1), the Commission shall establish limits on 
the amount of positions, as appropriate, other than bona fide hedge 
positions, that may be held by any person. CEA section 4a(a)(2) further 
provides that for exempt commodities (energy and metals), the limits 
required under CEA section 4a(a)(2) shall be established within 180 
days after the date of the enactment of CEA section 4a(a)(2); for 
agricultural commodities, the limits required under CEA section 
4a(a)(2) shall be established within 270 days after the date of the 
enactment of CEA section 4a(a)(2).\15\
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    \15\ CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2). The Commission 
notes that it uses the defined term ``bona fide hedging position'' 
throughout part 150, rather than ``bona fide hedge positions'' found 
in CEA section 4a(a)(2). CEA section 4a(c)(1) uses the term ``bona 
fide hedging transactions or positions'' and CEA section 4a(c)(2) 
uses the term ``bona fide hedging transaction or position.'' The 
Commission interprets all of these terms to mean the same. It should 
be noted that the Commission previously imposed transaction volume 
limits on ``the amounts of trading which may be done'' as authorized 
by CEA section 4a(a)(1), but removed those transaction volume 
limits. Elimination of Daily Speculative Trading Limits, 44 FR 7124, 
7127 (Feb. 6, 1979).
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    These and other changes to CEA section 4a(a) are described in more 
detail below.
    Pursuant to these amendments, the Commission adopted a position 
limits rule in 2011 (``2011 Position Limits Rule'') in a new part 
151.\16\ In the 2011 Position Limits Rule, the Commission imposed, in 
new part 151, speculative limits in the spot-month and non-spot-months 
on 28 physical commodity derivatives ``of particular significance to 
interstate commerce.'' \17\ Under the 2011 Position Limits Rule, part 
151 used formulas for calculating limit levels that are similar to the 
formulas used to calculate previous Commission- and exchange-set 
position limits.\18\ The 2011 Position Limits Rule contained provisions 
in part 151 that implemented the statutory exemption for bona fide 
hedging.\19\ It also provided account aggregation standards to 
determine which positions to attribute to a particular market 
participant.\20\ Because it interpreted the Dodd-Frank Act as mandating 
position limits, the Commission did not make an independent threshold 
determination that position limits are necessary to accomplish the 
purposes set forth in the statute. The Commission explained:
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    \16\ Position Limits for Futures and Swaps, 76 FR 71626 (Nov. 
18, 2011). As finalized, part 151 replaced part 150.
    \17\ Id. at 71665; see also id at 716629-30.
    \18\ Id. at 71632-33 (transition), 71668-70 (spot-month limit), 
71671 (non-spot month limit).
    \19\ Id. at 71643-51.
    \20\ Id. at 71651-55. A central feature of any position limits 
regime is determining which positions to attribute to a particular 
trader. The CEA requires the Commission to attribute to a person all 
positions that the person holds or trades, as well as positions held 
or traded by anyone else that such person directly or indirectly 
controls. 7 U.S.C. 6a(a)(1). This is referred to as account 
aggregation. In addition to account aggregation, Congress required 
the Commission to set limits on all derivative positions in the same 
underlying commodity that a trader may hold or control across all 
derivative exchanges. 7 U.S.C. 6a(a)(6). The Commission refers to 
this as position aggregation.

Congress directed the Commission to impose position limits and to do 
so expeditiously. Section 4a(a)(2)(B) states that the limits for 
physical commodity futures and options contracts ``shall'' be 
established within the specified timeframes, and section 4a(a)(2)(5) 
states that the limits for economically equivalent swaps ``shall'' 
be established concurrently with the limits required by section 
4a(a)(2). The congressional directive that the Commission set 
position limits is further reflected in the repeated references to 
the limits ``required'' under section 4a(a)(2)(A).\21\
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    \21\ Position Limits for Futures and Swaps, 76 FR at 71626-628.

    ISDA and SIFMA sued the Commission to vacate part 151 on the basis 
(among others) that, in their view, CEA section 4a(a) clearly required 
the Commission to make an antecedent necessity finding.
b. The District Court Opinion
    As set forth in the Commission's December 2013 Position Limits 
Proposal,\22\ the district court in ISDA v. CFTC found that, on one 
hand, CEA section 4a(a)(1) ``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 
[CEA section 4a(a)(1)].'' \23\ On the other hand, the court found that 
the Dodd-Frank Act amendments to CEA section 4a(a) rendered section 
4a(a)(1) ambiguous with respect to whether such findings are required 
for the position limits described in CEA section 4a(a)(2)--futures 
contracts, options, and certain swaps on agricultural and exempt 
commodities.\24\
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    \22\ International Swaps and Derivatives Ass'n v. United States 
Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259 (D.D.C. 2012).
    \23\ Id. at 270.
    \24\ Id. at 281.
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    The court's determination in ISDA v. CFTC that CEA sections 
4a(a)(1) and (2), read together, are ambiguous focused on the opening 
phrase of subsection (A)--``[i]n accordance with the standards set 
forth in [CEA section 4a(a)(1)].'' The court held that the term 
``standards'' in CEA section 4a(a)(2) was ambiguous as to whether it 
referred to the requirement in CEA section 4a(a)(1) that the Commission 
impose position limits only ``as [it] finds are necessary to diminish, 
eliminate, or prevent'' an unnecessary burden on interstate 
commerce.\25\ If not, ``standards'' would refer to the aggregation and 
flexibility standards stated in CEA section 4a(a)(1) by which position 
limits are to be implemented. Accordingly, the court rejected both (1) 
the Commission's contention that CEA section 4a(a) as a whole 
unambiguously mandated the imposition of position limits without the 
Commission finding independently that they are necessary; and (2) the 
plaintiffs' contention that CEA section 4a(a) unambiguously required 
the Commission to make such findings before the imposition of position 
limits.\26\ The court stated that because the Commission had 
incorrectly found CEA section 4a(a) unambiguous, it could not defer to 
any interpretation by the Commission 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.' '' \27\ 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.'' \28\ The court instructed that the Commission must apply 
its experience and expertise and cautioned that, in resolving the 
ambiguity in CEA section 4a(a), `` `it is incumbent upon the agency not 
to rest simply on its parsing of the statutory language.' '' \29\ The 
Commission does not rest simply on parsing the statutory language, but 
any interpretation necessarily begins with the text, which is described 
in the next section.
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    \25\ 887 F. Supp. 2d at 274-76.
    \26\ 887 F. Supp. 2d at 279-80.
    \27\ 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).
    \28\ 887 F. Supp. 2d at 282.
    \29\ Id. at n.7, quoting PDK Labs. Inc. v. DEA, 362 F.3d 786, 
797 (D.C. Cir. 2004).
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2. The Statutory Framework for Position Limits
    Before the Dodd-Frank Act, what was then CEA section 4a(a) 
authorized the

[[Page 96707]]

Commission to set limits on futures for any exchange-traded contract 
for future delivery of any commodity ``as the Commission finds are 
necessary to diminish, eliminate, or prevent [the] burden'' of 
``[e]xcessive speculation'' ``causing sudden or unreasonable 
fluctuations or unwarranted changes in the price of such commodity.'' 7 
U.S.C. 6a(a) (2009 Supp.).\30\ CEA section 4a(a) also required the 
Commission to follow certain criteria for aggregating limits once it 
made that determination. And the Commission was authorized to impose 
limits flexibly, depending on the commodity, delivery month, and other 
factors.\31\
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    \30\ Under the heading of ``Burden on interstate commerce; 
trading or position limits,'' 7 U.S.C. 6a(a) (2006) provided that 
excessive speculation in any commodity under contracts of sale of 
such commodity for future delivery made on or subject to the rules 
of contract markets or derivatives transaction execution facilities, 
or on electronic trading facilities with respect to a significant 
price discovery contract 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. 
Title 7 U.S.C. 6a(a) (2006) further provided that for the purpose of 
diminishing, eliminating, or preventing such burden, the Commission 
shall, from time to time, after due notice and opportunity for 
hearing, by rule, regulation, or order, proclaim and fix such limits 
on the amounts of trading which may be done or positions which may 
be held by any person under contracts of sale of such commodity for 
future delivery on or subject to the rules of any contract market or 
derivatives transaction execution facility, or on an electronic 
trading facility with respect to a significant price discovery 
contract, as the Commission finds are necessary to diminish, 
eliminate, or prevent such burden. Additionally, 7 U.S.C. 6a(a) 
(2006) stated that in determining whether any person has exceeded 
such limits, the positions held and trading done by any persons 
directly or indirectly controlled by such person shall be included 
with the positions held and trading done by such person; and 
further, such limits upon positions and trading shall apply to 
positions held by, and trading done by, two or more persons acting 
pursuant to an expressed or implied agreement or understanding, the 
same as if the positions were held by, or the trading were done by, 
a single person. Title 7 U.S.C. 6a(a) (2006) further stated that 
nothing in that section shall be construed to prohibit the 
Commission from fixing different trading or position limits for 
different commodities, markets, futures, or delivery months, or for 
different number of days remaining until the last day of trading in 
a contract, or different trading limits for buying and selling 
operations, or different limits for the purposes of paragraphs (1) 
and (2) of subsection (b) of this section, or from exempting 
transactions normally known to the trade as ``spreads'' or 
``straddles'' or ``arbitrage'' or from fixing limits applying to 
such transactions or positions different from limits fixed for other 
transactions or positions. Moreover, 7 U.S.C. 6a(a) (2006) defined 
the word ``arbitrage'' in domestic markets to mean the same as a 
``spread'' or ``straddle.'' It also authorized the Commission to 
define the term ``international arbitrage.'' 7 U.S.C. 6a(a) (2006).
    \31\ There were four other subsections of CEA section 4a: CEA 
section 4a(b), which made it unlawful for a person to hold positions 
in excess of Commission-set limits; CEA section 4a(c), which 
exempted positions held under an exemption for bona fide hedges, CEA 
section 4a(d), which exempted positions held by or on behalf of the 
United States, and CEA section 4a(e), which authorized exchanges to 
set limits so long as they were not higher than Commission-set 
limits and made it unlawful for any person to hold limits in excess 
of exchange-set limits. (Exchange-set limits are also addressed 
elsewhere in the CEA. E.g., 7 U.S.C. 7(d)(5)).
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    The 2010 Dodd-Frank Act amendments to CEA section 4a(a) 
significantly expanded and altered it. The entirety of pre-Dodd-Frank 
CEA section 4a(a) became CEA section 4a(a)(1). Congress added six new 
subsections to CEA section 4a(a)--sections 4a(a)(2) through (7). And, 
outside of section 4a(a), Congress imposed a requirement that the 
Commission study the new limits it imposed and provide Congress with a 
report on their effects within one year of their imposition.\32\
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    \32\ 15 U.S.C. 8307(a). Some parts of pre Dodd-Frank CEA 
sections 4a(a) and 4a(b)-(e) were also amended by the Dodd-Frank 
Act. CEA section 4a(a) is now CEA section 4a(a)(1) and was modified 
primarily to add swaps, CEA section 4a(b) updates the names of 
applicable exchanges, and CEA section 4a(c) requires the Commission 
to promulgate a rule in accordance with a narrowed definition of 
bona fide hedging position as an exemption from position limits. 7 
U.S.C. 6a(a)(1), 6a(b)-(e).
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    The primary change at issue here was the addition of new CEA 
section 4a(a)(2), which addresses position limits on a specific class 
of commodity contracts, ``physical commodities other than excluded 
commodities'':
    CEA section 4a(a)(2)(A) provides that in accordance with the 
standards set forth in CEA section 4a(a)(1), with respect to physical 
commodities other than excluded commodities, the Commission 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 contracts of sale for future delivery or with respect to options on 
the contracts.
    CEA section 4a(a)(2)(B), in turn, provides that the limits 
``required'' under CEA section 4a(a)(2)(A) ``shall be established 
within 180 days after the date of enactment of this paragraph'' for 
``agricultural commodities'' (such as wheat or corn) and ``within 270 
days after the date of the enactment of this paragraph'' for ``exempt 
commodities'' (which include energy-related commodities like oil, as 
well as metals).\33\
---------------------------------------------------------------------------

    \33\ 7 U.S.C. 6a(a)(2)(B)(i) and (ii).
---------------------------------------------------------------------------

    The other new subsections of CEA section 4a(a) delineate the types 
of physical commodity derivatives to which the new limits apply, set 
forth criteria for the Commission to consider in determining the levels 
of the required limits, require the Commission to aggregate the limits 
across exchanges for equivalent derivatives, require the Commission to 
impose limits on swaps that are economically equivalent to the physical 
commodity futures and options subject to CEA section 4a(a)(2), and 
permit the Commission to grant exemptions from the position limits it 
must impose under the provision:
     Section 4a(a)(3) guides the Commission in setting 
appropriate limit levels by providing that the Commission shall 
consider whether the limit levels: (i) Diminish, eliminate, or prevent 
excessive speculation; (ii) deter and prevent market manipulation, 
squeezes, and corners; (iii) ensure sufficient market liquidity for 
bona fide hedgers; and (iv) ensure that the price discovery function of 
the underlying market is not disrupted;
     Section 4a(a)(4) sets forth criteria for determining which 
swaps perform a significant price discovery function for purposes of 
the position limits provisions;
     Section 4a(a)(5) requires the Commission to concurrently 
impose appropriate limit levels on physical commodity swaps that are 
economically equivalent to the futures and options for which limits are 
required;
     Section 4a(a)(6) requires the Commission to apply the 
required position limits on an aggregate basis to contracts based on 
the same underlying commodity across all exchanges; and
     Section a(a)(7) authorizes the Commission to grant 
exemptions from the position limits it imposes.\34\
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    \34\ 7 U.S.C. 6a(a)(3)-(7).

In a separate Dodd-Frank Act provision, Congress required that the 
Commission, in consultation with exchanges, ``shall conduct a study of 
the effects (if any) of the position limits imposed'' under CEA section 
4a(a)(2), that ``[w]ithin twelve months after the imposition of 
position limits'' the Commission ``shall'' submit a report of the 
results of the study to Congress, and that Congress ``shall'' hold 
hearings within 30 days of receipt of the report regarding its 
findings.\35\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 8307(a).
---------------------------------------------------------------------------

3. The Commission's Experience With Position Limits
    As explained in the December 2013 Position Limits Proposal, 
position limits have a long history as a tool to prevent unwarranted 
price movement and volatility, including but not limited to price 
swings caused by market manipulation.\36\ Physical commodities 
underlying futures contracts are, by definition, in finite supply, and 
so it is

[[Page 96708]]

possible to amass or dissipate an extremely large position in such a 
way as to interfere with the normal forces of supply and demand. 
Speculators (who have no commercial use for the underlying commodity) 
are considered differently from hedgers (who use commodity derivatives 
to hedge commercial risk). Speculators have been considered a greater 
source of risk because their trading is unconnected with underlying 
commercial activity, whereas a hedger's trading is calibrated to other 
business needs. In various statutory enactments, Congress has 
recognized both the utility of position limits and the need to treat 
speculators differently from hedgers.
---------------------------------------------------------------------------

    \36\ December 2013 Position Limits Proposal, 78 FR at 75685.
---------------------------------------------------------------------------

    Congress began regulating commodity derivatives in 1917, when 
Congress enacted emergency legislation to stabilize the U.S. grain 
markets during the First World War by suspending wheat futures and 
securing ``a voluntary limitation'' of 500,000 bushels on trading in 
corn futures.\37\ In 1922 Congress enacted the Grain Futures Act, in 
which it noted that ``sudden or unreasonable fluctuations in the prices 
of commodity futures . . . frequently occur as a result of speculation, 
manipulation, or control . . . .'' \38\ In 1936, Congress strengthened 
the government's authority by providing for limits on speculative 
trading in commodity derivatives when it enacted the CEA. The CEA 
authorized the CFTC's predecessor, the Commodity Exchange Commission 
(CEC), to establish limits on speculative trading. Since that time, the 
Commission has been establishing or authorizing position limits for the 
past 80 years. As discussed in the December 2013 Position Limits 
Proposal and prior rulemakings, this history includes setting position 
limits beginning in 1938; overseeing exchange-set limits beginning in 
the 1960s; promulgating a rule in 1981, later directly ratified by 
Congress, mandating that exchanges set limits for all commodity futures 
for which there were no limits; allowing exchanges, in the 1990s, to 
set position accountability levels for certain financial contracts, 
such as futures and options on foreign currencies and other financial 
instruments with high degrees of stability; \39\ and later expanding 
exchange limits or accountability requirements to significant price 
discovery contracts traded on exempt commercial markets.\40\
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    \37\ Frank M. Surface, The Grain Trade During the World War, at 
224 (Macmilliam 1928).
    \38\ Grain Futures Act of 1922, ch. 369 at section 3, 342 Stat. 
998, 999 (1922), codified at 7 U.S.C. 5 (1925-26).
    \39\ See Speculative Position Limits--Exemptions From Commission 
Rule 1.61; Chicago Mercantile Exchange Proposed Amendments to Rules 
3902.D, 5001.E, 3010.F, 3012.F, 3013.F, 3015.F, 4604, and Deletion 
of Rules 3902.F, 5001.G, 3010.H., 3012.M, 3013.H, and 3015.H, 56 FR 
51687 (Oct. 15, 1991) (providing notice of proposed exchange rule 
changes; request for comments). The Government, either through 
Congress, CEC or the Commission, has maintained position limits on 
various agricultural commodities since 1917.
    \40\ December 2013 Position Limits Proposal, 78 FR at 75681-85; 
Significant Price Discovery Contracts on Exempt Commercial Markets, 
74 FR 12178 (March 23, 2009).
---------------------------------------------------------------------------

    As addressed in the December 2013 Position Limits Proposal, two 
aspects of the Commission's experience are particularly important to 
the Commission's interpretation of the Dodd-Frank Act amendments to CEA 
section 4a. The first is the Commission's experience with the time 
required to make necessity findings before setting limits, which 
relates to the time limits contained in CEA section 4a(a)(2)(B). The 
second is the Commission's experience in rulemaking requiring exchanges 
to set limits in accordance with certain ``standards,'' the term the 
district court found ambiguous.
a. Time to Establish Position Limits
    Based on its experience administering position limits, the 
Commission preliminarily concludes (as stated preliminarily in the 
December 2013 Position Limits Proposal) that Congress could not have 
contemplated that, as a prerequisite to imposing limits, the Commission 
would first make antecedent commodity-by-commodity necessity 
determinations in the 180-270 day time frame within which CEA section 
4a(a)(2)(B) states that limits ``required under subparagraph 
[4a(a)(2(A)] shall be established.'' \41\ As described in the December 
2013 Position Limits Proposal, for 45 years after passage of the CEA, 
the Commission's predecessor agency made findings of necessity in its 
rulemakings establishing position limits.\42\ During that period, the 
Commission had jurisdiction over only a limited number of agricultural 
commodities. In orders issued by the Commodity Exchange Commission 
between 1940 and 1956 establishing position limits, the CEC stated that 
the limits it was imposing in each 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.\43\ Proceedings leading 
up to the establishment of the limits commenced more than 13 months 
earlier, when the CEC issued a notice of hearing regarding the 
limits.\44\ 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.\45\ 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.\46\
---------------------------------------------------------------------------

    \41\ December 2013 Position Limits Proposal, 78 FR at 75682-83 
(citing 887 F. Supp. 2d at 273).
    \42\ 887 F. Supp. 2d at 269.
    \43\ See In the Matter of Limits on Position and Daily Trading 
in Wheat, Corn, Oats, Barley, Rye, and Flaxseed, for Future Delivery 
Findings of Fact, Conclusions, and Order, 3 FR 3145, Dec. 24, 1938.
    \44\ See 2 FR 2460, Nov. 12, 1937.
    \45\ See Limitation on Buying or Selling of Cotton Notice of 
Hearing, 4 FR 3903, Sep. 14, 1939; Part 150--Orders of the Commodity 
Exchange Commission Findings of Fact, Conclusions, and Order In the 
Matter of Limits on Position and Daily Trading in Cotton for Future 
Delivery, 5 FR 3198, Aug. 28, 1940.
    \46\ See Handling of Anti-Hog-Cholera Serum and Hog-Cholera 
Virus; Notice of Proposed Rule Making 16 FR 321, Jan. 12, 1951; 
Limits on Position and Daily Trading in Eggs for Future Delivery, 16 
FR 8106, Aug. 16, 1951; see also Limits on Positions and Daily 
Trading in Cottonseed Oil, Soybean Oil, and Lard for Future 
Delivery, 17 FR 6055, Jul. 4, 1952 (providing notice of a hearing 
regarding proposed position limits for cottonseed oil, soybean oil, 
and lard); Limits on Position and Daily Trading in Cottonseed Oil 
for Future Delivery, 18 FR 443, Jan. 22, 1953 (giving orders setting 
limits for cottonseed oil, soybean oil, and lard); Limits on 
Position and Daily Trading in Onions for Future Delivery; Notice of 
Hearing, 21 FR 1838, Mar. 24, 1956 (conveying notice of a hearing 
regarding proposed position limits for onions), Limits on Position 
and Daily Trading in Onions for Future Delivery, 21 FR 5575, Jul. 
25, 1956 (providing order setting position limits for onions).
---------------------------------------------------------------------------

    In the Commission's experience (including the experience of its 
predecessor agency), it generally took many months to make a necessity 
finding with respect to one commodity. The process of making the sort 
of necessity findings that plaintiffs in ISDA v. SIFMA urged with 
respect to all agricultural commodities and all exempt commodities (and 
that some commenters urge) would be far more lengthy than the time 
allowed by CEA section 4a(a)(3), i.e., 180 or 270 days from enactment 
of the Dodd-Frank Act.\47\ Because of the stringent time limits in CEA 
section 4a(a)(2)(B), the Commission concludes that Congress did not 
intend for the Commission to delay the imposition of limits until it 
first made antecedent, contract-by-contract necessity findings.
---------------------------------------------------------------------------

    \47\ 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.

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

[[Page 96709]]

b. Prior Rulemaking Requiring Exchanges to Set Limits
    The CFTC's preliminary interpretation of the statute is also based 
in part on its promulgation of a rule in 1981 requiring exchanges to 
impose limits on all contracts that did not already have limits. In 
that rulemaking, 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 17 CFR 1.61.\48\ This rule required 
exchanges to set speculative position limits ``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.'' \49\ The Commission explained that 
this action would ``close the existing regulatory gap whereby some but 
not all contract markets [we]re subject to a specified speculative 
position limit.'' \50\
---------------------------------------------------------------------------

    \48\ Establishment of Speculative Position Limits, 46 FR 50938, 
50944-45, Oct. 16, 1981. The rule adopted in 1981 tracked, in 
significant part, the language of CEA section 4a(1). Compare 17 CFR 
1.61(a)(1) (1982) with 7 U.S.C. 6a(1) (1976).
    \49\ Establishment of Speculative Position Limits, 46 FR at 
50945.
    \50\ Id. at 50939; see also id. at 50938 (``to ensure that each 
futures and options contract traded on a designated contract market 
will be subject to speculative position limits'').
---------------------------------------------------------------------------

    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.'' \51\ As used in 
the 1981 final rule and release, ``standards'' meant the criteria for 
determining how the required limits would be set.\52\ ``Standards'' did 
not include the antecedent ``necessity'' determination 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.'' \53\ The Commission 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.'' \54\
---------------------------------------------------------------------------

    \51\ Compare id. at 50941-42, 50945 with 7 U.S.C. 6a(a)(2)(A).
    \52\ Establishment of Speculative Position Limits, 46 FR 50941-
42, 50945.
    \53\ Id. at 50941-42 (preamble), 50945 (text of Sec.  
1.61(a)(2)).
    \54\ The Commission believes it likely that, given the 
prophylactic purposes articulated in current CEA section 
4a(a)(1)(A), a similar view of position limits underpins CEA section 
4a(a)(2)(A).
---------------------------------------------------------------------------

    The Commission thus directed the exchanges to set limits for all 
futures contracts ``pursuant to the . . . standards of rule 1.61,'' 
without requiring that the exchanges first make a finding of 
necessity.\55\ And rule 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.'' \56\ Because the Commission 
had already made the antecedent necessity findings, it imposed tight 
deadlines for the exchanges to establish the limits. It is, 
accordingly, reasonable to believe that Congress would have structured 
CEA section 4a(a) similarly, by first making the antecedent necessity 
determination on its own,\57\ then directing the Commission to impose 
the limits without making an independent determination of necessity, 
and then using the term ``standards'' just as the Commission did in 
1981 to refer to aggregation and flexibility rather than necessity for 
the required limits.
---------------------------------------------------------------------------

    \55\ Establishment of Speculative Position Limits. 46 FR at 
50942.
    \56\ Id. at 50945 (Sec.  1.61(a)). Compare 7 U.S.C. 6a(1) 
(1976).
    \57\ As discussed in further detail regarding congressional 
investigations, below, it is especially reasonable to infer that 
Congress had in fact made such a determination based on the 
congressional investigations that preceded these Dodd-Frank Act 
amendments. The fact that the Commission already had the clear 
authority to impose limits when it deemed them necessary bolsters 
this inference, because there was no need for these Dodd-Frank Act 
amendments to the position limits statute unless Congress, based on 
its own determination of necessity, sought to direct the Commission 
to impose limits.
---------------------------------------------------------------------------

    Indeed, legislative history shows reason to believe that Congress' 
choice of the word ``standards'' to refer to aggregation and 
flexibility alone was purposeful and intended it to mean the same thing 
it did in the Commission's 1981 rule.\58\ 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, who was then Chairman of the House Agriculture 
Committee and who would ultimately be a member of the Dodd-Frank Act 
conference committee.\59\ In important respects, the language of H.R. 
977 resembles the language the Commission used in 1981, suggesting that 
the regulation's text may have influenced the statutory text. Like the 
Commission's 1981 rule, H.R. 977 states that there ``shall'' be 
position limits in accordance with the ``standards'' identified in CEA 
section 4a(a).\60\ This language was included in CEA section 4a(a)(2) 
as adopted. Also 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.\61\ 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.'' \62\ 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). The Commission views the history and interplay of the 1981 rule 
and Dodd-Frank Act section 737 as 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.\63\
---------------------------------------------------------------------------

    \58\ The relevant broader legislative history is discussed in 
depth, below.
    \59\ H.R. 977, 11th Cong. (2009).
    \60\ 7 U.S.C. 6.
    \61\ Compare H.R. 977, 11th Cong. (2009) with Establishment of 
Speculative Position Limits, 46 FR at 50944.
    \62\ H.Rept. 111-385, at 15, 19 (Dec. 19, 2009).
    \63\ See Union Carbide Corp. & Subsidiaries v. Comm'r of 
Internal Revenue, 697 F.3d 104, 109 (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)).
---------------------------------------------------------------------------

    There is further evidence based on the 1981 rulemaking that 
Congress would have found the across-the-board prophylactic approach 
attractive. In 1983, when enacting the Futures Trading Act of 19982, 
Public Law 97-444, 96 Stat. 2294 (1983), Congress was aware that the 
Commission had ``promulgated a final rule requiring exchanges to submit 
speculative position limit proposals for Commission approval for all 
futures contracts traded as of that date.'' \64\ Presented with 
competing industry and Commission proposals to amend the position 
limits statute, Congress elected to amend the

[[Page 96710]]

CEA ``to clarify and strengthen the Commission's authority in this 
area,'' including authorizing the Commission to prosecute violations of 
exchange-set limits as if they were violations of the CEA.\65\ Thus, by 
granting the Commission explicit authority to enforce the Commission-
mandated exchange-set limits, Congress in effect ratified the 1981 
rule, finding it reasonable to impose position limits on an across-the 
board basis, rather than following a commodity-by-commodity 
determination. This contributes to the Commission's judgment that 
Congress reasonably could have followed a similar approach here and, 
for the reasons given elsewhere, likely did.
---------------------------------------------------------------------------

    \64\ S. Rep. No. 97-384, at 44 (1982).
    \65\ Id.
---------------------------------------------------------------------------

c. Comments \66\
---------------------------------------------------------------------------

    \66\ A list is provided below in Section V, Appendix B, of the 
full names, abbreviations, dates and comment letter numbers for all 
comment letters cited in this rulemaking. The Commission notes that 
many commenters submitted more than one comment letter. 
Additionally, all comment letters that pertain to the December 2013 
Position Limits Proposal and the 2016 Supplemental Position Limits 
Proposal, including non-substantive comment letters, are contained 
in the rulemaking comment file and are available through the 
Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1708. A search can be done online for a 
particular comment letters by inserting the specific comment letter 
number in the address in place of the hash tags in the following web 
address: http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=#####&SearchText.
---------------------------------------------------------------------------

    i. Commission's Experience: No commenter disputed the depth or 
breadth of the Commission's experience and expertise with position 
limits.\67\ Most, if not all, commenters, many of them exchanges, 
traders, and other market participants who have been subject to a long-
standing federal and exchange-set limit regime, implicitly or 
explicitly agreed that at least spot-month position limits continue to 
be essential to prevent manipulation and excessive volatility and thus 
serve the public interest.\68\ One commenter acknowledged that only the 
Commission can impose and monitor limits across exchanges.\69\ Another 
opined that only the Commission could impose limits without any 
conflicts of interest due to the exchanges' imperative to maximize 
trading volume in order to maximize profit.\70\
---------------------------------------------------------------------------

    \67\ One commenter questioned whether the Commission's 
experience was even relevant. This commenter asserted that the 
statute clearly and unambiguously does not mandate imposition of 
position limits, and therefore no consideration or deference to the 
Commission's experience is appropriate. CL-ISDA/SIFMA-59611 at 7. 
But the district court disagreed and directed the Commission to 
employ its experience in resolving the ambiguities in the statute. 
887 F. Supp. 2d at 270, 280-82. In any event, for the reasons 
discussed, the Commission's reading is, at a minimum, reasonable.
    \68\ E.g., CL-CME-59718 at 2; see also CL-ISDA/SIFMA-59611 at 3, 
27-32, App. A at 11, App. B at 6 (arguing for alternatives to limits 
outside the spot month).
    \69\ CL-CME-59718 at 18.
    \70\ CL-CMOC-60400 at 3; and CL-Public Citizen-60390 at 2-3.
---------------------------------------------------------------------------

    ii. Time to Establish Limits: No commenters disputed the fact that 
it took many months for the Commission to make a necessity 
determination before establishing limits. Some commenters agreed with 
the determinations the Commission preliminarily drew from its 
experience.\71\
---------------------------------------------------------------------------

    \71\ E.g., CL-A4A-59714 at 3.
---------------------------------------------------------------------------

    Several commenters asserted that the Commission's reliance on the 
timelines to support its view ignores other qualifying language in the 
statute, such as the terms ``necessary'' and ``appropriate.'' \72\ The 
Commission disagrees, because its interpretation of the statute 
considers the relevant provisions as an integrated whole, which is 
required in interpreting any statute. Under this approach, it is 
appropriate to give consideration to the import of the tight statutory 
deadlines in light of the Commission's experience that it could not 
possibly comply with if it had to make necessity findings as it has in 
the past. These comments fail to take these considerations into 
account. The Commission addresses the language relied upon by these 
commenters, infra, in its discussion of the text of the statute.
---------------------------------------------------------------------------

    \72\ CL-CME-59718 at 7; and CL-ISDA/SIFMA-59611 at 9, n. 32 
(asserting that deadlines are no excuse for the Commission to be 
``arbitrary'' or ``sloppy.'').
---------------------------------------------------------------------------

    CME also contended that the 180- and 270-day time limits were a 
difficulty manufactured by the December 2013 Position Limits Proposal 
itself. According to CME, the Commission could instead expedite the 
process for setting limits by utilizing its exchanges and others to 
determine whether position limits are necessary and appropriate for a 
particular commodity and, if so, the appropriate types and levels of 
limits and related exemptions.\73\ While this is a plausible approach 
to generating necessity findings, the Commission views it unlikely that 
Congress had this approach in mind. The provisions at issue make no 
mention of exchange-set limits or necessity findings. CME also gave no 
reason to believe that commodity-by-commodity necessity findings could 
be made by the exchanges within the prescribed 180/270 day limits.
---------------------------------------------------------------------------

    \73\ CL-CME-59718 at 7.
---------------------------------------------------------------------------

    iii. 1981 Rulemaking: Some commenters disagreed with the 
Commission's consideration of the 1981 Rule. CME commented that the 
1981 Rule is inapposite because there the Commission was requiring DCMs 
to impose position limits based on an ``antecedent judgment'' that 
limits were necessary and appropriate; a necessity finding was not 
required there.\74\ The Commission believes that CME's observation is 
consistent with its interpretation. In the 1981 rule, the Commission 
made an antecedent judgment on an across-the-board basis that position 
limits were necessary, and the exchanges then set them according to 
specific standards. Here, Congress has made the antecedent judgment on 
an across-the-board basis that position limits are necessary for 
physical commodities (i.e., commodities other than excluded 
commodities), and ordered the Commission to set them according to the 
same types of standards referenced in the 1981 rule. This supports, 
rather than undermines, the Commission's interpretation that the 
``standards'' in CEA section 4a(a)(1), referred to in CEA section 
4a(a)(2) as added by the Dodd-Frank Act, are the flexibility and 
aggregation standards, much as they were in the 1981 rulemaking 
interpreting CEA section 4a(a)(1).
---------------------------------------------------------------------------

    \74\ Id. at 9-10.
---------------------------------------------------------------------------

    Several commenters contended that the Commission's reliance on the 
1981 rulemaking ignores that the CFTC then imposed limits only after a 
fact-intensive inquiry into the characteristics of individual contracts 
markets to determine the limits most appropriate for individual 
contract markets.\75\ However, the Commission has taken those inquiries 
into account. The Commission believes these inquiries are significant 
because while the Commission performed such investigation for some 
markets, it did not do so for all markets ultimately within the scope 
of the rule. The 1981 Rule directed exchanges to impose limits on all 
futures contracts for which exchanges had not already imposed limits. 
For example, citing a then-recent disruption in the silver market, the 
Commission directed that position limits be imposed prophylactically 
for all futures and options contracts.\76\ It further directed the 
exchanges to consider the characteristics of particular contracts and 
markets in determining how to set limits (the standards, limit

[[Page 96711]]

levels and so on) but not whether to do so.\77\ It specifically 
rejected commenters' concerns that position limits would not be 
beneficial for all contracts, finding, after ``considerable years of 
Federal and contract market regulatory experience,'' that ``the 
capacity of any contract market . . . is not unlimited,'' and there was 
no need to evaluate the particulars of whether any contract would 
benefit from position limits.\78\ The Dodd-Frank Act amendments 
unfolded in an analogous fashion. Prior to the Dodd-Frank Act, Congress 
conducted studies of some, but not all, markets in physical 
commodities. This history suggests that Congress extrapolated from the 
conclusions reached in those studies to determine that position limits 
were necessary for all physical commodities other than excluded 
commodities.
---------------------------------------------------------------------------

    \75\ CL-AMG-59709 at 4, n. 8; and CL-CME-59718 at 15-16.
    \76\ Establishment of Speculative Position Limits, 46 FR at 
50940-41 (Oct. 16, 1981).
    \77\ Id.
    \78\ Id.
---------------------------------------------------------------------------

    ISDA and SIFMA asserted that the Commission's reliance on the 1981 
rulemaking is unavailing because (1) it cannot alter the Commission's 
statutory burdens with respect to imposing position limits; and (2) it 
was never adopted by Congress.\79\ The first of these comments begs the 
question, i.e., what is ``the statutory burden'' intended in the text 
of CEA sections 4a(a)(1) and (2), read as a whole and considered in 
context to resolve the ambiguity found by the district court. As to the 
second comment, the Commission does not contend that Congress adopted 
the 1981 rule. Rather, it is relevant because the language the district 
court found ambiguous in the Dodd-Frank Act amendments to CEA section 
4a(a) resembles the language of the 1981 rule, and some of the context 
is parallel. The relevance of this rulemaking is supported by the fact 
that Congress did ratify it the following year, when it amended the CEA 
by granting the Commission the authority to enforce the position limits 
set by the exchanges, reinforcing that as a historical matter Congress 
had approved an omnibus prophylactic approach as reasonable. That 
Congress had approved of such an approach before and then used language 
in the Dodd-Frank Act that closely resembles the very language the 
Commission used when it mandated that omnibus approach is another 
factor that weighs on the side of interpreting the statutory ambiguity 
to find a mandate to impose physical commodity positon limits.\80\
---------------------------------------------------------------------------

    \79\ CL-ISDA/SIFMA-59611 at 9.
    \80\ CFTC v. Schor, 478 U.S. 833, 846 (1986).
---------------------------------------------------------------------------

    Finally, several commenters asserted that the Commission cannot 
consider the 1981 rulemaking because the Commission later allowed 
exchanges to set position accountability levels in lieu of limits for 
some commodities and contracts.\81\ Those later exemptions do not, 
however, alter the language or import of the 1981 rule, which directed 
the exchanges to impose limits in accordance with ``standards'' that 
did not include a necessity finding. The 1981 rulemaking is the last 
time the Commission definitively addressed and identified the 
``standards'' in CEA section 4a(a)(1) for imposing across-the-board, 
prophylactic position limits in a manner akin to the Dodd-Frank Act 
amendments. That other approaches intervened is not inconsistent with 
the inference that Congress was influenced by the 1981 rulemaking in 
the Dodd-Frank Act amendments.
---------------------------------------------------------------------------

    \81\ E.g., CL-ISDA/SIFMA-59611 at 9; and CL-AMG-59709 at 4, n.8.
---------------------------------------------------------------------------

4. Legislative History of the Dodd-Frank Act Amendments to Position 
Limits Statute
    As discussed in the 2016 Supplemental Position Limits Proposal, the 
Commission has also considered the legislative history of the Dodd-
Frank Act amendments.\82\ That history contains further indication that 
Congress intended to mandate the imposition of limits for physical 
commodity derivatives without requiring the Commission to make 
antecedent necessity findings, and did not intend the term 
``standards'' to include such a finding.\83\
---------------------------------------------------------------------------

    \82\ Union Carbide Corp. & Subsidiaries v. Comm'r of Internal 
Revenue, 697 F.3d 104, 109 (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)).
    \83\ December 2013 Position Limits Proposal, 78 FR at 75682, 
75684-85.
---------------------------------------------------------------------------

    The Commission's preliminary interpretation of CEA section 4a(a)(2) 
is based in part on congressional concerns that arose, and 
congressional actions taken, before the passage of the Dodd-Frank Act 
amendments.\84\ During the 1990s, the Commission began permitting 
exchanges to experiment with an alternative to position limits--
position accountability, which allowed a trader to hold large positions 
subject to reporting requirements and gave the exchange the right to 
order the trader to hold or reduce its position.\85\ Then, in the 
Commodity Futures Modernization Act of 2000 (``CFMA''),\86\ Congress 
expressly authorized the use of position accountability as an 
alternative means to limit speculative positions.\87\
---------------------------------------------------------------------------

    \84\ Id. at 75682.
    \85\ Federal Speculative Position Limits for Referenced Energy 
Contracts and Associated Regulations, 75 FR 4144, 4147 (Jan. 26, 
2010); Revision of Federal Speculative Position Limits and 
Associated Rules, 64 FR 24038, 24048-49 (May 5, 1999).
    \86\ Commodity Futures Modernization Act of 2000, Public Law 
106-554, 114 Stat. 2763 (Dec. 21, 2000).
    \87\ 7 U.S.C. 7(d)(3) (2009).
---------------------------------------------------------------------------

    Following this experiment with position accountability, Congress 
became concerned about fluctuations in commodity prices. In the late 
1990s and 2000s, Congress conducted several investigations that 
concluded that excessive speculation accounted for significant 
volatility and price increases in physical commodity markets. For 
example, 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.'' \88\ 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.\89\ Subsequently, Congress found similar 
price volatility stemming from excessive speculation in the natural gas 
market.\90\
---------------------------------------------------------------------------

    \88\ 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).
    \89\ 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'').
    \90\ Gas Report at 1-2.
---------------------------------------------------------------------------

    These investigations appear to have informed the drafting of the 
Dodd-Frank Act. During hearings prior to the passage of the Dodd-Frank 
Act, Senator Carl Levin, then-Chair of the Senate Permanent 
Subcommittee on Investigations that had conducted them, urged passage 
to ensure ``a cop on the beat in all commodity markets where U.S. 
commodities are traded . . . that can enforce the law to prevent 
excessive speculation and market manipulation.'' \91\ In addition, 
Congress viewed the nearly $600 trillion little-regulated swaps market 
as a ``major contributor to the financial crisis'' because excessive 
risk taking, hidden leverage, and under collateralization in that 
market created a systemic risk of harm to the entire financial 
system.\92\ As Senator Cantwell and others explained, it was imperative 
that the CFTC have the ability to regulate swaps through

[[Page 96712]]

``position limits,'' ``exchange trading,'' and ``public transparency'' 
to avoid a recurrence of the instability that rippled through the 
entire financial system in 2008.\93\ And in the House of 
Representatives, Representative Collin Peterson, then-Chairman of the 
House Committee on Agriculture and author of an amendment strengthening 
the position limits provision as discussed below, reminded his 
colleagues that his committee's own ``in-depth review of derivative 
markets began when we experienced significant price volatility in 
energy futures markets due to excessive speculation--first with natural 
gas and then with crude oil. We all remember when we had $147 oil. . . 
. This conference report [now] includes the tools we authorized and the 
direction to the CFTC to mitigate outrageous price spikes we saw 2 
years ago.'' \94\ Congress's focus in its investigations on excessive 
speculation involving physical commodities is reflected in the scope of 
the Dodd-Frank Act's position limits amendment: It applies only to 
physical commodities.
---------------------------------------------------------------------------

    \91\ 156 Cong. Record S. 4064 (daily ed. May 20, 2010).
    \92\ S. Rep. 111-176, at 29 (2010).
    \93\ See, e.g., 156 Cong. Rec. S 2676-78, S 2698-99, S 3606-07, 
S 3966, S 5919 (daily ed. April 27, May 12, 19, July 15, 2010 
(providing statements of Senators Cantwell, Feinstein, Lincoln)).
    \94\ 156 Cong. Rec. H5245 (daily ed. June 30, 2010) (emphasis 
added).
---------------------------------------------------------------------------

    The evolution of the position limits provision in the bills before 
Congress from permissive to mandatory supports a preliminary 
determination that Congress intended to do something more than continue 
the long-standing statutory regime giving the Commission discretionary 
authority to impose limits.\95\ As initially introduced, the House bill 
that became the Dodd-Frank Act provided the Commission with 
discretionary authority to issue position limits, stating that the 
Commission ``may'' impose them.\96\ However, the House replaced the 
word ``may'' with the word ``shall,'' suggesting a specific judgment 
that the limits should be mandatory, not discretionary. The House also 
added other language militating in favor of interpreting CEA section 
4a(a)(2) as a mandate. In two new subsections, it set the tight 
deadlines described above.\97\ After changing ``may'' to ``shall,'' the 
House further amended the bill to refer in one instance to the limits 
for agricultural and exempt commodities as ``required.'' \98\ And only 
after the language had changed from permissive to mandatory, the House 
added the requirement that the Commission conduct studies on the 
``effects (if any) of position limits imposed'' \99\ to determine if 
the required position limits were harming U.S. markets.\100\ 
Underscoring its intent to amend the bill to include a mandate, the 
House Report accompanying the House Bill stated that it ``required'' 
the Commission to impose limits.\101\ The Conference Committee adopted 
the House bill's amended provisions on position limits and then 
strengthened them even further by referring to the position limits as 
``required'' an additional three times, bringing the total to four 
times in the final legislation the number of references in statutory 
text to position limits as ``required.'' \102\
---------------------------------------------------------------------------

    \95\ December 2013 Position Limits Proposal, 78 FR at 75684-85.
    \96\ 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. 3113(a)(2) 
(providing the version 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 ``Levine Br.'').
    \97\ Levin Br. at 11 (citing H.R. 4173, 111th Cong. 
3113(a)(5)(2), (7) (as passed by the House Dec. 11, 2009) 
(``Engrossed Bill'')).
    \98\ Id. at 12. (citing Engrossed Bill at 3113(a)(5)(3)).
    \99\ 15 U.S.C. 8307; Engrossed Bill at 3005(a).
    \100\ 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.
    \101\ Levin Br. at 23 (citing H.R. Rep. No. 111-373 at 11 
(2009)).
    \102\ Levin Br. at 17-18.
---------------------------------------------------------------------------

a. Comments
    A number of commenters generally supported or opposed the 
Commission's consideration of Congressional investigations and the 
textual strengthening of the Dodd-Frank bill. The Commission addresses 
specific comments below.
    i. Congressional Investigations: Several commenters agreed that the 
Congressional investigations, hearings and reports support the view 
that Congress decided to mandate position limits.\103\ They pointed out 
that Congress's investigations followed amendments in 2000 to the CEA 
as part of the CFMA that exempted swaps and energy derivatives from 
position limits and expressly authorized exchanges to impose position 
accountability levels in lieu of limits.\104\ According to the 
Commodity Markets Oversight Coalition (``CMOC''), ``witnesses confirmed 
[at those hearings] that the erosion of the position limits regime was 
a leading cause in market instability and wild price swings.'' \105\ 
Senator Levin, who presided over the investigations, commented that 
those investigations, conducted from 2002 onwards, ``into how our 
commodity markets function, focusing in particular on the role of 
excessive speculation on commodity prices'' ``have demonstrated that 
the failure to impose and enforce effective position limits have led to 
greater speculation and increased price volatility in U.S. commodity 
markets.'' \106\ According to Senator Levin, the investigations 
``provide[d] strong support for the Dodd-Frank decision to require the 
Commission to impose position limits on all types of commodity futures, 
swaps, and options.'' \107\ Senator Levin also stated that the harms of 
excessive speculation continue to be felt in the absence of the 
mandated limits. He cited recent actions by federal regulators to stop 
manipulation in energy markets, and opined that the continuing problems 
in the absence of the mandated limits only reinforce the reasonableness 
of the Commission's view that Congress intended to mandate position 
limits as a prophylactic measure.\108\ Senator Levin's point was echoed 
by Public Citizen, a consumer advocacy organization, and Airlines for 
America, a trade association for the U.S. scheduled airline 
industry.\109\
---------------------------------------------------------------------------

    \103\ CL-CMOC-59720 at 2; CL-Sen. Levin-59637 at 2-5; and CL-
A4A-59686 at 2-3.
    \104\ CL-IECA-59964 at 2; CL-A4A-59686 at 2; and CL-Public 
Citizen-59648 at 2-3.
    \105\ CL-CMOC-59720 at 2.
    \106\ CL-Sen. Levin-59637 at 3-4.
    \107\ Id.
    \108\ Id. at 2.
    \109\ CL-Public Citizen-59648 at 2-3, and CL-A4A-59686 at 1-2.
---------------------------------------------------------------------------

    Other commenters disagreed with the Commission's preliminary 
determination that the Congressional investigations indicate that 
Congress intended to mandate limits. CME asserted that the 
investigations do not in themselves demonstrate that Congress required 
the CFTC to impose position limits as recommended even if those 
investigations suggest that excessive speculation poses a burden on 
interstate commerce in certain physical commodity markets.\110\ Citadel 
questioned whether the cited reports could be ``broadly indicative of 
Congressional intent,'' or could ``redefine statutory language that has 
existed for nearly eight decades.'' \111\
---------------------------------------------------------------------------

    \110\ CL-CME-59718 at 8. CME also asserted that the 
Congressional investigation into excessive speculation in natural 
gas futures focused more on the fact that position accountability 
rules for exchange-traded natural gas futures were not in place for 
``look-alike'' natural gas swaps traded ``over the counter,'' 
permitting regulatory arbitrage.
    \111\ CL-Citadel-59717 at 3.
---------------------------------------------------------------------------

    But the Commission is not relying solely on these reports. The 
question, rather, is whether these Congressional

[[Page 96713]]

investigations and findings of excessive speculation and price 
volatility in energy markets, conducted and issued when the Commission 
was authorized but not required by law to impose limits, may be one 
indication, among others, that Congress sought to do something more 
with the Dodd-Frank Act amendments than to maintain the statutory 
status quo for futures on physical commodities. In the Commission's 
preliminary view, it is more plausible, based on these investigations, 
that Congress sought to do something more--to require that the 
Commission impose limits for the covered commodities without having to 
first find that they are necessary to prevent excessive speculation. 
Contrary to Citadel's comment, the Commission is not relying on the 
investigations and reports to redefine statutory language that has 
existed for nearly eight decades. Rather, the Commission believes that 
the investigations favor the conclusion that Congress added CEA section 
4a(a)(2) to the pre-existing language in order to strengthen the long-
standing position limits regime for a category of commodity 
derivatives--physical commodities--that Congress's investigations 
revealed to be vulnerable to substantial price fluctuations.
    ii. Evolution of the Dodd-Frank Bill: Several commenters agreed 
with the Commission's preliminary determination that the strengthening 
of the position limits language in the Dodd-Frank bill evinces 
Congress' intent to mandate limits.\112\
---------------------------------------------------------------------------

    \112\ CL-Public Citizen-59648 at 2.
---------------------------------------------------------------------------

    CME and MFA disagreed; while they do not directly address this 
point, they believed that the strengthening of the language in the 
Dodd-Frank bills does not indicate that Congress intended to de-couple 
the enacted directive to impose position limits from the necessity 
finding of CEA section 4a(a)(1).\113\ The Commission, however, 
preliminarily considers this the most plausible interpretation. The 
evolution of the bill from one stating the Commission ``may'' impose 
position limits to include statements that the Commission ``shall'' 
impose them, that they are ``required,'' and that the Commission shall 
study their effects indicates intentional progressive refinement from a 
bill that would continue the status quo for futures to one that added 
special nondiscretionary requirements for a category of commodities. 
This legislative evolution also supports the conclusion ``standards'' 
does not include an antecedent necessity finding.
---------------------------------------------------------------------------

    \113\ CL-CME-59718 at 2, 5-12 (maintaining statutory language 
requires necessity finding); and CL-MFA-59606 at 9 (citing S. Rept. 
111-176 (Apr. 30, 2010, which states ``[t]his section authorizes the 
CFTC to establish aggregate position limits. . . .'').
---------------------------------------------------------------------------

5. The Commission Preliminarily Interprets the Text of CEA Section 
4a(a) as an Integrated Whole, In Light of Its Experience and Expertise.
    In the December 2013 Position Limits Proposal, the Commission 
discussed how its interpretation of the text of CEA section 4a(a), 
considered as an integrated whole, is consistent with and supports its 
conclusions based on experience and expertise. As discussed, the 
ambiguity is the meaning of CEA section 4a(a)(2)'s statement that the 
Commission ``shall'' establish limits on physical commodities other 
than excluded commodities ``[i]n accordance with the standards'' set 
forth in CEA section 4a(a)(1). If ``standards'' includes a necessity 
finding, then a necessity finding is required before limits can be 
imposed on agricultural and exempt commodities. If not, the Commission 
must impose limits for that subset of commodity derivatives. In the 
December 2013 Position Limits Proposal, the Commission resolved the 
ambiguity by preliminarily determining that the reference in CEA 
section 4a(a)(2) to the ``standards'' in pre-Dodd-Frank section 
4a(a)(1) refers to the criteria in CEA section 4a(a)(1) for how the 
required limits are to be set and not the antecedent finding whether 
limits are even necessary. The Commission explained that, in its 
preliminary view, ``standards'' refers to, in CEA section 4a(a)(1), 
only the following two provisions. First, the limits must account for 
situations in which one person controls another or two persons act in 
concert, by aggregating those positions as if the trading were done by 
one person acting alone (aggregation). The second ``standard'' in CEA 
section 4a(a)(1) states that the limits may be different for different 
commodities, markets, delivery months, etc. (flexibility).
    The Commission reasoned that this construction of ``standards'' 
seemed most consistent with the Commission's experience and history 
administering position limits. It also seemed most consistent with the 
text of CEA section 4a(a)(2), the rest of CEA section 4a(a), and the 
Act as a whole. The Dodd-Frank Act amendments to CEA section 4a(a) 
largely re-shape CEA section 4a(a) by adding a new, detailed, and 
comprehensive section 4a(a)(2) that applies only to a subset of the 
derivatives regulated by the Commission--physical commodities like 
wheat, oil, and gold--and not intangible commodities like interest 
rates. Amended CEA section 4a(a) repeatedly uses the word ``shall'' and 
refers to the new limits as ``required,'' differentiating it from the 
text that existed before the Dodd-Frank Act.\114\ Never before in the 
Commission's experience had Congress set deadlines on action for 
position limits by a date certain, much less the short time provided in 
CEA section 4a(a)(2)(B).\115\ Nor, in the Commission's experience, had 
Congress required a report by a given date or committed itself to hold 
hearings on the report within 30 days thereafter.\116\ The Commission 
preliminarily concluded that, considered as a whole in light of this 
experience, these provisions evince a Congressional mandate that the 
Commission impose limits on physical commodities, that it do so 
quickly, that it impose limit levels in accordance with certain 
requirements, and that it study the effectiveness of the limits after 
imposing them and then report to Congress.
---------------------------------------------------------------------------

    \114\ E.g., CEA sections 4a(a)(2)(A) (providing that the 
Commission ``shall'' set the limits); 4a(a)(2)(B) (referring twice 
to the ``limits required'' and directing that they ``shall'' be 
established by a time certain); 4a(a)(3)(referring to the limits 
``required'' under subparagraph (A)); 4a(a)(5)(stating that the 
Commission ``shall'' concurrently establish limits on economically 
equivalent contracts).
    \115\ 7 U.S.C. 6a(a)(2(B).
    \116\ 15 U.S.C. 8307.
---------------------------------------------------------------------------

    By the same token, the Commission preliminarily determined that 
interpreting CEA section 4a(a)(2) as it proposed to do would not render 
superfluous the necessity finding requirement in CEA section 4a(a) 
because that section still applies to the non-physical (excluded) 
commodity derivatives that are not subject to CEA section 4a(a)(2). Nor 
would it nullify other parts of CEA section 4a(a), as those are 
unaffected by this reading.
    The Commission received a number of comments on its discussion of 
the interplay between the statute's text and the Commission's 
experience and expertise. The Commission has considered them carefully, 
but is not thus far persuaded. The Commission preliminarily believes 
that it is a reasonable interpretation of the text of the statute 
considered as an integrated whole and viewed through the lens of the 
Commission's experience and expertise, that Congress mandated that the 
Commission establish position limits for physical commodities. It is 
also reasonable to construe the reference to ``standards'' as an 
instruction to the Commission to apply the flexibility and aggregation 
standards set forth in CEA section 4a(a)(1), just as the Commission 
instructed the exchanges to impose

[[Page 96714]]

omnibus limits in 1981. And it is at least reasonable to conclude that 
Congress, in directing the Commission to impose the ``required'' limits 
on extremely tight deadlines, did not intend the Commission to 
independently make an antecedent finding that any given position limit 
for physical commodities is ``necessary''--a finding that would take 
many months for each individual physical commodity contract.
a. Comments
    Several commenters disputed the Commission's interpretation, based 
on its experience and expertise, that CEA section 4a(a)(2) is a mandate 
for prophylactic limits based on their view that the statute 
unambiguously requires the Commission to promulgate position limits 
only after making a necessity finding, and only ``as appropriate.'' 
\117\ But in ISDA v. SIFMA, the district court held that the statute 
was ambiguous in this respect, and the Commission here is following the 
court's direction to apply its experience and expertise to resolve the 
ambiguity. This is consistent with a commenter's statement that ``the 
meshing of the Dodd-Frank Act into the CEA may have created some 
ambiguity from a technical drafting/wording standpoint.'' \118\ 
Nevertheless, the Commission addresses these textual arguments to show 
that its preliminary interpretation is, at a minimum, a permissible 
one.
---------------------------------------------------------------------------

    \117\ CL-CME-59718 at 11; CL-MFA-59606. at 9; etc. But see, 
e.g., CL-A4A-59714 at 2-3 (noting that notwithstanding the 
``meshing'' problems, ``it is clear that the Commission's 
interpretation is reasonable and fully supported by the context in 
which the Dodd-Frank Act was passed, its legislative history, and 
the many other factors identified in the NPRM''); CL-AFR-59685 at 1; 
CL-Public Citizen-60390 at 2; CL-Public Citizen-59648 at 2; CL-Sen. 
Levin-59637 at 4; and CL-CMOC-59720 at 2-3.
    \118\ CL-A4A-59714 at 2-3.
---------------------------------------------------------------------------

    The commenters that disagreed with the Commission's preliminary 
conclusion argued that the Commission: (i) Erred in determining that 
the reference to ``standards'' in CEA section 4a(a)(2) does not include 
the necessity finding in CEA section 4a(a)(1); (ii) failed to consider 
other provisions that show Congress intended to require the Commission 
to make antecedent findings; and (iii) incorrectly determined that its 
interpretation is the only way to give effect to CEA section 4a(a)(2).
    i. Meaning of Standards: Several commenters asserted that the 
language: ``[in] accordance with the standards set forth in paragraph 
(1)'' in section 4a(a)(2) must include the phrase ``as the Commission 
finds are necessary to diminish, eliminate, or prevent [the burden on 
interstate commerce]'' in CEA section 4a(a)(1).\119\ They believed that 
the Commission's contrary interpretation constitutes an implied repeal 
of the necessity finding language.\120\
---------------------------------------------------------------------------

    \119\ See, e.g., CL-CME-59718 at 12-13; CL-Citadel-59717 at 3-4; 
CL-AMG-59709 at 3; CL-MFA-59606 at 9-10; CL-ISDA/SIFMA-59611 at 5-7; 
CL-IECAssn-59679 at 3-4; and CL-FIA-59595 at 6-7.
    \120\ CL-CME-59718 at 2, 12 (citing Hunter v. FERC, 711 F.3d 155 
(D.C. Cir. 2013)).
---------------------------------------------------------------------------

    The Commission disagrees that this constitutes an implied repeal. 
First, CEA section 4a(a)(2) applies only to physical commodities, not 
other commodities. Accordingly, the requirement of a necessity finding 
in section 4a(a)(1) still applies to a broad swath of commodity 
derivatives. Second, there is no implied repeal even in part, because 
the Commission is interpreting express language--the term 
``standards.'' The Commission must bring its experience to bear when 
interpreting the ambiguity in the new provision, and the Commission 
preliminarily believes that the statute, read in light of the 
Commission's experience administering position limits and making 
necessity findings, is more reasonably read as an express limited 
exception, for physical commodities futures and economically equivalent 
swaps, to the preexisting authorization in CEA section 4a(a)(1) for the 
Commission to impose limits when it finds them necessary.
    ii. Other Limiting Language: Some commenters pointed to a number of 
terms and provisions that they say support the notion that the 
Commission must make antecedent findings before imposing any limits 
under new CEA section 4a(a)(2).
    First, some commenters asserted that the term ``as appropriate'' in 
CEA sections 4a(a)(3) (factors that the ``Commission, ``as 
appropriate'' must consider when it ``shall set limits'') and 
4a(a)(5)(A) (providing that Commission ``shall'' ``as appropriate'' 
establish limits on swaps that are economically equivalent to physical 
commodity futures and options) require the Commission to make 
antecedent findings that the limits required under CEA section 4a(a)(2) 
are appropriate before it may impose them.\121\ The district court 
found these words to be ambiguous. In the court's view, they could 
refer 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.\122\
---------------------------------------------------------------------------

    \121\ See, e.g., CL-ISDA/SIFMA-59611 at 5, 7-8 (citing CEA 
section 4a(a)(5) as authorizing aggregate position limits ``as 
appropriate'' for swaps that are economically equivalent to DCM 
futures and options and CEA section 4a(a)(3), which directs the 
Commission to set position limits as appropriate and 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.).
    \122\ 887 F.Supp. 2d at 278; December 2013 Position Limits 
Proposal, 78 FR at 75685, n. 59.
---------------------------------------------------------------------------

    The Commission preliminarily believes that when these words are 
considered in the context of CEA section 4a(a)(2)-(7) as a whole, 
including the multiple uses of the new terms ``shall'' and ``required'' 
and the historically unique stringent time limits for imposing the 
covered limits and post-imposition study requirement, it is more 
reasonable to interpret these words as referring to the level of 
limits, i.e., the Commission must set physical commodity limits at an 
appropriate level, and not to require the Commission to first determine 
whether the required limits are appropriate before it may even impose 
them.\123\ In other words, 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.
---------------------------------------------------------------------------

    \123\ CEA section 4a(a)(2)(A) provides that the Commission 
``shall'' establish limits; CEA section 4a(a)(2)(B) refers multiple 
times to the ``required'' limits in (A) that ``shall'' be 
established within 180 or 270 days of enactment of Dodd-Frank; and 
CEA section 4a(a)(2)(C) provides that ``[i]n establishing the limits 
required'' the Commission shall ``strive to ensure'' that trading on 
foreign boards of trade for commodities that have limits will be 
subject to ``comparable limits,'' thereby assuming that limits must 
be established and requiring that they be set at levels in 
accordance with particular considerations. CEA section 4a(a)(3) 
contains ``specific limitations'' on the ``required'' limits which 
are most reasonably understood to be considerations for the 
Commission for the levels of limits.
---------------------------------------------------------------------------

    Some commenters claimed that other parts of CEA section 4a(a)(2) 
undermine the Commission's determination. First, CEA section 4a(2)(C) 
states that the ``[g]oal . . . [i]n establishing the limits required'' 
is to ``strive to ensure'' that trading on foreign boards of trade 
(``FBOTs'') for commodities that have limits will be subject to 
``comparable limits.'' It goes on to state that for ``any limits to be 
imposed'' the Commission will strive to ensure that they not shift 
trading overseas. Commenters argue that ``any limits to be imposed'' 
under CEA section 4a(a)(2)(A) implies that limits might not be imposed 
under that section. However, in the context discussed and in view of 
the reference in that section to position limits

[[Page 96715]]

``required,'' the reference to ``any limits to be imposed'' refers 
again to the levels or other standards applied. That is, whatever the 
contours the Commission chooses for the required limits, they must meet 
the goal set forth in that section.
    Second, CEA section 4a(a)(3)(B) states certain factors that the 
Commission must consider in setting limits under CEA section 
4a(a)(2).\124\ The Commission sees no inconsistency with mandatory 
position limits--the Commission must consider these factors in setting 
the appropriate levels and other contours. Indeed, CEA section 
4a(a)(3)(B) applies by its own terms to ``establishing the limits 
required in paragraph (2).'' Moreover, consideration of these factors 
under CEA section 4a(a)(3) is not mandatory, as some commenters 
suggest,\125\ but rather to be made ``in [the Commission's] 
discretion.'' \126\ In the Commission's preliminary view, there is thus 
nothing in these provisions at odds with the Commission's 
interpretation that it is required by CEA section 4a(a)(2)(A) to impose 
limits on a subset of commodities without making antecedent findings 
whether they should be imposed, particularly when the language at issue 
is construed, as it should be, with other terms in CEA section 
4a(a)(2)-(7), discussed above, that use mandatory language and impose 
time limits.
---------------------------------------------------------------------------

    \124\ See, e.g., CL-CME-59718 at 11, 13-17, and CL-FIA-59595 at 
5-6.
    \125\ See, e.g., CL-AMG-59709 at 3; and CL-CME-59718 at 13-17.
    \126\ CEA section 4a(a)(3), 7 U.S.C. 6a(a)(3).
---------------------------------------------------------------------------

    Some commenters stated that two pre-Dodd Frank Act provisions in 
CEA section 4a undermine the Commission's interpretation. The first is 
CEA section 4a(e),which states, ``if the Commission shall have fixed 
limits . . . for any contract . . . , then the limits'' imposed by 
DCMs, SEFs or other trading facilities ``shall not be higher than the 
limits fixed by Commission.'' \127\ According to a commenter, the ``if/
then'' formulation suggests position limits should not be presupposed 
for any contract.\128\ The Commission sees the provision differently. 
CEA section 4a(a)(2) applies only to a subset of futures contracts--
contracts in physical commodities. For other commodities, position 
limits remain subject to the Commission's determination of necessity, 
and the ``if/then'' formulation applies and remains logical. There is, 
accordingly, no inconsistency.
---------------------------------------------------------------------------

    \127\ CEA section 4a(e), 7 U.S.C. 6a(e).
    \128\ CL-CME-59718 at 10 (citing CEA section 4a(e)).
---------------------------------------------------------------------------

    The second pre-Dodd Frank Act provision the commenters mentioned is 
CEA section 5(d)(5); \129\ it gives the exchanges discretionary 
authority to impose position limits on all commodity derivatives ``as 
is necessary and appropriate.'' \130\ There is, however, no 
inconsistency. Exchanges retain the discretionary authority to set 
position limits for the many commodities not covered by CEA section 
4a(a)(2), and they retain the discretion to impose position limits for 
physical commodities, so long as the limits are no higher than federal 
position limits.
---------------------------------------------------------------------------

    \129\ 7 U.S.C. 7(d)(5).
    \130\ CL-CME-59718 at 11 (citing 7 U.S.C. 7(d)(5)).
---------------------------------------------------------------------------

    Some commenters cited other language in CEA section 5(d)(5) to 
support their assertion that, notwithstanding the Dodd-Frank Act 
amendments discussed above requiring the Commission to impose limits, 
the Commission retains and should exercise its discretion to impose 
position accountability levels in lieu of limits or delegate that 
authority exchanges to do so. CEA section 5(d)(5) authorizes exchanges 
to adopt ``position limitations or position accountability'' levels in 
order to reduce the threat of manipulation and congestion. These 
commenters also pointed out that the Commission has previously endorsed 
accountability levels for exchanges in lieu of limits.\131\ Other 
commenters disagree. They asserted that, given what they interpret as a 
mandate in CEA section 4a(a)(2) for the Commission to impose position 
limits for physical commodities, it would be inappropriate for the 
Commission to consider imposing position accountability levels instead 
for those commodities, or to allow exchanges to do so.\132\
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    \131\ CL-CME-59718 at 10; CL-AMG-59709 5-6; CL-FIA-59595 at 12-
13; CL-FIA-60392 at 4-6, 8 (asserting that under the Commission's 
general rulemaking authority in CEA section 8a(5), 7 U.S.C. 12a(5), 
``the Commission has the power to adopt, as part of an 
accountability regime, a rule pursuant to which it or a DCM could 
direct a market participant to reduce speculative positions above an 
accountability limit because that authority is `reasonably necessary 
to effectuate' a position accountability rule,'' and observing that 
the Commission previously determined in rulemakings that exchange-
set accountability levels represent an alternative means to limit 
excessive speculation); CL-FIA-60303 at 3-4; CL-DBCS-59569 at 4; CL-
MFA-60385 at 7-8, 10-14; and CL-Olam-59658 at 1-2 (declaring that 
the Commission can and should permit exchanges to administer 
position accountability levels in lieu of Commission-set limits 
under CEA section 4a(a)(2)).
    \132\ CL-Public Citizen-60390 at 3-4 (noting other concerns with 
exchange set limits or accountability levels); CL-IECA 60389 at 3-4 
(asserting that the Commission should not cede its authority to 
exchanges); CL-AFR-60953 at 4; CL-A4A-59686 at 2-3; CL-IECA-59671 at 
2; and CL-CMOC-59720 at 2.
---------------------------------------------------------------------------

    The Commission agrees with the latter group of commenters and finds 
the former reading strained. CEA section 4a(a)(2) makes no mention of 
position accountability levels. Regardless whether pre-Dodd Frank 
section 5(d)(5) allows exchanges to set accountability levels in lieu 
of limits where the Commission has not set limits, and regardless 
whether the Commission has in the past endorsed exchange-set position 
accountability levels in lieu of limits, CEA section 4a(a)(2) does not 
mention that tool. If anything, reference to accountability levels 
elsewhere in the CEA shows that Congress understands that exchanges 
have used position accountability, but made no reference to it in 
amended CEA section 4a(a).
    iii. Avoiding Surplusage or Nullity: Several commenters took issue 
with the Commission's preliminary determination that its interpretation 
is necessary in order to avoid rendering CEA section 4a(a)(2)(A) 
surplusage. These commenters suggested that reading the term 
``standards'' in CEA section 4a(a)(2)(A) to include the antecedent 
necessity finding in CEA section 4a(a)(1) will not render CEA section 
4a(a)(2) surplusage because if the Commission finds a position limit is 
``necessary'' and ``appropriate,'' it now must impose one (as opposed 
to pre-Dodd-Frank, when the Commission had authority but not a mandate 
under CEA section 4a(a) to impose limits).\133\ The Commission finds 
this reading highly unlikely. There is no history of the Commission 
determining that limits are necessary and appropriate, but then 
declining to impose them. Nor is it reasonable to expect that the 
Commission might do so. Indeed, historically necessity findings were 
made only in connection with establishing limits.
---------------------------------------------------------------------------

    \133\ CL-ISDA/SIFMA-59611 at 5; and CL-MFA-59606 at 9-10. The 
District Court expressed the same concern. 887 F. Supp. 2d at 274-
75.
---------------------------------------------------------------------------

    Furthermore, if Congress had still wanted to leave it to the 
Commission to ultimately decide whether a limit was necessary, there is 
no reason for it to have also set tight deadlines, repeat multiple 
times that the limits are ``required,'' and direct the agency to 
conduct a study after the limits were imposed. In other words, 
requiring the Commission to make an antecedent necessity finding would 
render many of the Dodd-Frank Act amendments superfluous. For example, 
if the Commission determined limits were not necessary then, contrary 
to CEA section 4a(a)(2), no limits were in fact ``required,'' no limits 
needed to be imposed by the deadlines, and no study

[[Page 96716]]

needed to be conducted. But none of these provisions were phrased in 
conditional terms (e.g., if the Commission finds a limit necessary, 
then it shall . . . ). Had Congress wanted the Commission to continue 
to be the decisionmaker regarding the need for limits, it could have 
expressed that view in countless ways that would not strain the 
statutory language in this way.
    CME contended that the Commission's position--that requiring a 
necessity finding would essentially give the Commission the same 
permissive authority it had before the Dodd-Frank Act amendments--is 
``short-sighted'' because other provisions of CEA section 4a(a) ``would 
still have practical significance.'' In support of this view, CME 
stated that new CEA sections 4a(a)(2)(C) and 4(a)(3)(B) have 
significance even if the Commission is required to make a necessity 
finding because they ``set forth safeguards that the CFTC must balance 
when it establishes limits'' after ``the CFTC finds that such limits 
are necessary.'' The Commission preliminarily believes it unlikely that 
Congress would have intended that. On CME's reading, the statute would 
place additional requirements to constrain the Commission's preexisting 
authority. Given the background for the amendments, particularly the 
studies that preceded the Dodd-Frank Act, the Commission sees no reason 
why Congress would have placed additional constraints, nor any reason 
it would have placed them with respect to physical commodities but not 
excluded commodities or others. This comment also does not address the 
thrust of the Commission's interpretation, which is that finding a 
mandate is the only way to read the entirety of the statute 
harmoniously, including the timing requirements of CEA section 
4a(a)(2)(B) and the reporting requirements of Section 719 of the Dodd-
Frank Act, account for the historical context, and, at the same time, 
avoid reading CEA section 4a(a)(2)(A) as the functional equivalent of 
CEA section 4a(a)(1).\134\ CME also cited CEA section 4a(a)(5), which 
requires position limits for economically equivalent swaps, to make the 
same point that there are still meaningful provisions in CEA section 
4a(a), even with a necessity finding. But CEA section 4a(a)(1) already 
authorizes the Commission to establish limits on swaps as necessary, 
and so the authority, which would be discretionary under CME's reading, 
to impose limits on economically equivalent swaps would add nothing to 
the statute and the amendment would be wholly superfluous.
---------------------------------------------------------------------------

    \134\ In this vein, then-Commissioner Mark Wetjen, who was an 
aide to Senate Majority Leader Harry Reid during the Dodd-Frank 
legislative process, stated at the Commission's public meeting to 
adopt the December 2013 proposal that to read Section 4a(a)(2)(A) to 
require the same antecedent necessity finding as Section 4a(a)(1) 
``does not comport with my understanding of the statute's intent as 
informed by my experience working as a Senate aide during 
consideration of these provisions.'' Statement of Commissioner Mark 
Wetjen, Public Meeting of the Commodity Futures Trading Commission 
(Nov. 5, 2013), http://www.cftc.gov/PressRoom/SpeechesTestimony/wetjenstatement110513.
---------------------------------------------------------------------------

6. Conclusion
    Having carefully considered the text, purpose and legislative 
history of CEA section 4a(a) as a whole, along with its own experience 
and expertise and the comments on its proposed interpretation, the 
Commission preliminarily believes for the reasons above that Congress--
while not expressing itself with ideal clarity--decided that position 
limits were necessary for a subset of commodities, physical 
commodities, mandated the Commission to impose them on those 
commodities in accordance with certain criteria, and required that the 
Commission do so expeditiously, without first making antecedent 
findings that they are necessary to prevent excessive speculation. 
Consistent with this interpretation, Congress also directed the agency 
to report back to Congress on their effectiveness within one year. In 
the Commission's preliminary view, this interpretation, even if not the 
only possible interpretation, best gives effect to the text and purpose 
of the Dodd-Frank Act amendments in the context of the pre-existing 
position limits provision, while ensuring that neither the amendments 
nor the pre-existing language is rendered superfluous.

C. Necessity Finding

1. Necessity
    The Commission reiterates its preliminary alternative necessity 
finding as articulated in the December 2013 Position Limits Proposal: 
\135\ Out of an abundance of caution in light of the district court 
decision in ISDA v. CFTC,\136\ and without prejudice to any argument 
the Commission may advance in any forum, the Commission reproposes, as 
a separate and independent basis for the Rule, a preliminary finding 
herein that the speculative position limits in this reproposed Rule are 
necessary to achieve their statutory purposes.
---------------------------------------------------------------------------

    \135\ December 2013 Position Limits Proposal, 78 FR at 75685.
    \136\ International Swaps and Derivatives Association v. United 
States Commodity Futures Trading Commission, 887 F. Supp. 2d 259 
(D.D.C. 2012).
---------------------------------------------------------------------------

    As described in the Proposal, the policy basis and reasoning for 
the Commission's necessity finding is illustrated by two major 
incidents in which market participants amassed massive futures 
positions in silver and natural gas, respectively, which enabled them 
to cause sudden and unreasonable fluctuations and unwarranted changes 
in the prices of those commodities. CEA section 4a(a)(1) calls for 
position limits for the purpose of diminishing, eliminating, or 
preventing the burden of excessive speculation.\137\ Although both 
episodes involved manipulative intent, the Commission believes that 
such intent is not necessary for an excessively large position to give 
rise to sudden and unreasonable fluctuations or unwarranted changes in 
the price of an underlying commodity. This is illustrated, for example, 
by the fact that when the perpetrators of the silver manipulation lost 
the ability to control their scheme, i.e., to manipulate the market at 
will, they were forced to liquidate quickly, which, given the amount of 
contracts sold in a very short time, caused silver prices to plummet. 
Any trader who was forced by conditions in the market or their own 
financial condition to liquidate a very large position could 
predictably have similar effects on prices, regardless of their 
motivation for amassing the position in the first place. Moreover, 
although these two episodes unfolded in contract markets for silver and 
natural gas, and unfolded at two different times in the past, there is 
nothing unique about either market at either relevant time that causes 
the Commission to restrict its preliminary finding of necessity to 
those markets or to reach a different conclusion based on market 
conditions today. Put another way, any contract market has a limited 
ability, closely linked to the market's size, to absorb the 
establishment and liquidation of large speculative positions in an 
orderly manner.\138\ The silver and natural gas examples illustrate 
these issues, but the reasoning applies beyond their specific facts. 
Accordingly, the Commission preliminarily finds it necessary to 
implement position limits as a prophylactic measure for the 25 core 
referenced futures contracts.\139\
---------------------------------------------------------------------------

    \137\ 7 U.S.C. 6a(a)(1).
    \138\ Establishment of Speculative Position Limits, 46 FR 50938, 
50940 (Oct. 16, 1981).
    \139\ The Commission's necessity finding is also supported by 
the consideration of costs and benefits below.

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

[[Page 96717]]

    The Commission received many comments on its preliminary 
alternative necessity finding; the Commission summarizes and responds 
to significant comments below.
    a. Studies' Lack of Consensus.\140\ The Commission stated in the 
December 2013 Position Limits Proposal that the lack of consensus in 
the studies reviewed at that time warrants acting on the side of 
caution and implementing position limits as a prophylactic measure, 
``to protect against undue price fluctuations and other burdens on 
commerce that in some cases have been at least in part attributable to 
excessive speculation.'' \141\ Some commenters suggested that a lack of 
consensus means instead that the Commission should not implement 
position limits,\142\ that the issue merits further study,\143\ that it 
would be arbitrary and capricious to implement position limits,\144\ 
and that the desire to err on the side of caution should be irrelevant 
to an assessment of whether position limits are necessary.\145\ In 
short, these comments contend that the lack of consensus means position 
limits cannot be necessary.\146\ The Commission disagrees. The lack of 
consensus does not provide ``objective evidence that position limits 
are not necessary;'' \147\ rather, it suggests that they remain 
controversial.\148\ In response to these comments, the Commission 
believes that Congress could not have intended by using the word 
``necessary'' to restrict the Commission from determining to implement 
position limits unless experts unanimously agree or form a consensus 
they would be beneficial. Otherwise a necessity finding would be 
virtually impossible and, in fact, the Commission could plausibly be 
stymied by interested persons publishing self-interested studies. The 
Commission's view in this respect is supported by the text of CEA 
section 4a(a)(1), which states that there shall be such limits as ``the 
Commission finds'' are necessary.\149\ Thus, while the Commission finds 
the studies useful, it does not cede the necessity finding to the 
authors.
---------------------------------------------------------------------------

    \140\ The Commission observed in the December 2013 Position 
Limits Proposal that the studies discussed therein ``overall show a 
lack of consensus regarding the impact of speculation on commodity 
markets and the effectiveness of position limits.'' 78 FR at 75695.
    \141\ December 2013 Position Limits Proposal, 78 FR at 75695.
    \142\ E.g., CL-CCMR-59623 at 4-5; CL-EEI-EPSA-59602 at 3; CL-
FIA-59595 at 7; and CL-IECAssn-59679 at 3.
    \143\ E.g., CL-BG Group-59656 at 3; CL-EEI-EPSA-59602 at 3; and 
CL-WGC-59558 at 2.
    \144\ CL-Chamber-59684 at 4.
    \145\ CL-CCMR-59623 at 4-5.
    \146\ Contra CL-AFR-59711 at 1; CL-AFR-59685 at 1; CL-Public 
Citizen-59648 at 3; CL-WEED-59628.
    \147\ CL-EEI-EPSA-59602 at 3.
    \148\ A discussion of the cumulative studies reviewed by the 
Commission follows below. See below, Section I.C.2. (discussing 
studies and reports received or reviwed in connection with the 
December 2013 Position Limits Proposal), and accompanying text.
    \149\ This assumes that, contrary to the Commission's 
interpretation of the statute, Congress did not make that 
determination itself as to physical commodity markets.
---------------------------------------------------------------------------

    b. Reliance on Silver and Natural Gas Studies.\150\ The Commission 
stated in the December 2013 Position Limits Proposal that it ``found 
two studies of actual market events to be helpful and persuasive in 
making its preliminary alternative necessity finding,'' \151\ namely, 
the Interagency Silver Study \152\ and the PSI Report on Excessive 
Speculation in the Natural Gas Market.\153\ Some commenters criticized 
the Commission's reliance on these two studies.\154\ These commenters 
dismissed the two studies, variously, as limited, outdated,\155\ 
dubious,\156\ unpersuasive, anecdotal, and irrelevant.\157\ Other 
commenters characterized the episodes as extreme or unique.\158\ Some 
commenters observed that neither study recommended position 
limits.\159\ One noted that, ``Each study focuses on activities in a 
single market during a limited timeframe that occurred years ago.'' 
\160\ Others noted that the Commission has undertaken no independent 
analysis of each market, commodity, or contract affected by this 
rulemaking.\161\ They then claim that because particular markets or 
commodities have unique characteristics, one cannot extrapolate from 
these two specific episodes to other commodities or other markets.\162\ 
Several commenters describe the Hunt brothers silver crisis and the 
collapse of the natural gas speculator Amaranth as instances of market 
manipulation rather than excessive speculation.\163\
---------------------------------------------------------------------------

    \150\ The Commission stated in the December 2013 Position Limits 
Proposal that it found two studies of actual market events to be 
helpful and persuasive in making its preliminary alternative 
necessity finding, namely, the interagency report on the silver 
crisis, 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, and the PSI 
Report on, U.S. Senate, ``Excessive Speculation in the Natural Gas 
Market,'' June 25, 2007.
    \151\ December 2013 Position Limits Proposal, 78 FR at 75695.
    \152\ 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.
    \153\ 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.
    \154\ One commenter called the Commission's choice `cherry-
picking.' CL-Citadel-59717 at 4.
    \155\ The Commission disagrees; that an exemplary event occurred 
in the past does not make it irrelevant.
    \156\ Contra CL-Sen. Levin-59637 at 6 (pointing to ``concrete 
examples'').
    \157\ E.g., CL-Chamber-59684 at 3; CL-CME-59718 at 3, 18; CL-
IECAssn-59679 at 2; CL-ISDA/SIFMA-59611 at 12; and CL-USCF-59644 at 
3.
    \158\ E.g., CL-IECAssn-59679 at 2; and CL-BG Group-59656 at 3. 
Certainly the Commission seeks to prevent extreme events such as 
Amaranth and the Hunt brothers, however infrequently they may occur.
    \159\ E.g., CL-CME-59718 at 18; and CL-CCMR-59623 at 3.
    \160\ CL-CME-59718 at 18.
    \161\ E.g., CL-EEI-EPSA-59602 at 2; CL-WGC-59558 at 2.
    \162\ E.g., CL-Citadel-59717 at 4; CL-ISDA/SIFMA-59611 at 12-14; 
CL-MFA-59606 at 10; and CL-WGC-59558 at 2.
    \163\ E.g., CL-Better Markets-59716 at 12; CL-BG Group-59656 at 
3; CL-COPE-59622 at 4-5; CL-CCMR-59623 at 4; CL-ISDA/SIFMA-59611 at 
13; and CL-AMG-59709 at 5.
---------------------------------------------------------------------------

    As discussed above, the presence of manipulative intent or activity 
does not preclude the existence of excessive speculation, and traders 
do not need manipulative intent for the accumulation of very large 
positions to cause the negative consequences observed in the Hunt and 
Amaranth incidents. These are some reasons position limits are valuable 
as a prophylactic measure for, in the language of CEA section 4a(a)(1), 
``preventing'' burdens on interstate commerce. The Hunt brothers, who 
distorted the price of silver, and Amaranth, who distorted the price of 
natural gas, are examples that illustrate the burdens on interstate 
commerce of excessive speculation that occurred in the absence of 
position limits, and position limits would have restricted those 
traders' ability to cause unwarranted price movement and market 
volatility, and this would be so even had their motivations been 
innocent. Both episodes involved extraordinarily large speculative 
positions, which the Commission has historically associated with 
excessive speculation.\164\ We are also given no persuasive reason to 
change our conclusion that extraordinarily large speculative positions 
could result in sudden or unreasonable fluctuations or unwarranted 
price changes in other physical commodity markets, just as they did in 
silver and natural case in the Hunt Brothers and Amaranth episodes. 
Although commenters describe changes in these markets over time, the 
characteristics that we find salient have

[[Page 96718]]

not changed materially.\165\ Thus, these two examples remain relevant 
and compelling.
---------------------------------------------------------------------------

    \164\ December 2013 Position Limits Proposal, 78 FR at 75685, n. 
60.
    \165\ See infra Section I.C.1.f., and accompanying text.
---------------------------------------------------------------------------

    CME makes a textual argument in support of the position that CEA 
section 4a(a)(2) requires a commodity-by-commodity determination that 
position limits are necessary. It cites several places in CEA section 
4a(a)(1) that refer to limits as necessary to eliminate ``such burden'' 
on ``such commodity'' or ``any commodity.'' \166\ However, the 
prophylactic measures described herein address vulnerabilities 
characteristic of each market.\167\ Accordingly, the Commission 
believes the statute's use of the singular is immaterial.\168\
---------------------------------------------------------------------------

    \166\ CL-CME-59718 at 13-14.
    \167\ See, e.g., Establishment of Speculative Position Limits, 
46 FR at 50940 (Oct. 16, 1981) (``[I]t 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.'').
    \168\ See also 1 U.S.C. 1 (``In determining the meaning of any 
Act of Congress, unless the context indicates otherwise--words 
importing the singular include and apply to several persons, 
parties, or things[.]'')
---------------------------------------------------------------------------

    The Commission's analysis applies to all physical commodities, and 
it would account for differences among markets by setting the limits at 
levels based on updated data regarding estimated deliverable supply in 
each of the given underlying commodities in the case of spot-month 
limits or based on exchange recommendation, if an exchange recommended 
a spot-month limit level of less than 25 percent of estimated 
deliverable supply, and open interest in the case of single-month and 
all-months-combined limits, for each separate commodity. The 
Commission's Reproposal regarding whether to adopt conditional spot-
month limits is also based on updated data.\169\ The Commission also 
does not find it relevant that the Interagency Silver Study and the PSI 
Report, each of which was published before the Dodd-Frank Act became 
law, do not recommend the imposition of position limits. Based on the 
facts described in those reports, along with the Commission's 
understanding of the policies underlying CEA section 4a(a)(1) in light 
of the Commission's own experience with legacy limits, the Commission 
preliminarily finds that position limits are necessary within the 
meaning of that section.
---------------------------------------------------------------------------

    \169\ See the Commission's discussion of its verification of 
estimates of deliverable supply and work with open interest data, 
below.
---------------------------------------------------------------------------

    c. Commission research. One commenter asserted that the Commission 
failed ``to conduct proper economic analysis to determine, if in fact, 
the position limits as proposed were likely to have any positive impact 
in promoting fair and orderly commodity markets.'' \170\ While 
acknowledging the Commission's resource constraints, this commenter 
remarked on ``the paucity of the published record by the CFTC's s own 
staff'' \171\ and suggests that outside authors be given ``controlled 
access to all of the CFTC's data regarding investor and hedger trading 
records.'' \172\ This commenter then proceeds to accuse the Commission 
of failing to ``conduct such research because they felt the data would 
not in fact support the proposed position limit regulations.'' \173\
---------------------------------------------------------------------------

    \170\ CL-USCF-59644 at 2.
    \171\ CL-USCF-59644 at 2. This commenter exaggerates. The last 
arguably relevant report of Commission staff is ``Commodity Swap 
Dealers & Index Traders with Commission Recommendations'' (Sept. 
2008), available at http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/cftcstaffreportonswapdealers09.pdf. However, several 
authors or co-authors of academic papers reviewed by the Commission 
are or have been affiliated with the Commission in various 
capacities and have added to the current literature relating to 
position limits. Each of Harris, see note240, Kirilenko, see note 
2400, and Overdahl, see notes 240 and 241, are former Chief 
Economists of the Commission. Other authors, e.g., Aulerich, Boyd, 
Brunetti, B[uuml]y[uuml]k[scedil]ahin, Einloth, Haigh, Hranaiova, 
Kyle, Robe, and Rothenberg, are now or have been staff and/or 
consultants to the Commission, have spent sabbaticals at the 
Commission, or have been detailed to the Commission from other 
federal agencies. Graduate students studying with some study 
authors, including some working on dissertations, have also cycled 
through the Commission as interns. Cf. note 180 (disclaimer on paper 
by Harris and B[uuml]y[uuml]k[scedil]ahin).
    \172\ CL-USCF-59644 at 3. Data regarding investor and hedger 
trading records may be protected by section 8 of the CEA, 7 U.S.C. 
12. In general, ``the Commission may not publish data and 
information that would separately disclose the business transactions 
or market positions of any person and trade secrets or names of 
customers . . . .'' 7 U.S.C. 12(a)(1). The Commission must therefore 
be very careful about granting outside economists access to such 
data. Commission registrants have in the past ``questioned why the 
CFTC was permitting outside economists to access CFTC data, why the 
CFTC was permitting the publication of academic articles using that 
data, and . . . the administrative process by which the CFTC was 
employing these outside economists.'' Review of the Commodity 
Futures Trading Commission's Response to Allegations Pertaining to 
the Office of the Chief Economist, Prepared by the Office of the 
Inspector General, Commodity Futures Trading Commission, Feb. 21. 
2014, at ii, available at http://www.cftc.gov/idc/groups/public/@freedomofinformationact/documents/file/oigreportredacted.pdf. The 
Commission is sensitive to these concerns, and strives to ensure 
that reports and publications that rely on Commission data do not 
reveal sensitive information. To do so requires an expenditure of 
effort by Commission staff.
    \173\ CL-USCF-59644 at 3. The Commission rejects the commenter's 
aspersion. The Commission's Office of the Inspector General 
addressed the perception of institutional censorship in its ``Follow 
Up Report: Review of the Commodity Futures Trading Commission's 
Response to Allegations Pertaining to the Office of the Chief 
Economist, Jan. 13, 2016 (``Follow Up Report''), available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/oig_oce011316.pdf. The Follow Up Report emphasizes ``that there has 
been no allegation that the Chairman or Commissioners have attempted 
to prevent certain topics from being researched or to alter 
conclusions,'' Follow Up Report at 11, but nevertheless recommended 
``that OCE not prohibit research topics relevant to the CFTC 
mission.'' Follow Up Report at 10. The Follow Up Report observed 
that recently ``OCE has focused almost exclusively on short-term 
research and economic analysis in support of other Divisions and the 
Commission.'' Follow Up Report at 10.
---------------------------------------------------------------------------

    The Commission disagrees that it has failed to conduct proper 
economic analysis to determine the likely benefits of position limits. 
CEA section 15(a) requires that before promulgating a regulation under 
the Act, the Commission consider the costs and benefits of the action 
according to five statutory factors. The Commission does so below in 
robust fashion with respect to the Reproposal in its entirety, 
including the alternative necessity finding. Neither section 15(a) of 
the CEA nor the Administrative Procedure Act requires the Commission to 
conduct a study in any particular form so long as it considers the 
costs and benefits and the entire administrative record. Section 719(a) 
of the Dodd-Frank Act, on the other hand, provides that the Commission 
``shall conduct a study of the effects (if any) of the position limits 
imposed pursuant to the . . . [CEA] on excessive speculation'' and 
report to Congress on such matters after the imposition of position 
limits.\174\ The Commission will do so as required by Section 719(a), 
thereby fully discharging its duty. At all stages, the Commission has 
relied on and will continue to rely on the input of staff economists in 
the Division of Market Oversight (``DMO'') and the Office of the Chief 
Economist (``OCE'').
---------------------------------------------------------------------------

    \174\ 15 U.S.C. 8307(a). See December 2013 Position Limits 
Proposal, 78 FR at 75684 (discussing section 719(a) of the Dodd-
Frank Act in the context of the Commission's construal of CEA 
section 4a(a) to mandate that the Commission impose position 
limits).
---------------------------------------------------------------------------

d. Excessive Speculation
    One commenter opined that, ``in discussing only the Hunt Brothers 
and Amaranth case studies the Commission has not given adequate weight 
to the benefits that speculators provide to the market.'' \175\ To the 
contrary, the Commission recognizes that speculation is part of a well-
functioning market, particularly insofar as speculators contribute 
valuable liquidity. The focus of this reproposed rulemaking is not 
speculation per se; Congress identified excessive speculation as an 
undue

[[Page 96719]]

burden on interstate commerce in CEA section 4a(a)(1).\176\
---------------------------------------------------------------------------

    \175\ CL-MFA-59606 at 11-12.
    \176\ 7 U.S.C. 6a(a)(1). One commenter suggests that the 
Commission base speculative position limits on ``a determination of 
an acceptable total level of speculation that approximates the 
historic ratio of hedging to investor/speculative trading.'' CL-A4A-
59714 at 4. The Commission declines at this time to adopt such a 
ratio as basis for speculative position limits. Among other things, 
the Commission does not now collect reliable data distinguishing 
hedgers from speculators. Also, there may be levels above a historic 
hedging ratio that still provide liquidity rather than denoting 
excessive speculation. While the Commission has authority under 
section 4a(a)(1) of the Act to impose position limits on a group or 
class of traders, the only way that the Commission knows how to 
implement limit levels based on such a historic ratio would be to 
impose rationing, which the Commission declines to do at this time.
---------------------------------------------------------------------------

    One commenter asserted that the Commission must provide a 
definition of excessive speculation before making any necessity 
finding.\177\ The Commission disagrees that the rule must include such 
a definition. The statute contains no such requirement, and did not 
contain such a requirement prior to the Dodd-Frank Act. The Commission 
has never based necessity findings on a rigid definition. The 
Commission's position on this issue has been clear over time: ``The CEA 
does not define excessive speculation. But the Commission historically 
has associated it with extraordinarily large speculative positions . . 
. .'' \178\ CEA section 4a(a)(1) states that position limits should 
diminish, eliminate, or prevent burdens on interstate commerce 
associated with sudden or unreasonable fluctuations or unwarranted 
changes in the price of commodities.\179\ It stands to reason that 
excessive speculation involves positions large enough to risk such 
unreasonable fluctuations or unwarranted changes. This commenter also 
urges the Commission to ``demonstrate and determine that . . . harmful 
excessive speculation exists or is reasonably likely to occur with 
respect to particular commodities'' \180\ before implementing any 
position limits.\181\ As stated in the December 2013 Position Limits 
Proposal, the Commission referenced its prior determination in 1981 
``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.' '' \182\ The Commission reiterates this 
statement and underscores that these risks are characteristic of 
contract markets generally. Differences among markets can be addressed, 
as the Commission reproposes to do here, by setting the limit levels to 
account for individual market characteristics. Attempting to 
demonstrate and determine that excessive speculation is reasonably 
likely to occur with respect to particular commodities before 
implementing position limits is impractical because historical trading 
data in a particular commodity is not necessarily indicative of future 
events in that commodity. Further, it would require the Commission to 
determine what may happen in a forecasted future state of the market in 
a particular commodity. As the Commission has often repeated, position 
limits are a prophylactic measure. Inherently, then, position limits 
are designed to address the burdens of excessive speculation well 
before they occur, not when the Commission somehow determines that such 
speculation is imminent, which the Commission (or any market actor for 
that matter) cannot reliably do.
---------------------------------------------------------------------------

    \177\ CL-ISDA/SIFMA-59611 at 3, 14-15; see also CL-FIA-59595 at 
6-7.
    \178\ December 2013 Position Limits Proposal, 78 FR at 75685, n. 
60 (citation omitted).
    \179\ 7 U.S.C. 6a(a)(1).
    \180\ CL-ISDA/SIFMA-59611 at 3; see also CL-CCMR-59623 at 4; CL-
Chamber-59684 at 4. Contra CL-Sen. Levin-59637 at 6 (stating 
``[c]ontrary to the complaints of some critics, it would be a waste 
of time and resources for the Commission to expand the proposed 
rules beyond the existing justification to repeat the same analysis, 
reach the same conclusions, and issue the same findings for each of 
the 28 commodities.'').
    \181\ See also CL-CCMR-59623 at 4-5. Another commenter 
``contends that the best available evidence discounts the theory 
that there is excessive speculation distorting the prices in the 
commodity markets.'' CL-MFA-59606 at 13 (citing Pirrong). Such a 
contention is inconsistent 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 . . 
. [agricultural and exempt] commodities. December 2013 Position 
Limits Proposal, 78 FR at 75695 (footnote omitted). Another 
commenter mischaracterizes the finding of the Congressional Budget 
Report, ``Evaluating Limits on Participation and Transactions in 
Markets for Emissions Allowances'' (2010), available at http://www.cbo.gov/publication/21967 (``CBO Report''); the CBO Report does 
not conclude ``that position limits are harmful to markets.'' CL-
IECAssn-59679 at 3. Rather, in the context of creating markets for 
emissions allowance trading, the CBO Report discusses both the uses 
and benefits and the challenges and drawbacks of not only position 
limits but also circuit breakers, in addition to banning certain 
types of traders and banning allowance derivatives. Among other 
things, the CBO Report states, ``Position Limits would probably 
lessen the possibility of systemic risk and manipulation in 
allowance markets . . . .'' CBO Report at viii. Another commenter 
states that a ``CFTC study'' found that the 2008 crude oil crisis 
was primarily due to fundamental factors in the supply and demand of 
oil. CL-CCMR-59623 at 4. The referenced study is Harris and 
B[uuml]y[uuml]k[scedil]ahin, The Role of Speculators in the Crude 
Oil Futures Market (working paper 2009). See generally note 240 
(listing studies that employ the Granger method of statistical 
analysis). While Harris is a former Chief Economist, and 
B[uuml]y[uuml]k[scedil]ahin is a former staff economist in OCE, as 
noted above, the cover page of the referenced paper contains the 
standard disclaimer, ``This paper reflects the opinions of its 
authors only, and not those of the U.S. Commodity Futures Trading 
Commission, the Commissioners, or other staff of the Commission.'' 
That is, it is not a ``CFTC study.'' In addition, other studies of 
that market at that time reached different conclusions. Cf. note 252 
(citing study that concludes price changes precede the position 
change). The Commission reviewed several studies of the crude oil 
market around 2008 and discusses them herein. See discussion of 
persuasive academic studies, below. The Commission cautions that, 
given the continuing controversy surrounding position limits, it is 
unlikely that one study will ever be completely dispositive of these 
complicated and difficult issues.
    \182\ December 2013 Position Limits Proposal, 78 FR at 75683.
---------------------------------------------------------------------------

e. Volatility
    Commenters assert, variously, that ``the volatility of commodity 
markets has decreased steadily over the past decade,'' \183\ that 
``research found that there was a negative correlation between 
speculative positions and market volatility,'' \184\ research shows 
that factors other than excessive speculation were primarily 
responsible for specific instances of price volatility,\185\ that 
futures markets are associated with lower price volatility,\186\ that 
particular types of speculators provide liquidity rather than causing 
price volatility,\187\ that position limits will increase 
volatility,\188\ etc. It would follow, then, according to these 
commenters, that because they believe there is little or no volatility 
(no sudden or unreasonable fluctuations or unwarranted price changes), 
or no volatility caused by excessive speculation, position limits 
cannot be necessary.
---------------------------------------------------------------------------

    \183\ CL-CCMR-59623 at 4 (claim supported only by a reference to 
a comment letter that pre-dates the December 2013 Position Limits 
Proposal).
    \184\ CL-MFA-59606 at 12 (citing one academic paper, Irwin and 
Sanders, The Impact of Index and Swap Funds on Commodity Futures 
Markets: Preliminary Results (working paper 2010)). See generally 
note 240 (studies that employ the Granger method of statistical 
analysis).
    \185\ E.g., CL-MFA-59606 at 11-12, n. 26. Contra CL-AFR-59685 at 
1 (stating ``We understand that other factors contribute to highly 
volatile commodity prices, but excessive speculation plays a 
significant part, according to studies by Princeton, MIT, the 
Petersen Institute, the University of London, and the U.S. Senate, 
among other highly credible sources.'').
    \186\ CL-MFA-59606 at 13, n. 30.
    \187\ E.g., CL-MFA-59606 at 12-13 (hedge funds). Cf. CL-SIFMA 
AMG-59709 at 15 (asserting ``neither Amaranth nor the Hunt brothers 
were in any way involved in commodity index swaps''), 16 (registered 
investment companies and ERISA accounts).
    \188\ CL-MFA- 59606 at 13. Contra CL-CMOC-59702 at 2 
(maintaining that witness testimony before policymakers ``confirmed 
that the erosion of the position limits regime was a leading cause 
in market instability and wild price swings seen in recent years and 
that it had led to diminished confidence in the commodity derivative 
markets as a hedging and price discovery tool'').
---------------------------------------------------------------------------

    As stated above, the Commission recognizes that speculation is part 
of a

[[Page 96720]]

well-functioning market particularly, as noted in comments, as a source 
of liquidity. Position limits address excessive speculation, not 
speculation per se. Position limits neither exclude particular types of 
speculators nor prohibit speculative transactions; they constrain only 
speculators with excessively large positions in order to diminish, 
eliminate, or prevent an undue and unnecessary burden on interstate 
commerce in a commodity.\189\ The Commission agrees that futures 
markets are associated with, and may indeed contribute to, lower 
volatility in underlying commodity prices. However, as Congress 
observed, in CEA section 4a(a)(1), excessive speculation in a commodity 
contract that causes 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.\190\ In promulgating 
CEA section 4a(a)(1), Congress adopted position limits as a useful tool 
to diminish, eliminate, or prevent those problems. The Commission 
believes that position limits are a necessary prophylactic measure to 
guard against disruptions arising from excessive speculation, and the 
Commission has endeavored to repropose limit levels that are not so low 
as to hamper healthy speculation as a source of liquidity.\191\
---------------------------------------------------------------------------

    \189\ That a particular type of speculator trades a different 
type of instrument, employs a different trading strategy, or is 
unlevered, diversified, subject to other regulatory regimes, etc., 
so as to distinguish it in some way from Amaranth or the Hunt 
brothers does not overcome the size of the position held by the 
speculator, and the risks inherent in amassing extraordinarily large 
speculative positions.
    \190\ CEA section 4a(a)(1); 7 U.S.C. 6a(a)(1).
    \191\ See the discussion of the impact analysis, below under 
Sec.  150.2.
---------------------------------------------------------------------------

f. Basis for Determination
    One commenter states, ``The necessity finding . . . proffered by 
the Commission--which consists of a discussion of two historical events 
and a cursory review of existing studies and reports on position limits 
related issues--falls short of a comprehensive analysis and 
justification for the proposed position limits.\192\ We disagree with 
the commenter's opinion that the Commission's analysis is not 
comprehensive or falls short of justifying the reproposed rule.\193\
---------------------------------------------------------------------------

    \192\ CL-Citadel-59717 at 3-4 (footnote omitted). Contra CL-Sen. 
Levin-59637 at 6 (declaring that ``[t]he Commission's analysis and 
findings, paired with concrete examples, provide a comprehensive 
explanation of the principles and reasoning behind establishing 
position limits.'').
    \193\ Although the events described in the proposal are 
sufficient to support the necessity finding for the reasons given, 
the Commission also notes reports that more recent market events 
have been perceived as involving excessively large positions that 
have caused or threatened to cause market disruptions. See, e.g., Ed 
Ballard, Speculators sit on Sugar Pile, Raising Fears of Selloff, 
The Wall Street Journal (Nov. 21, 2016) (``Speculative investors 
have built a record position in sugar this year, sparking fears of a 
swift pullback in its price.''); Of mice and markets, A surge in 
speculation is making commodity markets more volatile, The Economist 
(Sept. 10, 2016) (discussing ``scramble by funds to unwind their 
short positions in'' West Texas Intermediate that appears to have 
``fanned a rally in spot oil prices''). As discussed elsewhere, 
willingness to participate in the futures and swaps markets may be 
reduced by perceptions that a participant with an unusually large 
speculative position could exert unreasonable market power.
---------------------------------------------------------------------------

    Another commenter states that the December 2013 Position Limits 
Proposal ``does not provide any quantitative analysis of how the 
outcome of these [two historical] events might have differed if the 
proposed position limits had been in place.'' \194\ The Commission 
disagrees. The Commission stated in the December 2013 Position Limits 
Proposal that, ``The Commission believes that if Federal speculative 
position limits had been in effect that correspond to the . . . . 
[proposed] limits . . . , across markets now subject to Commission 
jurisdiction, such limits would have prevented the Hunt brothers and 
their cohorts from accumulating such large futures positions.'' \195\ 
This statement was based on calculations using a methodology similar to 
\196\ that proposed in the December 2013 Position Limits Proposal 
applied to quantitative data included and as described therein.\197\ 
The Commission's stated belief is unchanged at the higher single-month 
and all-months-combined limit levels of 7,600 contracts that the 
Commission adopts today for silver.\198\ Nevertheless, historical data 
regarding absolute position size from the period of the late-1970's to 
1980 may not be readily comparable to the numerical limits adopted in 
the current market environment. Accordingly, the Commission is 
reproposing establishing levels using the methodology based on the size 
of the current market as described elsewhere in this release.
---------------------------------------------------------------------------

    \194\ CL-WGC-59558 at 2; see also CL-BG Group-59656 at 3.
    \195\ December 2013 Position Limits Proposal, 78 FR at 75690.
    \196\ The Commission's methodology is a fair approximation of 
how the limits would have been applied during the time of the silver 
crisis. See December 2013 Position Limits Proposal, 78 FR at 75690.
    \197\ December 2013 Position Limits Proposal, 78 FR at 75690-1.
    \198\ For example, using historical month-end open interest 
data, the Commission calculated a single- and all-months-combined 
limit level of 6,700 contracts, which would have been exceeded by a 
total Hunt position of over 12,000 contracts for March delivery. 
December 2013 Position Limits Proposal, 78 FR at 75690. Baldly, a 
position of 12,000 contracts would still exceed a 7,600 contract 
limit.
---------------------------------------------------------------------------

    With respect to Amaranth, the Commission stated, ``Based on certain 
assumptions . . . , the Commission believes that if Federal speculative 
position limits had been in effect that correspond to the limits that 
the Commission . . . [proposed in the December 2013 Position Limits 
Proposal], 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.'' \199\ This statement of belief about Amaranth was also 
based on calculations using the methodology applied to quantitative 
data as described and included in the December 2013 Position Limits 
Proposal preamble.\200\ The historical size of Amaranth positions would 
no longer breach the higher single-month and all-months-combined limit 
levels of 200,900 contracts that the Commission adopts today for 
natural gas.\201\ However, the Commission is reproposing setting a 
level using a methodology that adapts to changes in the market for 
natural gas, i.e., the fact that it has grown larger and more liquid 
since the collapse of Amaranth. Thus, it stands to reason that a 
speculator might now have to accumulate a larger position than 
Amaranth's historical position to present a similar risk of disruption 
to the natural gas market. In fact, the Commission has long recognized 
``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.'' \202\ A larger market should have larger 
capacity, other things being equal; \203\ hence, the Commission is 
adopting higher levels of limits. Moreover, costly disruptions like 
those associated with Amaranth remain entirely possible. Because the 
costs of these disruptions can be great, and borne by members of the 
public

[[Page 96721]]

unconnected with trading markets, the Commission preliminarily finds it 
necessary to impose speculative position limits as a preventative 
measure. As markets differ in size, the limit levels differ 
accordingly, each designed to prevent the accumulation of positions 
that are extraordinary in size in the context of each market.
---------------------------------------------------------------------------

    \199\ December 2013 Position Limits Proposal, 78 FR at 75692.
    \200\ December 2013 Position Limits Proposal, 78 FR at 75692-3.
    \201\ See level of initial limits under App. D to part 150.
    \202\ Establishment of Speculative Position Limits, 46 FR 50938, 
50940.
    \203\ A gross comparison such as this may not meaningful. For 
example, the Commission could have increased the size of Amaranth's 
historical position proportionately to the increased size of the 
market and compared it to the limit level for natural gas that the 
Commission adopts today. But such an approach would be less rigorous 
than the analysis on which the Commission bases its determination 
today.
---------------------------------------------------------------------------

    Several commenters opined that the Commission, in reaching its 
preliminary alternative necessity finding, ignores current market 
developments and does not employ the ``new tools'' other than position 
limits available to it to prevent excessive speculation or manipulative 
or potentially manipulative behavior.\204\ Specifically, some 
commenters suggested that position limits are not necessary because 
position accountability rules and exchange-set limits are 
adequate.\205\ The Commission agrees that the Dodd-Frank Act gave the 
Commission new tools with which to protect and oversee the commodity 
markets, and agrees that these along with older tools may be useful in 
addressing market volatility. However, the Commission disagrees that 
the availability of other tools means that position limits are not 
necessary.\206\ Rather the statute, at a minimum, reflects Congress' 
judgment that position limits may be found by the Commission to be 
necessary. The Commission notes that although CEA section 4a(a) 
position limits provisions have existed for many years, the Dodd-Frank 
Act not only retained CEA section 4a(a), but added, rather than 
deleted, several sections. This leads to the conclusion that Congress 
appears to share the Commission's view that the other tools provided by 
Congress were not sufficient.
---------------------------------------------------------------------------

    \204\ E.g., CL-CCMR-59623 at 3 (supporting additional 
transparency and reporting); CL-Citadel-59717 at 4 (pointing to 
available tools, including ``enhanced market surveillance, broadened 
reporting requirements, broadened special call authorities, and 
exchange limits''); CL-ISDA/SIFMA-59611 at 13 (noting that tools 
that the Commission has incorporated include ``enhanced market 
surveillance, broadened reporting requirements, broadened special 
call authorities, and exchange limits''); CL-MFA-59606 at 10; and 
CL-SIFMA AMG-59709 at 5-6 (providing examples of new tools).
    \205\ E.g., CL-CME-59718 at 18; CL-ICE-59645 at 2-4; CL-FIA-
59595 at 6, n. 13, 12-13; and CL-AMG-59709 at 8.
    \206\ The Commission observes that logically there is no reason 
why the availability of some regulatory tools under the CEA should 
preclude the use of another tool explicitly authorized by Congress.
---------------------------------------------------------------------------

    Position accountability, for example, is an older tool, from the 
era of the CFMA. As the Commission explained in the December 2013 
Position Limits Proposal, the 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 as an 
alternative means to prevent such undue burdens on interstate commerce. 
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,'' 
\207\ and it expanded the Commission's authority again in the Dodd-
Frank Act.\208\ While position accountability is useful in providing 
exchanges with information about specific trading activity so that 
exchanges can act if prudent to require a trader to reduce a position 
after the position has already been amassed, position limits operate 
prophylactically without requiring case-by-case, ex post determinations 
about large positions. As to exchange-set accountability levels or 
position limits set at levels below those of federal position limits, 
those remain useful as well and should be used, at the exchanges' 
discretion, in conjunction with federal position limits. They may be 
most useful, for example, with respect to contracts that are not core-
referenced futures contracts or if an exchange determines that federal 
limits are too high to address adequately the conditions in the markets 
it administers. In the regulations that the Commission reproposes 
today, the Commission would update (rather than eliminate) the 
acceptable practices for exchange-set speculative position limits and 
position accountability rules to conform to the Dodd-Frank Act changes 
[as described in the December 2013 Position Limits Proposal].\209\ 
Generally, for contracts subject to speculative limits, exchanges may 
set limits no higher than the federal limits,\210\ and may impose 
``restrictions . . . to reduce the threat of market manipulation or 
congestion, to maintain orderly execution of transactions, or for such 
other purposes consistent with its responsibilities.'' \211\ And Sec.  
150.5(b)(3) sets forth the requirements for position accountability in 
lieu of exchange-set limits in the case of contracts not subject to 
federal limits. The exchanges are also still authorized to react to 
instances of greater price volatility by exercising emergency authority 
as they did during the silver crisis.\212\ In addition, the Commission 
has striven to take current market developments into account by 
considering the market data to which the Commission has access as 
described herein and by considering the description of current market 
developments to the extent included in the comments the Commission has 
received in connection with the December 2013 Position Limits Proposal. 
Some commenters suggest that the Commission, in reaching its 
preliminary alternative necessity finding, has not undertaken any 
empirical analysis of available data.\213\ As discussed above, the 
Commission carefully reviewed the Interagency Silver Study and the PSI 
Report on Excessive Speculation in the Natural Gas Market.\214\ The 
Commission also carefully considered the studies submitted during the 
various comment periods regarding the December 2013 Position Limits 
Proposal and the 2016 Supplemental Position Limits Proposal. Other 
commenters suggest that the Commission relies on incomplete, 
unreliable, or out of date data, and that the Commission should collect 
more and/or better data before determining that position limits are 
necessary or implementing position limits.\215\ The Commission 
disagrees. The Commission has considered the recent data presented by 
the exchanges in support of their estimates of deliverable supply. The 
Commission is expending significant, agency-wide efforts to improve 
data collection and to analyze the data it receives. The quality of the 
data on which the Commission relies has improved since the December 
2013 Position Limits Proposal. The Commission is satisfied with the 
quality of the data on which it bases its Reproposal.
---------------------------------------------------------------------------

    \207\ 78 FR at 75681 (footnotes omitted).
    \208\ See generally December 2013 Position Limits Proposal, 78 
FR at 75681.
    \209\ See generally December 2013 Position Limits Proposal, 78 
FR at 75747-8.
    \210\ See discussion of requirements for exchange-set position 
limits under Sec.  150.5, below, and exchange core principles 
regarding position limits, below.
    \211\ See reproposed Sec.  150.5(a)(6)(iii).
    \212\ See generally 7 U.S.C. 7(d)(6) (DCM Core Principles: 
Emergency Authority); 7 U.S.C. 7b-3(f)(8) (Core Principles for Swap 
Execution Facilities--Emergency Authority); 17 CFR 37.800 (Swap 
Execution Facility Core Principle 8--Emergency authority), 17 CFR 
38.350 (Designated Contract Markets -Emergency Authority--Core 
Principle 6).
    \213\ E.g., CL-FIA-59595 at 3; CL-EEI-EPSA-59602 at 2, 8-9.
    \214\ See supra Section I.C.2 (discussing the Interagency Silver 
Study and the PSI Report on Excessive Speculation in the Natural Gas 
Market).
    \215\ E.g., CL-Citadel-59717 at 4-5; CL-EEI-EPSA-59602 at 8-9.
---------------------------------------------------------------------------

    One commenter opines that, ``The Proposal's `necessary' finding 
offers no reasoned basis for adopting its framework and the shift in 
regulatory policy it embodies.'' \216\ To the contrary,

[[Page 96722]]

the necessity finding, including the Commission's responses to 
comments, is the Commission's explanation of why position limits are 
necessary.\217\
---------------------------------------------------------------------------

    \216\ CL-CME-59718 at 3.
    \217\ See CL-Sen. Levin-59637 at 6 (stating that the 
Commission's necessity finding ``appropriately reflects 
Congressional action in enacting the Dodd-Frank Act which requires 
the Commission to impose appropriate position limits on speculators 
trading physical commodities.'').
---------------------------------------------------------------------------

g. Non-Spot-Month Limits
    Some commenters opine that ``the Commission's proposed non-spot-
month position limits do not increase the likelihood of preventing the 
excessive speculation or manipulative trading exemplified by Amaranth 
or the Hunt brothers relative to the status quo.'' \218\ The Commission 
disagrees; as repeated above, ``the capacity of the market is not 
unlimited.'' \219\ This includes markets in non-spot month contracts. 
Thus, as with spot-month contracts, extraordinarily large positions in 
non-spot month contracts may still be capable of distorting 
prices.\220\ If prices are distorted, the utility of hedging may 
decline.\221\ One commenter argues for non-spot month position 
accountability rules; \222\ the Commission discusses position 
accountability above.\223\ Another argues that Amaranth was really just 
``another case of spot-month misconduct.'' \224\ The Commission 
disagrees that this limits the relevance of Amaranth; a speculator like 
Amaranth may attempt to distort the perception of supply and demand in 
order to benefit, for instance, calendar spread positions by, for 
instance, creating the perception of a nearby shortage of the commodity 
which a speculator could do by accumulating extraordinarily large long 
positions in the nearby month.\225\ One commenter states that 
``improperly calibrated non-spot month limits would also deter 
speculative activity that triggers no risk of manipulation or `causing 
sudden or unreasonable fluctuations or unwarranted changes in the price 
of such commodity,' the hallmarks of `excessive speculation.' '' \226\ 
The Commission sees little merit in this objection because the 
Reproposal would calibrate the levels of the non-spot month limits to 
accommodate speculative activity that provides liquidity for hedgers.
---------------------------------------------------------------------------

    \218\ CL-AMG-59709 at 9. See the Commission's response to the 
comment regarding the purported lack of ``quantitative analysis of 
how the outcome of these [two historical] events might of differed 
if the proposed position limits had been in place'' at the text 
accompanying notes 192-200 above. See also CL-CME-59718 at 41-3; CL-
ISDA/SIFMA-59611 at 28.
    \219\ See note 202 supra and accompanying text.
    \220\ See December 2013 Position Limits Proposal, 78 FR at 75691 
(citing the PSI Report, ``Amaranth accumulated such large positions 
and traded such large volumes of natural gas futures that it 
distorted market prices, widened price spread, and increased price 
volatility.'').
    \221\ See December 2013 Position Limits Proposal, 78 FR at 75692 
(citing the PSI Report, ``Commercial participants in the 2006 
natural gas markets were reluctant or unable to hedge.'').
    \222\ CL-CME-59718 at 41-42.
    \223\ See notes 207-212 supra and accompanying text.
    \224\ CL-ISDA/SIFMA-59611 at 28.
    \225\ The Commission discussed the trading activity of Amaranth 
at length in the December 2013 Position Limits Proposal, 78 FR at 
75691-3; in particular, Amaranth's calendar spread trading is 
discussed at 78 FR 75692. The Commission repeats that the findings 
of the Permanent Subcommittee in the PSI Report support the 
imposition of speculative position limits outside the spot month. A 
trader, who does not liquidate an extraordinarily large long futures 
position in the nearby physical-delivery futures contract, contrary 
to typical declining open interest patterns in a physical-delivery 
contract approaching expiration, may cause the nearby futures price 
to increase as short position holders, who do not wish to make 
physical delivery, bid up the futures price in an attempt to offset 
their short positions. Potential liquidity providers who do not 
currently hold a deliverable commodity may be hesitant to establish 
short positions as a physical-delivery futures contract approaches 
expiration, because exchange rules and contract terms require such 
short position holder to prepare to make delivery by obtaining the 
cash commodity.
    \226\ CL-CME-59718 at 43; cf. CL-APGA-59722 at 3 (asserting that 
``the non-spot month limits being proposed by the Commission are too 
high to be effective'').
---------------------------------------------------------------------------

h. Meaning of Necessity
    One commenter suggests that position limits could only be necessary 
if they were the only means of preventing the Hunt brothers and 
Amaranth crises.\227\ First, while the Commission relies on these 
incidents to explain its reasoning, the risks they illustrate apply to 
all markets in physical commodities, and so the efficacy of the limits 
the Commission adopts today, and the extent to which other tools are 
sufficient, cannot be judged solely by whether they might have 
prevented those specific incidents. Second, in any event, the 
Commission rejects such an overly restrictive reading, which lacks a 
basis in both common usage and statutory construction. The Commission 
preliminarily finds that limits are necessary as a prophylactic tool to 
strengthen the regulatory framework to prevent excessive speculation ex 
ante to diminish the risk of the economic harm it may cause further 
than it would reliably be from the other tools alone. Other commenters 
question why the Commission proposed limits at levels they contend are 
too high to be effective, undercutting the Commission's alternative 
necessity finding.\228\ One commenter points out that the limit levels 
as proposed would not have prevented the misconduct alleged by the 
Commission in a particular enforcement action filed in 2011.\229\ As 
repeated elsewhere in this Notice \230\ and in the December 2013 
Position Limits Proposal,\231\ in establishing limits, the Commission 
must, ``to the maximum extent practicable, in its discretion . . . 
ensure sufficient market liquidity for bona fide hedgers.\232\ The 
Commission realizes that the reproposed initial limit levels may 
prevent or deter some, but fail to eliminate all, excessive speculation 
in the markets for the 25 commodities covered by this first phase of 
implementation. But the Commission is concerned that initial limit 
levels set lower than those reproposed today, and in particular low 
enough to prevent market manipulation or excessive speculation in 
specific, less egregious cases than the Hunt brothers or Amaranth, 
could impair liquidity for hedges.\233\
---------------------------------------------------------------------------

    \227\ CL-CCMR-59623 at 4.
    \228\ CL-ISDA/SIFMA-59611 at 28; CL-Better Markets-59716 at 24; 
CL-APGA-59722 at 6-7.
    \229\ CL-Better Markets-59716 at 22, n. 38 (Parnon Energy).
    \230\ See the discussion in levels of limits, under Sec.  150.2, 
below.
    \231\ E.g., December 2013 Position Limits Proposal, 78 FR at 
75681.
    \232\ CEA section 4a(a)(3)(B)(iii), 7 U.S.C. 6a(a)(3)(B)(iii). 
Some commenters expressed concern that position limits could 
disproportionately affect commercial entities. E.g., CL-CME-59718 at 
43; CL-APGA-59722 at 3. Some commenters expressed concern about the 
application of position limits to trade options. E.g., CL-APGA-59722 
at 3; CL-EEI-EPSA-59602 at 3. The Commission reminds commenters that 
speculative position limits do not apply to bona fide hedging 
transactions or positions. CEA section 4a(c), 7 U.S.C. 6a(c).
    \233\ The Commission will revisit the specific limitations set 
forth in CEA section 4a(a)(3) when, under reproposed Sec.  150.2(e), 
it considers resetting limit levels.
---------------------------------------------------------------------------

    The Commission requests comment on all aspects of this section.
2. Studies and Reports
    The Commission has reviewed and evaluated studies and reports 
received as comments on the December 2013 Position Limits Proposal, in 
addition to the studies and reports reviewed in connection with the 
December 2013 Position Limits Proposal \234\ (such

[[Page 96723]]

studies and reports, collectively, ``studies''). Appendix A to this 
preamble is a summary of the various studies reviewed and evaluated by 
the Commission.
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    \234\ A list of studies and reports that the Commission reviewed 
in connection with the December 2013 Position Limits Proposal was 
included in its Appendix A to the preamble. December 2013 Position 
Limits Proposal, 78 FR at 75784-7. One commenter observed that the 
studies reviewed in connection with the December 2013 Position 
Limits Proposal are not all ``necessarily germane to specific 
position limits proposed.'' CL-Citadel-59717 at 4. See also CL-CCMR-
59623 at 5 (stating that it had reviewed the studies, and found that 
``only 27 address position limits''). The Commission acknowledges 
that some studies are more relevant than others. The Commission in 
the December 2013 Position Limits Proposal was disclosing the 
studies that it had reviewed and evaluated. The Commission requested 
comment on its discussion of the studies, and invited commenters to 
advise the Commission of other studies to consider, in the hope that 
commenters would indicate which studies they believe are more 
germane or persuasive and suggest other studies for Commission 
review.
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    The Commission observed in the December 2013 Position Limits 
Proposal, ``There is a demonstrable lack of consensus in the studies.'' 
\235\ Neither the passage of time nor the additional studies have 
changed the Commission's view: As a group, these studies do not show a 
consensus in favor of or against position limits.\236\ In addition to 
arriving at disparate conclusions, the quality of the studies varies. 
Nevertheless, the Commission believes that some well-executed studies 
suggest that excessive speculation cannot be excluded as a possible 
cause of undue price fluctuations and other burdens on commerce in 
certain circumstances. All of these factors persuade the Commission to 
act on the side of caution in preliminarily finding limits necessary, 
consistent with their prophylactic purpose. For these reasons, 
explained in more detail below, the Commission preliminarily concludes 
that the studies, individually or taken as a whole, do not persuade the 
Commission to reverse course \237\ or to change its necessity 
finding.\238\
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    \235\ December 2013 Position Limits Proposal, 78 FR at 75694.
    \236\ See 162 Cong. Rec. E1005-03, E1006 (June 28, 2016) 
(Statement of Rep. Conaway, Chairman of the House Committee on 
Agriculture) (``Comment letters on either side declaring that the 
matter is settled in their favor among respectable economists are 
simply incorrect.''). Contra CL-CCMR-59623 at 5, which says, ``The 
Committee staff also reviewed these studies and found that of them, 
only 27 address position limits, with the majority opposing such 
limits.'' The commenter describes how it arrives at this conclusion 
as follows: ``The Committee staff reviewed the abstract and body of 
each study to determine if the author assessed: (1) Whether position 
limits are effective at reducing speculation; or (2) whether 
excessive speculation is distorting prices in commodities markets. 
If the author presented a critical analysis of the issue, rather 
than just mentioning position limits or excessive speculation in 
passing, then the Committee staff included the study in its tally.'' 
Such a method is relatively unsophisticated, and the Commission 
cannot evaluate it without knowing to which studies the commenter 
refers. The commenter continues, ``Of the total, 105 studies address 
whether excessive speculation is distorting prices in today's 
commodity markets, with 66 of these studies finding that excessive 
speculation is not a problem.'' This statement did not identify the 
66 studies or 105 studies on which it based its belief. Accordingly, 
the Commission is unable to evaluate the basis of its belief.
    \237\ See discussion of mandate, above. We emphasize that this 
discussion relates only to the Commission's alternative necessity 
finding. To the extent there is a Congressional mandate that the 
Commission establish position limits, these studies could be no 
basis to disregard it. As noted in the December 2013 Position Limits 
Proposal, ``Studies that militate against imposing any speculative 
position limits appear to conflict with the Congressional mandate . 
. . that the Commission impose limits on futures contracts, options, 
and certain swaps for agricultural and exempt commodities.'' 78 FR 
at 75695 (footnote omitted). Separately, ``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,'' irrespective of whether they are mandated. Id. The 
Commission acknowledges that some of the studies, when considered as 
comments on the December 2013 Position Limits Proposal, can be 
understood to suggest that, contrary to the Congressional 
determination, there is no empirical evidence that excessive 
speculation exists, that excessive speculation causes sudden or 
unreasonable fluctuations or unwarranted changes in the price of a 
commodity, or is an undue and unnecessary burden on interstate 
commerce in a commodity.
    \238\ See discussion of necessity finding, above.
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    The Commission's deliberations are informed by its consideration of 
the studies. The Commission recognizes that speculation and volatility 
are not per se unusual or exceptional occurrences in commodity markets. 
Some economic studies attempt to distinguish normal, helpful 
speculative activity in commodity markets from excessive speculation, 
and normal volatility from unreasonable price fluctuations. It has 
proven difficult in some studies to discriminate between the proper 
workings of a well-functioning market and unwanted phenomena. That some 
studies have as yet failed to do so with precision or certainty does 
not, in light of the full record, persuade the Commission to reverse 
course or to change its necessity finding.
    In general, many studies focused on subsidiary questions and did 
not directly address the desirability or utility of position limits. 
Their proffered interpretations may not be the only plausible 
explanation for statistical results. There is no broad academic 
consensus on the formal, testable economic definition of ``excessive 
speculation'' in commodity futures markets or other relevant terms such 
as ``price bubble.'' There is also no broad academic consensus on the 
best statistical model to test for the existence of excessive 
speculation. There are not many papers that quantify the impact and 
effectiveness of position limits in commodity futures markets. The 
Commission has identified some reasons why there are not many 
compelling, peer-reviewed economic studies engaging in quantitative, 
empirical analysis of the impact of position limits on prices or price 
volatility: Limitations on publicly available data, including detailed 
information on specific trades and traders; pre-existing position 
limits in some commodity markets, making it difficult to determine how 
those markets would operate in the absence of position limits; and the 
difficulties inherent in modelling complex economic phenomena.
    The studies that the Commission considered can be grouped into 
seven categories.\239\
     
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    \239\ These categories are not exclusive; some studies employ or 
examine more than one type of methodology. That researchers in the 
different categories employed different methodologies complicates 
the task of comparing the studies across the seven categories. In 
addition, some studies were not susceptible to meaningful economic 
analysis for various reasons, such as being written in a foreign 
language, being founded on suspect methodologies, being press 
releases, etc. These studies include: Basak and Pavlova, A Model 
Financialization of Commodities (working paper 2013); Bass, 
Finanazm[auml]rkte als Hungerverursacher? (working paper 2011); 
Bass, Finanzspekulation und Nahrungsmittelpreise. Anmerkungenzum 
Stand der Forschung (working paper 2013); Bukold, 
[Ouml]lpreisspekulation und Benzinpreise in Deutschland, (2011); 
Chevalier, (Minist[egrave]re de l'Economie, de l'Industrie e t de 
l'emploi): Rappor t du groupe de travai l sur la volatilit[egrave] 
des prix du p[egrave]trole, (2010); Dicker, Oil's Endless Bid, 
(2011); Ederington and Lee, Who Trades Futures and How: Evidence 
from the Heating Oil Market?, Journal of Business 2002; Evans, The 
Official Demise of the Oil Bubble, Wall Street Journal 2008; Gheit 
and Katzenberg, Surviving Lower Oil Prices, Oppenheimer & Co. 
(2008); Ghosh, Commodity Speculation and the Food Crisis, (working 
paper 2010); Halova, The Intraday Volatility-Volume Relationship in 
Oil and Gas Futures, (working paper 2012); Jouyet, Rappor t d' 
[eacute]tape-Pr[eacute]venir e t g[eacute]rer l'instabilit[eacute] 
des march[eacute]s agricoles, (2010); Korzenik, Fundamental 
Misconceptions in the Speculation Debate, (2009); Lake Hill Capital 
Management, Investable Indices are Distorting Commodity Markets?, 
(2013); Lee, Cheng, and Koh, Would Position Limits Have Made any 
Difference to the `Flash Crash' on May 6, 2010?, Review of Futures 
Markets (2010); Markham, Manipulation of Commodity Futures Prices: 
The Unprosecutable Crime, Yale Journal of Regulation (1991); Mayer, 
The Growing Financializsation of Commodity Markets: Divergences 
between Index Investors and Money Managers, Journal of Development 
Studies (2012); Morse, Oil dotcom, Research Notes, (2008); Naylor, 
Food Security in an Era of Economic Volatility (working paper 2010); 
Newell, Commodity Speculation's ``Smoking Gun'' (2008); Peri, 
Vandone, and Baldi, Internet, Noise Trading and Commodity Prices 
(working paper 2012); Soros, Interview with Stern Stern Magazine 
(2008); Tanaka, IEA Says Speculation Amplifying Oil Price Moves, 
(2006); Von Braun and Tadesse, Global Food Price Volatility and 
Spikes: An Overview of Costs, Cause and Solutions (2012).
---------------------------------------------------------------------------

Granger Causality Analyses \240\
     
---------------------------------------------------------------------------

    \240\ Studies that employ the Granger method of statistical 
analysis include: Algieri, Price Volatility, Speculation and 
Excessive Speculation in Commodity Markets: Sheep or Shepherd 
Behaviour? (working paper 2012); Antoshin, Canetti, and Miyajima, 
IMF Global Financial Stability Report: Financial Stress and 
Deleveraging: Macrofinancial Implications and Policy, Annex 1.2, 
Financial Investment in Commodities Markets (October 2008); 
Aulerich, Irwin, and Garcia, Bubbles, Food Prices, and Speculation: 
Evidence from the CFTC's Daily Large Trader Data Files (NBER 
Conference 2012); Borin and Di Nino, The Role of Financial 
Investments in Agricultural Commodity Derivatives Markets (working 
paper 2012); Brunetti and B[uuml]y[uuml]k[scedil]ahin, Is 
Speculation Destabilizing? (working paper 2009); Cooke and Robles, 
Recent Food Prices Movements: A Time Series Analysis (working paper 
2009); Frenk, Review of Irwin and Sanders 2010 OECD Report (Better 
Markets June 10, 2010); Gilbert, Commodity Speculation and Commodity 
Investment (2010); Gilbert, How to Understand High Food Prices, 
Journal of Agricultural Economics (2008); Gilbert, Speculative 
Influences on Commodity Futures Prices, 2006-2008, UN Conference on 
Trade and Development (2010); Goyal and Tripathi, Regulation and 
Price Discovery: Oil Spot and Futures Markets (working paper 2012); 
Grosche, Limitations of Granger Causality Analysis to Assess the 
Price Effects From the Financialization of Agricultural Commodity 
Markets Under Bounded Rationality, Agricultural and Resource 
Economics (2012); Harris and B[uuml]y[uuml]k[scedil]ahin, The Role 
of Speculators in the Crude Oil Futures Market (working paper 2009); 
Irwin and Sanders, Energy Futures Prices and Commodity Index 
Investment: New Evidence from Firm-Level Position Data (working 
paper 2014); Irwin and Sanders, The Impact of Index and Swap Funds 
on Commodity Futures Markets: A Systems Approach, Journal of 
Alternative Investments (working paper 2010); Irwin and Sanders, The 
Impact of Index and Swap Funds on Commodity Futures Markets: 
Preliminary Results (working paper 2010); Irwin and Sanders, The 
``Necessity'' of New Position Limits in Agricultural Futures 
Markets: The Verdict from Daily Firm-Level Position Data (working 
paper 2014); Irwin and Sanders, The Performance of CBOT Corn, 
Soybean, and Wheat Futures Contracts after Recent Changes in 
Speculative Limits (working paper 2007); Irwin, Sanders, and Merrin, 
Devil or Angel: The Role of Speculation in the Recent Commodity 
Price Boom, Journal of Agricultural and Applied Economics (2009); 
Kaufman, The role of market fundamentals and speculation in recent 
price changes for crude oil, Energy Policy, Vol. 39, Issue 1 
(January 2011); Kaufmann and Ullman, Oil Prices, Speculation, and 
Fundamentals: Interpreting Causal Relations Among Spot and Futures 
Prices, Energy Economics, Vol. 31, Issue 4 (July 2009); Mayer, The 
Growing Interdependence Between Financial and Commodity Markets, UN 
Conference on Trade and Development (discussion paper 2009); Mobert, 
Do Speculators Drive Crude Oil Prices? (2009 working paper); Robles, 
Torero, and von Braun, When Speculation Matters (working paper 
2009); Sanders, Boris, and Manfredo, Hedgers, Funds, and Small 
Speculators in the Energy Futures Markets: An Analysis of the CFTC's 
Commitment of Traders Reports, Energy Economics (2004); Sanders, 
Irwin, and Merrin, The Adequacy of Speculation in Agricultural 
Futures Markets: Too Much of a Good Thing?, Applied Economic 
Perspectives and Policy (2010); Sanders, Irwin, and Merrin, Smart 
Money? The Forecasting Ability of CFTC Large Traders, Journal of 
Agricultural and Resource Economics (2009); Sanders, Irwin, and 
Merrin, A Speculative Bubble in Commodity Futures? Cross-Sectional 
Evidence, Agricultural Economics (2010); Singleton, The 2008 Boom/
Bust in Oil Prices (working paper 2010); Singleton, Investor Flows 
and the 2008 Boom/Bust in Oil Prices (working paper 2011); Stoll and 
Whaley, Commodity Index Investing and Commodity Futures Prices 
(working paper 2010); Timmer, Did Speculation Affect World Rice 
Prices?, UN Food and Agricultural Organization (working paper 2009); 
Tse and Williams, Does Index Speculation Impact Commodity Prices?, 
Financial Review, Vol. 48, Issue 3 (2013); Tse, The Relationship 
Among Agricultural Futures, ETFs, and the US Stock Market, Review of 
Futures Markets (2012); Varadi, An Evidence of Speculation in Indian 
Commodity Markets (working paper 2012); Williams, Dodging Dodd-
Frank: Excessive Speculation, Commodities Markets, and the Burden of 
Proof, Law & Policy Journal of the University of Denver (2015).

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[[Page 96724]]

    Some economic studies considered by the Commission employ the 
Granger method of statistical analysis. The Granger method seeks to 
assess whether there is a strong linear correlation between two sets of 
data that are arranged chronologically forming a ``time series.'' While 
the Granger test is referred to as the ``Granger causality test,'' it 
is important to understand that, notwithstanding this shorthand, 
``Granger causality'' does not necessarily establish an actual cause 
and effect relationship. The result of the Granger method is evidence, 
or the lack of evidence, of the existence of a linear correlation 
between the two time series. The absence of Granger causality does not 
necessarily imply the absence of actual causation.
Comovement or Cointegration Analyses \241\
     
---------------------------------------------------------------------------

    \241\ Studies that employ the comovement or cointegration 
methods include: Ad[auml]mmer, Bohl and Stephan, Speculative Bubbles 
in Agricultural Prices (working paper 2011); Algieri, A Roller 
Coaster Ride: an Empirical Investigation of the Main Drivers of 
Wheat Price (working paper 2013); Babula and Rothenberg, A Dynamic 
Monthly Model of U.S. Pork Product Markets: Testing for and 
Discerning the Role of Hedging on Pork-Related Food Costs, Journal 
of Int'l Agricultural Trade and Development (2013); Baffes and 
Haniotos, Placing the 2006/08 Commodity Boom into Perspective, World 
Bank Policy Research Working Paper 5371 (2010); Basu and Miffre, 
Capturing the Risk Premium of Commodity Futures: The Role of Hedging 
Pressure, Journal of Banking and Risk (2013); Belke, Bordon, and 
Volz, Effects of Global Liquidity on Commodity and Food Prices, 
German Institute for Economic Research (2013); Bicchetti and 
Maystre, The Synchronized and Long-lasting Structural Change on 
Commodity Markets: Evidence from High Frequency Data (working paper 
2012); Boyd, B[uuml]y[uuml]k[scedil]ahin, and Haigh, The Prevalence, 
Sources, and Effects of Herding (working paper 2013); Bunn, 
Chevalier, and Le Pen, Fundamental and Financial Influences on the 
Co-movement of Oil and Gas Prices (working paper 2012); 
B[uuml]y[uuml]k[scedil]ahin, Harris, and Haigh, Fundamentals, Trader 
Activity, and Derivatives Pricing (working paper 2008); 
B[uuml]y[uuml]k[scedil]ahin and Robe, Does it Matter Who Trades 
Energy Derivatives?, Review of Env't, Energy, and Economics (2013); 
B[uuml]y[uuml]k[scedil]ahin and Robe, Does ``Paper Oil'' Matter? 
(working paper 2011); B[uuml]y[uuml]k[scedil]ahin and Robe, 
Speculators, Commodities, and Cross-Market Linkages (working paper 
2012); Cheng, Kirilenko, and Xiong, Convective Risk Flows in 
Commodity Futures Markets (working paper 2012); Coleman and Dark, 
Economic Significance of Non-Hedger Investment in Commodity Markets 
(working paper 2012); Creti, Joets, and Mignon, On the Links Between 
Stock and Commodity Markets' Volatility, Energy Economics (2010); 
Dorfman and Karali, Have Commodity Index Funds Increased Price 
Linkages between Commodities? (working paper 2012); Filimonov, 
Bicchetti, Maystre, and Sornette, Quantification of the High Level 
of Endogeneity and of Structural Regime Shifts in Commodity Markets, 
(working paper 2013); Haigh, Harris, and Overdahl, Market Growth, 
Trader Participation and Pricing in Energy Futures Markets (working 
paper 2007); Hoff, Herding Behavior in Asset Markets, Journal of 
Financial Stability (2009); Kawamoto, Kimura, et al., What Has 
Caused the Surge in Global Commodity Prices and Strengthened Cross-
market Linkage?, Bank of Japan Working Papers Series No.11-E-3 (May 
2011); Korniotis, Does Speculation Affect Spot Price Levels? The 
Case of Metals With and Without Futures Markets (working paper, FRB 
Finance and Economic Discussion Series 2009); Le Pen and 
S[eacute]vi, Futures Trading and the Excess Comovement of Commodity 
Prices (working paper 2012); Pollin and Heintz, How Wall Street 
Speculation is Driving Up Gasoline Prices Today (AFR working paper 
2011); Tang and Xiong, Index Investment and Financialization of 
Commodities, Financial Analysts Journal (2012); and Windawi, 
Speculation, Embedding, and Food Prices: A Cointegration Analysis 
(working paper 2012).
---------------------------------------------------------------------------

    The comovement method looks for whether there is correlation that 
is contemporaneous and not lagged. A subset of these comovement studies 
use a technique called cointegration for testing correlation between 
two sets of data.
Models of Fundamental Supply and Demand \242\
     
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    \242\ Studies that employ models of fundamental supply and 
demand include: Acharya, Ramadorai, and Lochstoer, Limits to 
Arbitrage and Hedging: Evidence from Commodity Markets, Journal of 
Financial Economics (2013); Allen, Litov, and Mei, Large Investors, 
Price Manipulation, and Limits to Arbitrage: An Anatomy of Market 
Corners, Review of Finance (2006); Bos and van der Molen, A Bitter 
Brew? How Index Fund Speculation Can Drive Up Commodity Prices, 
Journal of Agricultural and Applied Economics (2010); 
Breitenfellner, Crespo, and Keppel, Determinants of Crude Oil 
Prices: Supply, Demand, Cartel, or Speculation?, Monetary Policy and 
the Economy (2009); Brennan and Schwartz, Arbitrage in Stock Index 
Futures, Journal of Business (1990); Byun and Sungje, Speculation in 
Commodity Futures Market, Inventories and the Price of Crude Oil 
(working paper 2013); Chan, Trade Size, Order Imbalance, and 
Volatility-Volume Relation, Journal of Financial Economics (2000); 
Chordia, Subrahmanyam and Roll, Order imbalance, Liquidity, and 
Market Returns, Journal of Financial Economics (2002); Cifarelli and 
Paladino, Oil Price Dynamics and Speculation: a Multivariate 
Financial Approach, Energy Economics (2010); Doroudian and 
Vercammen, First and Second Order Impacts of Speculation and 
Commodity Price Volatility (working paper 2012); Ederington, 
Dewally, and Fernando, Determinants of Trader Profits in Futures 
Markets (working paper 2013); Einloth, Speculation and Recent 
Volatility in the Price of Oil (working paper 2009); Frankel and 
Rose, Determinants of Agricultural and Mineral Commodity Prices 
(working paper 2010); Girardi, Do Financial Investors Affect 
Commodity Prices? (working paper 2011); Gorton, Hayashi, 
Rouwenhorst, The Fundamentals of Commodity Futures Returns, Review 
of Finance (2013); Guilleminot and Ohana, The Interaction of Hedge 
Funds and Index Investors in Agricultural Derivatives Markets 
(working paper 2013); Gupta and Kamzemi, Factor Exposures and Hedge 
Fund Operational Risk: The Case of Amaranth (working paper 2009); 
Haigh, Hranaiova, and Overdahl, Hedge Funds, Volatility, and 
Liquidity Provisions in the Energy Futures Markets, Journal of 
Alternative Investments (2007); Haigh, Hranaiova, and Overdahl, 
Price Dynamics, Price Discovery, and Large Futures Trader 
Interactions in the Energy Complex, (working paper 2005); Hamilton, 
Causes and Consequences of the Oil Shock of 2007-2008, Brookings 
Paper on Economic Activity (2009); Hamilton and Wu, Effects of 
Index-Fund Investing on Commodity Futures Prices, International 
Economic Review, Vol. 56, No. 1 (2015); Hamilton and Wu, Risk Premia 
in Crude Oil Futures Prices, Journal of International Money and 
Finance (2013); Harrison and Kreps, Speculative Investor Behavior in 
a Stock Market with Heterogeneous Expectations, Quarterly Journal of 
Economics (1978); Henderson, Pearson and Wang, New Evidence on the 
Financialization of Commodity Markets (working paper 2012); 
Hirshleifer, Residual Risk, Trading Costs, and Commodity Futures 
Risk Premia, Review of Financial Studies, Vol. 1, No. 2, Oxford 
University Press (1988); Hong and Yogo, Digging into Commodities 
(working paper 2009); Interagency Task Force on Commodity Markets, 
Interim Report on Crude Oil, multiple federal agencies including the 
CFTC (2008); Juvenal and Petrella, Speculation in the Oil Market 
(working paper 2012); Juvenal and Petrella, Speculation in 
Commodities, and Cross-Market Linkages (working paper 2011); Kilian, 
Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply 
Shocks in the Crude Oil Market, American Economic Review (2007); 
Kilian and Lee, Quantifying the Speculative Component in the Real 
Price of Oil: The Role of Global Oil Inventories (working paper 
2013); Kilian and Murphy, The Role of Inventories and Speculative 
Trading in the Global Market for Crude Oil, Journal of Applied 
Econometrics (2010); Knittel and Pindyck, The Simple Economics of 
Commodity Price Speculation, (working paper 2013); Kyle and Wang, 
Speculation Duopoly with Agreement to Disagree: Can Overconfidence 
Survive the Market Test?, Journal of Finance (1997); Manera, 
Nicolini and Vignati, Futures Price Volatility in Commodities 
Markets: The Role of Short-Term vs Long-Term Speculation (working 
paper 2013); Mei, Acheinkman, and Xiong, Speculative Trading and 
Stock Prices: An Analysis of Chinese A-B Share Premia, Annals of 
Economics and Finance (2009); Morana, Oil Price Dynamics, Macro-
finance Interactions and the Role of Financial Speculation, Journal 
of Banking & Finance, Vol. 37, Issue 1 (Jan. 2012); Mou, Limits to 
Arbitrage and Commodity Index Investment: Front-Running the Goldman 
roll (working paper 2011); Plato and Hoffman, Measuring the 
Influence of Commodity Fund Trading on Soybean Price Discovery 
(working paper 2007); Sornette, Woodard and Zhou, The 2006-2008 Oil 
Bubble and Beyond: Evidence of Speculation, and Prediction, Physica 
A. (2009); Stevans and Sessions, Speculation, Futures Prices, and 
the U.S. Real Price of Crude Oil, American Journal of Social and 
Management Science (2010); Trostle, Global Agricultural Supply and 
Demand: Factors Contributing to the Recent Increase in Food 
Commodity Prices, USDA Economic Research Service (2008);Van der 
Molen, Speculators Invading the Commodity Markets (working paper 
2009); Weiner, Do Birds of A Feather Flock Together? Speculation in 
the Oil Markets, (Working Paper 2006); Weiner, Speculation in 
International Crises: Report from the Gulf, Journal of Int'l 
Business Studies (2005); Westcott and Hoffman, Price Determination 
for Corn and Wheat: The Role of Market Factors and Government 
Programs (working paper 1999); Wright, International Grain Reserves 
and Other Instruments to Address Volatility in Grain Markets, World 
Bank Research Observer (2012).

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[[Page 96725]]

    Some economists have developed economic models for the supply and 
demand of a commodity. These models often include theories of how 
storage capacity and use affect supply and demand, which may influence 
the price of a physical commodity over time. An economist looks at 
where the model is in equilibrium with respect to quantities of a 
commodity supplied and demanded to arrive at a ``fundamental'' price or 
price return. The economist then looks for deviations between the 
fundamental price (based on the model) and the actual price of a 
commodity. When there is a statistically significant deviation between 
the fundamental price and the actual price, the economist generally 
infers that the price is not driven by market fundamentals of supply 
and demand.
Switching Regressions or Similar Analyses \243\
     
---------------------------------------------------------------------------

    \243\ Studies that include switching regressions or similar 
analyses include: Brooks, Prokopczuk, and Wu, Boom and Bust in 
Commodity Markets: Bubbles or Fundamentals? (working paper 2014); 
Baldi and Peri, Price Discovery in Agricultural Commodities: the 
Shifting Relationship Between Spot and Futures Prices (working paper 
2011); Chevallier, Price Relationships in Crude oil Futures: New 
Evidence from CFTC Disaggregated Data, Environmental Economics and 
Policy Studies (2012); Cifarelli and Paladino, Commodity Futures 
Returns: A non-linear Markov Regime Switching Model of Hedging and 
Speculative Pressures (working paper 2010); Fan and Xu, What Has 
Driven Oil Prices Since 2000? A Structural Change Perspective, 
Energy Economics (2011); Hache and Lantz, Speculative Trading & Oil 
Price Dynamic: A Study of the WTI Market, Energy Economics, Vol. 36, 
p.340 (March 2013); Lammerding, Stephan, Trede, and Wifling, 
Speculative Bubbles in Recent Oil Price Dynamics: Evidence from a 
Bayesian Markov Switching State-Space Approach, Energy Economics 
Vol. 36 (2013); Sigl-Gr[uuml]b and Schiereck, Speculation and 
Nonlinear Price Dynamics in Commodity Futures Markets, Investment 
Management and Financial Innovations, Vol. 77 (2010); Silvernnoinen 
and Thorp, Financialization, Crisis and Commodity Correlation 
Dynamics, Journal of Int'l Financial Markets, Institutions, and 
Money (2013).
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    In the context of studies relating to position limits, economists 
employing switching regression analysis generally posit a model with 
two states: A normal state, where prices reflect market fundamentals, 
and a second state, often interpreted as a ``bubble.'' \244\ Using 
price data, authors of these studies calculate the probability of a 
transition between the two states. The point of transition is called a 
structural ``breakpoint.'' Examination of these breakpoints permits the 
researcher to identify the duration of a particular ``bubble.''
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    \244\ While there is no broad academic consensus on the formal, 
testable economic definition of the term ``price bubble,'' price 
bubbles are colloquially thought to be unsustainable surges in asset 
prices fueled by speculation and followed by ``crashes'' or 
precipitous price drops.
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Eigenvalue Stability Analysis \245\
     
---------------------------------------------------------------------------

    \245\ Studies that employ eigenvalue stability analysis include: 
Czudaj and Beckman, Spot and Futures Commodity Markets and the 
Unbiasedness Hypothesis--Evidence from a Novel Panel Unit Root Test, 
Economic Bulletin (2013); Du, Yu, and Hayes, Speculation and 
Volatility Spillover in the Crude Oil and Agricultural Commodity 
Markets: A Bayesian Analysis, (working paper 2012); Gilbert, 
Speculative Influences on Commodity Futures Prices, 2006-2008, UN 
Conference on Trade and Development (working paper 2010); Gutierrez, 
Speculative Bubbles in Agricultural Commodity Markets, European 
Review of Agricultural Economics (2012); Phillips and Yu, Dating the 
Timeline of Financial Bubbles During the Subprime Crisis, 
Quantitative Economics (2011).
---------------------------------------------------------------------------

    Some economists have run regression analyses \246\ on price and 
time-lagged values of price. They estimate an equation that relates 
current to past time values over short time intervals and solve for the 
roots of that equation, called the eigenvalues (latent values), in 
order to detect unusual price changes. If they find an eigenvalue \247\ 
with an absolute value of greater than one, they infer that the price 
of the commodity is in a ``bubble.''
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    \246\ In statistical modeling, regression analysis is a process 
for estimating the relationships among certain types of variables 
(values that change over time or in different circumstances).
    \247\ In this context, an eigenvalue is a mathematical 
calculation that summarizes the dynamic properties of the data 
generated by the model. Generally, an eigenvalue is a concept from 
linear algebra.
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Theoretical Models \248\
     
---------------------------------------------------------------------------

    \248\ Studies that present theoretical models include: Avriel 
and Reisman, Optimal Option Portfolios in Markets with Position 
Limits and Margin Requirements, Journal of Risk (2000); Dai, Jin and 
Liu, Illiquidity, Position Limits, and Optimal Investment (working 
paper 2009); Dicembrino and Scandizzo, The Fundamental and 
Speculative Components of the Oil Spot Price: A Real Options Value 
Approach (working paper 2012); Dutt and Harris, Position Limits for 
Cash-Settled Derivative Contracts, Journal of Futures Markets 
(2005); Ebrahim and ap Gwilym, Can Position Limits Restrain Rogue 
Traders?, at p.832 Journal of Banking & Finance (2013); Edirsinghe, 
Naik, and Uppal, Optimal Replication of Options with Transaction 
Costs and Trading Restrictions, Journal of Financial and 
Quantitative Analysis (1993); Froot, Scharfstein, and Stein, Herd on 
the Street: Informational Inefficiencies in a Market with Short Term 
Speculation, (Working Paper 1990); Kumar and Seppi, Futures 
Manipulation with ``Cash Settlement'', Journal of Finance (1992); 
Kyle and Viswanathan, How to Define Illegal Price Manipulation, 
American Economic Review (2008); Kyle and Wang, Speculation Duopoly 
with Agreement to Disagree: Can Overconfidence Survive the Market 
Test?, Journal of Finance (1997); Lee, Cheng and Koh, An Analysis of 
Extreme Price Shocks and Illiquidity Among Systematic Trend 
Followers (working paper 2010); Leitner, Inducing Agents to Report 
Hidden Trades: A Theory of an Intermediary, Review of Finance 
(2012); Liu, Financial-Demand Based Commodity Pricing: A Theoretical 
Model for Financialization of Commodities (working paper 2011); 
Lombardi and van Robays, Do Financial Investors Destabilize the Oil 
Price? (working paper, European Central Bank, 2011); Morris, 
Speculative Investor Behavior and Learning, Quarterly Journal of 
Economics (1996); Parsons, Black Gold & Fool's Gold: Speculation in 
the Oil Futures Market, Economia (2009); Pierru and Babusiaux, 
Speculation without Oil Stockpiling as a Signature: A Dynamic 
Perspective (working paper 2010); Pirrong, Manipulation of the 
Commodity Futures Market Delivery Process, Journal of Business 
(1993); Pirrong, The Self-Regulation of Commodity Exchanges: The 
Case of Market Manipulation, Journal of Law and Economics (1995); 
Pliska and Shalen, The Effects of Regulation on Trading Activity and 
Return Volatility in Futures Markets, Journal of Futures Markets 
(2006); Routledge, Seppi, and Spatt, Equilibrium Forward Curves for 
Commodities, Journal of Finance (2000); Schulmeister, Technical 
Trading and Commodity Price Fluctuations (working paper 2012); 
Schulmeister, Torero, and von Braun, Trading Practices and Price 
Dynamics in Commodity Markets (working paper 2009); Shleifer and 
Vishney, The Limits of Arbitrage, Journal of Finance (1997); Sockin 
and Xiong, Feedback Effects of Commodity Futures Prices (working 
paper 2012); Vansteenkiste, What is Driving Oil Price Futures? 
Fundamentals Versus Speculation (working paper, European Central 
Bank, 2011); Westerhoff, Speculative Markets and the Effectiveness 
of Price Limits, Journal of Economic Dynamics and Control (2003).

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[[Page 96726]]

    Some studies perform little or no empirical analysis and instead 
present a general theoretical model that may bear, directly or 
indirectly, on the effect of excessive speculation in the commodities 
markets. Because these papers do not include empirical analysis, they 
contain many untested assumptions and conclusory statements, limiting 
their usefulness to the Commission.
Surveys of Economic Literature and Opinion Pieces \249\
     
---------------------------------------------------------------------------

    \249\ Studies that are survey or opinion pieces include: 
Anderson, Outlaw, and Bryant, The Effects of Ethanol on Texas Food 
and Feed, Agricultural and Food Policy Center Research Report 
(2008); Baffes, The Long-term Implications of the 2007-2008 
Commodity-Price Boom, Development in Practice (2011); Basu and 
Gavin, What Explains the Growth in Commodity Derivatives? (working 
paper 2011); Berg, The Rise of Commodity Speculation: from 
Villainous to Venerable, (2011); Bessenbinder, Lilan, and Mahadeva, 
The Role of Speculation in Oil Markets: What Have We Learned So Far? 
(working paper 2012); Cagan, Financial Futures Markets: Is More 
Regulation Needed?, Journal of Futures Markets (1981); Chincarini, 
The Amaranth Debacle: Failure of Risk Measures or Failure of Risk 
Management (working paper 2007); Chincarini, Natural Gas Futures and 
Spread Position Risk: Lessons from the Collapse of Amaranth Advisors 
L.L.C., Journal of Applied Finance (2008); CME Group, Inc., 
Excessive Speculation and Position Limits in Energy Derivatives 
Markets (working paper); Cooper, Excessive Speculation and Oil Price 
Shock Recessions: A Case of Wall Street ``D[eacute]j[agrave] vu All 
Over Again,'' Consumer Federation of America (2011); Dahl, Future 
Markets: The Interaction of Economic Analyses and Regulation: 
Discussion, American Journal of Agricultural Economics (1980); De 
Schutter, Food Commodities Speculation and Food Price Crises, United 
Nations Special Report on the Right to Food (2010); Easterbrook, 
Monopoly, Manipulation, and the Regulation of Futures Markets, 
Journal of Business (1986); Eckaus, The Oil Price Really is a 
Speculative Bubble (working paper 2008); Ellis, Michaely, and 
O'Hara, The Making of a Dealer Market: From Entry to Equilibrium in 
the Trading of Nasdaq Stocks, Journal of Finance (2002); European 
Commission, Review of the Markets in Financial Instruments Directive 
(working paper 2010); European Commission, Tackling the Challenges 
in Commodity Markets, Communication from the European Commission to 
the European Parliament (2011); Frenk and Turbeville, Commodity 
Index Traders and the Boom/Bust Cycle in Commodities Prices, Better 
Markets Copyright (2011); Goldman Sachs, Global Energy Weekly March 
2011 (2011); Government Accountability Office, Issues Involving the 
Use of the Futures Markets to Invest in Commodity Indexes, (Report 
2009); Greenberger, The Relationship of Unregulated Excessive 
Speculation to Oil Market Price Volatility (working paper 2010); 
Harris, Circuit Breaker and Program Trading Limits: What Have We 
Learned, Brooking Institutions Press (1997); Henn, CL-WEED-59628; 
Her Majesty's Treasury, Global Commodities: A Long Term Vision for 
Stable, Secure, and Sustainable Global Markets, (2008); House of 
Commons Select Committee on Science & Technology of the United 
Kingdom, Strategically Important Metals, (2011); Hunt, Thought for 
the Day: Unreported Copper Stocks, Simon Hunt Strategic Services 
(2011); Inamura Kimata, and Takeshi, Recent Surge in Global 
commodity Prices--Impact of Financialization of Commodities and 
Globally Accommodative Monetary Conditions, Bank of Japan Review 
March 2011; International Monetary Fund, Is Inflation Back? 
Commodity Prices and Inflation, Chapter 3 of IMF's World Economic 
Outlook ``Financial Stress, Downturns, and Recoveries'' (2008); 
Irwin and Sanders, Index Funds, Financialization, and Commodity 
Futures Markets, Applied Economic Perspective and Policy (2010); 
Jack, Populists vs Theorists: Futures Markets and the Volatility of 
Prices, Exploration in Economic History (2006); Jickling and Austin, 
Hedge Fund Speculation and Oil Prices (working paper 2011); Kemp, 
Crisis Remarks the Commodity Business, Reuters Columnist (2008); 
Khan, The 2008 Oil Price ``Bubble (working paper 2009); Koski and 
Pontiff, How Are Derivatives Used? Evidence from the Mutual Fund 
Industry, Journal of Finance (1996); Lagi, Bar-Yam, and Bertrand, 
The Food Crisis: A Quantitative Model Of Food Prices Including 
Speculators and Ethanol Conversion (working paper 2012); Lagi, Bar-
Yam, and Bertrand, The Food Crisis: A Quantitative Model Of Food 
Prices Including Speculators and Ethanol Conversion (working paper 
2011); Lines, Speculation in Food Commodity Markets, World 
Development Movement (2010); Luciani, From Price Taker to Price 
Maker? Saudi Arabia and the World Oil Market (working paper 2009); 
Masters and White, The Accidental Hunt Brother: How Institutional 
Investors are Driving UP Food and Energy Prices (working paper 
2008); Medlock and Myers, Who is in the Oil Futures Market and How 
Has It Changed?, (working paper 2009); Newman, Financialiation and 
Changes in the Social Relations along commodity Chains: The Case of 
Coffee, Review of Radical Political Economics (2009); Nissanke, 
Commodity Markets and Excess Volatility: An Evolution of Price 
Dynamics Under Financialization (working paper 2011); Nissanke, 
Commodity Market Linkage in the Global Financial Crisis: Excess 
Volatility and Development Impact, Journal of Development Studies 
(2012); Parsons, Black Gold & Fool's Gold: Speculation in the Oil 
Futures Market, (Economia 2009); Jones, Price Limits: A Return to 
Patience and Rationality in U.S. Markets, Speech to the CME Global 
Financial Leadership (2010); Petzel, Testimony before the CFTC, 
(July 28, 2009); Pfuderer and Gilbert, Index Funds Do Impact 
Agricultural Prices? (working paper 2012); Pirrong, Squeezes, 
Corners, and the Anti-Manipulation Provisions of the Commodity 
Exchange Act, Regulation (1994); Pirrong, Annex B to CL-ISDA/SIFMA-
59611; Plante and Yucel, Did Speculation Drive Oil Prices? Market 
Fundamentals Suggest Otherwise, Federal Reserve Bank of Dallas 
(2011); Plante and Yucel, Did Speculation Drive Oil Prices? Futures 
Market Points to Fundamentals, Federal Reserve Bank of Dallas 
(2011); Ray and Schaffer, Index Funds and the 2006-2008 Run-up in 
Agricultural Commodity Prices (working paper 2010); Rossi, Analysis 
of CFTC Proposed Position Limits on Commodity Index Fund Trading 
(working paper 2011); Smith, World Oil: Market or Mayhem?, Journal 
of Economic Perspectives (2009); Technical Committee of the 
International Organization of Securities Commissions, Task Force on 
Commodity Futures Market Final Report, (2009); Tokic, Rational 
Destabilizing Speculation, Positive Feedback Trading, and the Oil 
Bubble of 2008, Energy Economics (2011); 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., (1981); U.S. Commodity Futures Trading 
Commission, Staff Report on Commodity Swap Dealers and Index Traders 
with Commission Recommendations, (2008); U.S. Senate Permanent 
Subcommittee, Excessive Speculation in the Natural Gas Market, 
(2007); U.S. Senate Permanent Subcommittee, Excessive Speculation in 
the Wheat Market, (2009); U.S. Senate Permanent Subcommittee, The 
Role of Market Speculation in Rising Oil and Gas Prices: A Need to 
Put the cop Back on the Beat, (2006); United Nations Commission of 
Experts on Reforms of the International and Monetary System, Report 
of the Commission of Experts, (2009); United Nations Conference on 
Trade and Development, The Global Economic Crisis: Systemic Failures 
and Multilateral Remedies, (2009); United Nations Conference on 
Trade and Development, The Financialization of Commodity Markets, 
(2009); United Nations Conference on Trade and Development, Trade 
and Development Report: Price Formation in Financialized Commodity 
Markets: The Role of Information, (2011); United Nations Food and 
Agricultural Organization, Final Report of the Committee on 
Commodity Problems: Extraordinary Joint Intersessional Meeting of 
the Intergovernmental Group (IGG), (2010); United Nations Food and 
Agricultural Organization, Price Volatility in Agricultural Markets, 
Economic and Social Perspectives Policy Brief (2010); United Nations 
Food and Agricultural Organization, Price Volatility in Food and 
Agricultural Markets: Policy Response, (2011); Urbanchuk, 
Speculation and the Commodity Markets (2011); Verleger, Annex A to 
CL-ISDA/SIFMA-59611; Woolley, Why are Financial Markets so 
Inefficient and Exploitative--and a Suggested Remedy, (2010); Wray, 
The Commodities Market Bubble: Money Manager Capitalism and the 
Financialization of Commodities (working paper 2008).
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    The Commission considered more than seventy studies that are survey 
or opinion pieces. Some of these studies provide useful background 
material but, on the whole, they offer mere opinion unsupported by 
rigorous empirical analysis. While they may be useful for developing 
hypotheses or informing policymakers, these secondary sources often 
exhibit policy bias and are not neutral, reliable bases for scientific 
inquiry the way that primary economic studies are.\250\
---------------------------------------------------------------------------

    \250\ For example, these surveys may posit ``facts'' that are 
unsupported by testing, may not test their hypotheses, or may claim 
results that are subject to multiple interpretations.
---------------------------------------------------------------------------

More Persuasive Academic Studies
    While the economic literature is inconclusive, the Commission can

[[Page 96727]]

identify a few of the well-executed studies that do not militate 
against and, to some degree, support the Commission's reproposal to 
follow, out of due caution, a prophylactic approach.\251\ Hamilton and 
Wu, in Risk Premia in Crude Oil Futures Prices, Journal of 
International Money and Finance (2013), using models of fundamental 
supply and demand, find evidence that changes in non-commercial 
positions can affect the risk premium in crude oil futures prices; that 
is, Hamilton and Wu found that, for a limited period around the time of 
the 2008 financial crisis that gave rise to the Dodd-Frank Act, 
increases in speculative positions reduced the risk premiums \252\ in 
crude oil futures prices.\253\ This is important because, all else 
being equal, one would expect the risk premium to be the component of 
price that would be affected by traders accumulating large 
positions.\254\ Hamilton, in Causes of the Oil Shock of 2007-2008, 
Brookings Paper on Economic Activity (2009), also concludes that the 
oil price run-up was caused by strong demand confronting stagnating 
world production, but that something other than fundamental factors of 
supply and demand (as modeled) may have aggravated the speed and 
magnitude of the ensuing oil price collapse. Singleton, in Investor 
Flows and the 2008 Boom/Bust in Oil Prices (working paper 2011), 
employs a technique that is similar to Granger causality and finds a 
negative correlation between speculative positions and risk 
premiums.\255\ Chevallier, in Price Relationships in Crude Oil Futures: 
New Evidence from CFTC Disaggregated Data, Environmental Economics and 
Policy Studies (2012), applies switching regression analysis to 
position data and concludes that one cannot eliminate the possibility 
of speculation as one of the main factors contributing to oil price 
volatility in 2008. This study also suggests that when supply and 
demand are highly inelastic, i.e., relatively unresponsive to price 
changes, financial investors may have contributed to oil price 
volatility by taking large positions in energy sector commodity index 
funds.\256\ As one may infer from this small sample, some of the more 
compelling studies that support the proposition that large positions 
may move prices involve empirical studies of the oil market. The 
Commission acknowledges that not all commodity markets exhibit the same 
price behavior at the same times. Even so, that the findings of a 
particular study of the market experience of a particular commodity 
over a particular time period may not be extensible to other commodity 
markets or over other time periods does not mean that the Commission 
should disregard that study. This is because, as explained elsewhere, 
these markets are over time all susceptible to similar risks from 
excessive speculation. Again, this supports a prophylactic approach to 
limits and a determination that limits are necessary to effectuate 
their statutory purposes.
---------------------------------------------------------------------------

    \251\ Generally, studies that the Commission considers to be 
well-executed, for example, employ well-accepted, defensible, 
scientific methodology, document and present facts and results that 
can be replicated, are on point regarding issues relevant to 
position limits, and may eventually appear in respected, peer-
reviewed academic journals.
    \252\ A risk premium is the amount of return on a particular 
asset or investment that is in excess of the expected rate of return 
on a theoretically risk free asset or investment, i.e., one with a 
virtually certain or guaranteed return.
    \253\ The economic rationale behind this is that speculative 
traders would be taking long positions to earn the risk premium, 
among other things. If more speculative traders are going long, 
i.e., bidding to earn the risk premium, the risk premium would be 
reduced. In this way, speculators make it cheaper for short hedgers 
to lock in their price risk. Contra Harris and 
B[uuml]y[uuml]k[scedil]ahin, The Role of Speculators in the Crude 
Oil Futures Market (working paper 2009) (concluding that price 
changes precede the position change). In this way, speculators make 
it cheaper for short hedgers to lock in their price risk.
    \254\ Long speculators would tend to be compensated for assuming 
the price risk that is inherent with going long in the crude oil 
futures contract. If more speculators are bidding to earn the risk 
premium by taking long position in crude oil futures contracts, it 
should lower the risk premium, all else being equal.
    \255\ That is, when long speculative positions are larger, the 
risk premiums are smaller.
    \256\ See also Hamilton and Wu, Risk Premia in Crude Oil Futures 
Prices, Journal of International Money and Finance (2013); Hamilton, 
Causes of the Oil Shock of 2007-2008, Brookings Paper on Economic 
Activity (2009).
---------------------------------------------------------------------------

    The Commission in the December 2013 Position Limits Proposal 
identified two studies of actual market events to be helpful and 
persuasive in making its alternative necessity finding: \257\ The 
inter-agency report on the silver crisis \258\ and the PSI Report on 
Excessive Speculation in the Natural Gas Market.\259\ These two studies 
and some of the other reports included in the survey category \260\ do 
not use statistical or theoretical models to reach economically 
rigorous conclusions. Some of the evidence cited in these studies is 
anecdotal. Still, these two studies are in-depth examinations of actual 
market events and the Commission continues to find them to be helpful 
and persuasive in making its preliminary alternative necessity finding. 
The Commission reiterates that the PSI Report (because it closely 
preceded Congress' amendments to CEA section 4a(a) in the Dodd-Frank 
Act) indicates how Congress views limits as necessary as a prophylactic 
measure to prevent the adverse effects of excessively large speculative 
positions. The studies, individually or taken as a whole, do not 
dissuade the Commission from its consistent view that large speculative 
positions and outsized market power pose risks to well-functioning 
commodities markets, nor from its preliminary finding that speculative 
position limits are necessary to achieve their statutory purposes.
---------------------------------------------------------------------------

    \257\ December 2013 Position Limits Proposal, 78 FR at 75695-6.
    \258\ U.S. Commodity Futures Trading Commission, ``Part Two, A 
Study of the Silver Market,'' May 29, 1981, Report to Congress in 
Response to Section 21 of The Commodity Exchange Act.
    \259\ U.S. Senate Permanent Subcommittee on Investigations, 
``Excessive Speculation in the Natural Gas Market,'' June 25, 2007.
    \260\ E.g., U.S. Commodity Futures Trading Commission, Staff 
Report on Commodity Swap Dealers and Index Traders with Commission 
Recommendations (2008); U.S. Senate Permanent Subcommittee, 
Excessive Speculation in the Wheat Market (2009); U.S. Senate 
Permanent Subcommittee, The Role of Market Speculation in Rising Oil 
and Gas Prices: A Need to Put the Cop Back on the Beat (2006).
---------------------------------------------------------------------------

    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.

II. Compliance Date for the Reproposed Rules

    Commenters requested that the Commission delay the compliance date, 
generally for at least nine months, to provide adequate time for market 
participants to come into compliance with a final rule.\261\ In 
addition, a commenter requested the Commission delay the compliance 
date until no earlier than January 3, 2018, to coordinate with the 
expected implementation date for position limits in Europe.\262\
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    \261\ See, e.g., CL-FIA-60937 at 5.
    \262\ CL-FIA-61036 at 2.
---------------------------------------------------------------------------

    In response to commenters, in this reproposal, the Commission 
proposes to delay the compliance date of any final rule until, at 
earliest, January 3, 2018, as provided under reproposed Sec.  150.2(e). 
The Commission is of the opinion that a delay would provide market 
participants with sufficient time to come into compliance with a final 
rule, particularly in light of grandfathering provisions, discussed 
below.
    The Commission believes that a delay until January 3, 2018, would 
provide time for market participants to gain

[[Page 96728]]

access to adequate systems to compute futures-equivalent positions. The 
Commission bases this opinion on its experience, including with swap 
dealers and clearing members of derivative clearing organizations, who, 
as reporting entities under part 20 (swaps large trader reporting), 
have been required to prepare reports of swaps on a futures-equivalent 
basis for years. As discussed above, futures-equivalent reporting of 
swaps under part 20 generally has improved. This means many reporting 
entities already have implemented acceptable systems to compute 
futures-equivalent positions. The systems developed for that purpose 
also should be acceptable for monitoring compliance with position 
limits. The Commission believes it is reasonable to expect some 
reporting entities to offer futures-equivalent computation services to 
market participants. In this regard, such reporting entities already 
compute and report, under part 20, futures-equivalent positions for 
swap counterparties with reportable positions, including spot-month 
positions and non-spot-month positions.
    The Commission notes that market participants who expect to be over 
the limits would need to assess whether exemptions are available 
(including requesting non-enumerated bona fide hedging positon 
exemptions or spread exemptions from exchanges, as discussed below 
under reproposed Sec. Sec.  150.9 and 150.10). In the absence of 
exemptions, such market participants would need to develop plans for 
coming into compliance.
    The Commission notes the request for a further delay in a 
compliance date may be mitigated by the grandfathering provisions in 
the Reproposal. First, the reproposed rules would exclude from position 
limits ``pre-enactment swaps'' and ``transition period swaps,'' as 
discussed below. Second, the rules would exempt certain pre-existing 
positions from position limits under reproposed Sec.  150.2(f). 
Essentially, this means only futures contracts initially would be 
subject to non-spot-month position limits, as well as swaps entered 
after the compliance date. The Commission notes that a pre-existing 
position in a futures contract also would not be a violation of a non-
spot-month limit, but, rather, would be grandfathered, as discussed 
under reproposed Sec.  150.2(f)(2), below. Nevertheless, the Commission 
intends to provide a substantial implementation period to ease the 
compliance burden.
    The Commission requests comment on its discussion of the proposed 
compliance date.

III. Reproposed Rules

    The Commission is not addressing comments that are beyond the scope 
of this reproposed rulemaking.

A. Sec.  150.1--Definitions

1. Various Definitions Found in Sec.  150.1
    Among other elements, the December 2013 Position Limits Proposal 
included amendments to the definitions of ``futures-equivalent,'' 
``long position,'' ``short position,'' and ``spot-month'' found in 
Sec.  150.1 of the Commission's regulations, to conform them to the 
concepts and terminology of the CEA, as amended by the Dodd-Frank Act. 
The Commission also proposed 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 proposed 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 proposed to delete the definition for ``the first 
delivery month of the `crop year.' '' \263\ Separately, the Commission 
proposed making a non-substantive change to list the definitions in 
alphabetical order rather than by use of assigned letters.\264\ 
According to the December 2013 Position Limits Proposal, this last 
change would 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.
---------------------------------------------------------------------------

    \263\ At that time, the Commission noted that several terms that 
are not currently in part 150 were not included in the December 2013 
Position Limits Proposal even though definitions for those terms 
were adopted in vacated part 151. The Commission stated its view 
that the definition of those terms was not necessary for clarity in 
light of other revisions proposed in that rulemaking. The terms not 
proposed at that time include ``swaption'' and ``trader.''
    \264\ The December 2013 Position Limits Proposal also made 
several non-substantive edits to the definitions to make them easier 
to read.
---------------------------------------------------------------------------

    Finally, in connection with the 2016 Supplemental Position Limits 
Proposal, which provided new alternative processes for DCMs and SEFs to 
recognize certain positions in commodity derivative contracts as non-
enumerated bona fide hedges or enumerated anticipatory bona fide 
hedges, and to exempt from federal position limits certain spread 
positions, the Commission proposed to further amend certain relevant 
definitions, including changes to the definitions of ``futures-
equivalent,'' ``intermarket spread position,'' and ``intramarket spread 
position.''
    Separately, as noted in the December 2013 Position Limits Proposal, 
amendments to two definitions were proposed in the November 2013 
Aggregation Proposal,\265\ which was approved by the Commission on the 
same date as the December 2013 Position Limits Proposal. The November 
2013 Aggregation Proposal, a companion to the December 2013 Position 
Limits Proposal, included amendments to the definitions of ``eligible 
entity'' and ``independent account controller.'' \266\ The Commission 
notes that since the amendments were part of the separate Aggregation 
proposal, the proposed amendments to those definitions, and comments 
thereon, are addressed in the final Aggregation rulemaking (the ``2016 
Final Aggregation Rule''); \267\ therefore, the Commission is not 
addressing the definitions of ``eligible entity'' and ``independent 
account controller'' herein.
---------------------------------------------------------------------------

    \265\ See Aggregation of Positions, 78 FR 68946 (Nov. 15, 2013) 
at 68965, 68974 (proposing changes to the definitions of ``eligible 
entity'' and ``independent account controller'') (``November 2013 
Aggregation Proposal''). The Commission issued a supplement to this 
proposal in September 2015, but the supplement did not propose any 
changes to the definitions. See 80 FR 58365 (Sept. 29, 2015).
    \266\ The December 2013 Position Limits Proposal mirrored the 
amendments to the definitions of ``eligible entity'' and 
``independent account controller,'' proposed in the November 2013 
Aggregation Proposal, and also included some non-substantive change 
to the definition of ``independent account controller.''
    \267\ See 2016 Final Aggregation Rule, adopted by the Commission 
separately from this Reproposal.
---------------------------------------------------------------------------

    The Commission is reproposing the amendments to the definitions in 
Sec.  150.1, as set forth in the December 2013 Position Limits Proposal 
and as amended in the 2016 Supplemental Position Limits Proposal, with 
modifications made in response to public comments. The Reproposal also 
includes non-substantive changes to certain definitions to enhance 
readability and clarity for market participants and the public, 
including the extraction of definitions that were contained in the 
definition of ``referenced contract'' to stand on their own. The 
amendments and the public

[[Page 96729]]

comments relevant to each amendment are discussed below.
a. Basis Contract
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to exclude ``basis contracts'' from the definition 
of ``referenced contracts.'' \268\ While the term ``basis contract'' is 
not defined in current Sec.  150.1, the Commission proposed a 
definition for basis contract in the December 2013 Position Limits 
Proposal. Proposed Sec.  150.1 defined 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.''
---------------------------------------------------------------------------

    \268\ The Commission also notes that the proposed definition of 
``commodity index contract'' excluded intercommodity spread 
contracts, calendar spread contracts, and basis contracts.
---------------------------------------------------------------------------

    The Commission also proposed Appendix B to part 150, Commodities 
Listed as Substantially the Same for Purposes of the Definition of 
Basis Contract. As proposed, the definition of basis contract would 
include contracts cash-settled on the difference in prices of two 
different, but economically closely related commodities, for example, 
certain quality differentials (e.g., RBOB gasoline vs. 87 
unleaded).\269\ As explained when it was proposed, the intent of the 
proposed definition was 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.\270\ In the absence of this 
provision, the speculator could then increase further the large 
position in the referenced contracts. By way of comparison, the 
Commission noted in the December 2013 Position Limits Proposal that 
there is greater concern (i) that 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 outright price of a 
referenced contract.\271\
---------------------------------------------------------------------------

    \269\ The proposed basis contract definition was not intended to 
include significant time differentials in prices of the two 
commodities (e.g., the proposed basis contract definition did not 
include calendar spreads for nearby vs. deferred contracts).
    \270\ December 2013 Position Limits Proposal at 75696.
    \271\ Id.
---------------------------------------------------------------------------

    Comments Received: The Commission received a number of comment 
letters regarding the proposed definition of basis contract. One 
commenter supported the proposed definition of basis contract and 
stated that it appreciates the Commission's inclusion of Appendix B 
listing the commodities it believes are substantially the same as a 
core referenced futures contract for purposes of identifying contracts 
that meet the basis contract definition.\272\ Other comment letters 
requested that the Commission broaden the definition to include 
contracts that settle to other types of differentials, such as 
processing differentials (e.g., crack or crush spreads) or quality 
differentials (e.g., sweet vs. sour crude oil). One commenter 
recommended a definition of basis contract that includes crack spreads, 
by-products priced at a differential to other by-products (e.g., jet 
fuel vs. heating oil, both of which are crude oil by-products), and a 
commodity that includes similar commodities such as a contract based on 
the difference in prices between light sweet crude and a sour crude 
that is not deliverable against the NYMEX Light Sweet Crude Oil core 
referenced futures contract. This commenter suggested that if these 
types of contracts are included as basis contracts, market participants 
should be able to net certain contracts where a commodity is priced at 
a differential to a product or by-product, subject to prior approval 
according to a process created by the Commission.\273\
---------------------------------------------------------------------------

    \272\ CL-Working Group-59693 at 68.
    \273\ CLWorking Group-59959 at 16.
---------------------------------------------------------------------------

    Two commenters specifically requested that the list in Appendix B 
include Jet fuel (54 grade) as substantially the same as heating oil 
(67 grade). They also requested that WTI Midland (Argus) vs. WTI 
Financial Futures should be listed as basis contracts for Light 
Louisiana Sweet (LLS) Crude Oil.\274\
---------------------------------------------------------------------------

    \274\ CL-FIA-59595 at 19; CL-ISDA/SIFMA-59611 at 35.
---------------------------------------------------------------------------

    Noting that basis contracts are excluded from the definition of 
referenced contract and thus not subject to speculative position 
limits, two commenters requested CFTC expand the list in Appendix B to 
part 150 of commodities considered substantially the same as a core 
referenced futures contract, and the corresponding list of basis 
contracts, to reflect the commercial practices of market 
participants.\275\ One of these commenters recommended that the 
Commission adopt a flexible process for identifying any additional 
commodities that are substantially the same as a commodity underlying a 
core referenced futures contract for inclusion in Appendix B, and allow 
market participants to request a timely interpretation regarding 
whether a particular commodity is substantially the same as a core 
referenced futures contract or that a particular contract qualifies as 
a basis contract.\276\
---------------------------------------------------------------------------

    \275\ CL-FIA-59595 at 4 and 18-19; CL-ISDA/SIFMA-59611 at 34-35.
    \276\ CL-FIA-59595 at 19.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
the definition of basis contract as originally proposed, but to change 
the defined term from ``basis contract'' to ``location basis 
contract.'' The Commission intended the ``basis contract'' definition 
to encompass contracts that settle to the difference between prices in 
separate delivery locations of the same (or substantially the same) 
commodity, while the industry seems to use the term ``basis'' more 
broadly to include other price differentials, including, among other 
things, processing differentials and quality differentials. Thus, under 
the Reproposal, the term is changing from ``basis contract'' to 
``location basis contract'' in order to reduce any confusion stemming 
from the more encompassing use of the word ``basis'' in industry 
parlance.\277\
---------------------------------------------------------------------------

    \277\ Consequently, the Commission realizes that its 
determination to retain its traditional definition while clarifying 
its meaning by adopting the amended term of ``locational basis 
contract'' does not provide for the expanded definition of basis 
contract requested by some of the commenters. A broader definition 
of basis contract would result in the exclusion of more derivative 
contracts from the definition of referenced contract than previously 
proposed. A contract excluded from the definition of referenced 
contract is not subject to position limit under this Reproposal. The 
Commission declines to exclude more than the locational basis 
contracts that it previously proposed from the definition of 
referenced contract.

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

[[Page 96730]]

    The Commission is reproposing Appendix B as originally proposed. 
The Commission is not persuaded by commenters' suggestions for 
expanding the current list of commodities considered ``substantially 
the same'' in Appendix B. While a commenter requested the Commission 
expand the list to address all ``commercial practices'' used by market 
participants, the Commission believes this request is too vague and too 
broad to be workable. In addition, although a commenter recommended 
that the Commission adopt a flexible process for identifying any 
additional commodities that are substantially the same as a commodity 
underlying a core referenced futures contract for inclusion in Appendix 
B,\278\ the Commission observes that market participants are already 
provided the flexibility of two processes: (i) To request an exemptive, 
no-action or interpretative letter under Sec.  140.99; and/or (ii) to 
petition for changes to Appendix B under Sec.  13.2. Under either 
process, the Commission would need to carefully consider whether it 
would be beneficial and consistent with the policies underlying CEA 
section 4a to list additional commodities as substantially the same as 
a commodity underlying a core referenced futures contract, especially 
since various market participants might have conflicting views on such 
a determination in certain cases.
---------------------------------------------------------------------------

    \278\ As noted above, according to the commenter, a flexible 
process would allow market participants to request a timely 
interpretation regarding whether a particular commodity is 
substantially the same as a core referenced futures contract or that 
a particular contract qualifies as a ``basis contract. See CL-FIA-
59595 at 19
---------------------------------------------------------------------------

    Finally, the Commission notes that comments regarding other types 
of differentials were addressed in the Commission's 2016 Supplemental 
Position Limits Proposal, which would allow exchanges to grant spread 
exemptions, including calendar spreads, quality differential spreads, 
processing spreads, and product or by-product differential 
spreads.\279\ Comments responding to that 2016 Supplemental Position 
Limits Proposal and the Commission's Reproposal are discussed below.
---------------------------------------------------------------------------

    \279\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38476-80.
---------------------------------------------------------------------------

b. Commodity Derivative Contract
    Proposed Rule: The December 2013 Position Limits Proposal would 
define in Sec.  150.1 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)). The proposed use of such a generic term 
would be a convenient 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.\280\
---------------------------------------------------------------------------

    \280\ See, e.g., amendments to Sec.  150.1 (the definitions of: 
``location 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.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as proposed for the reasons given above.
c. Commodity Index Contract, Spread Contract, Calendar Spread Contract, 
and Intercommodity Spread Contract
    Proposed Rule: The December 2013 Position Limits Proposal excluded 
commodity index contracts from the definition of referenced contracts; 
thus, commodity index contracts would not be subject to position 
limits. The Commission also proposed to define the term commodity index 
contract, which is not in current Sec.  150.1, to mean ``an agreement, 
contract, or transaction that is not a basis contract or any type of 
spread contract, based on an index comprised of prices of commodities 
that are not the same or substantially the same.''
    Further, the Commission proposed to add a definition of basis 
contract, as discussed above, and spread contract to clarify which 
types of contracts would not be considered a commodity index contract 
and thus would be subject to position limits. Under the proposal, a 
spread contract was defined as ``a calendar spread contract or an 
intercommodity spread contract.'' \281\ Finally, the Commission 
proposed the addition of definitions for a calendar spread contract, 
and an intercommodity spread contract to clarify the meanings of those 
terms. In particular, under the proposal, a calendar spread contract 
would mean ``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.'' An intercommodity spread contract would 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.'' \282\
---------------------------------------------------------------------------

    \281\ In the December 2013 Position Limits Proposal, the 
Commission noted that while the proposed definition of ``referenced 
contract'' specifically excluded guarantees of a swap, basis 
contracts and commodity index contracts, spread contracts were not 
excluded from the proposed definition of ``referenced contract.'' 
The December 2013 Position Limits Proposal at 75702.
    \282\ In the December 2013 Position Limits Proposal, the 
Commission also clarified that if a swap was 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 was an ``intercommodity spread contract,'' was not a 
commodity index contract, and was a referenced contract subject to 
the position limits specified in Sec.  150.2. The Commission further 
clarified that 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) was not a commodity 
index contract and was a referenced contract subject to position 
limits specified in Sec.  150.2. See December 2013 Position Limits 
Proposal, 78 FR at 75697, n. 163.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal further noted that 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.\283\ Therefore, for commodity index contracts, the 
Commission stated its intention 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. The 
Commission explained that this would 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.\284\
---------------------------------------------------------------------------

    \283\ Id. at 75697, n. 163.
    \284\ Id. at 75697.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definitions for commodity index contract, spread contract, 
calendar spread contract, and intercommodity spread contract.\285\
---------------------------------------------------------------------------

    \285\ The Commission notes that although it did not receive 
comments on the proposed definitions for commodity index contract, 
spread contract, calendar spread contract, and intercommodity spread 
contract, it did receive a number of comments regarding the 
interplay of those defined terms and the definition of ``referenced 
contract.'' Discussion of those comments are included in the 
discussion of the proposed definition of ``referenced contract'' 
below.

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

[[Page 96731]]

    Commission Reproposal: The Commission has determined to repropose 
the definitions as originally proposed for the reasons provided above, 
with the exception that, under the Reproposal, the term ``basis 
contract'' will be replaced with the term ``location basis contract,'' 
in the reproposed definition of commodity index contract, to conform to 
the name change discussed above. In addition, the Commission notes that 
while it had proposed to subsume the definitions of commodity index 
contract, spread contract, calendar spread contract, and intercommodity 
spread contract under the definition of referenced contract, in the 
Reproposal it is enumerating each as a separate definition for ease of 
reference.
d. Core referenced Futures Contract
    Proposed Rule: The December 2013 Position Limits Proposal provided 
a list of futures contracts in Sec.  150.2(d) to which proposed 
position limit rules would apply. The Commission proposed the term 
``core referenced futures contract'' as a short-hand phrase to denote 
such contracts.\286\ Accordingly, the Commission proposed to include in 
Sec.  150.1 a definition of core referenced futures contract to mean 
``a futures contract that is listed in Sec.  150.2(d).'' In its 
proposal, the Commission also clarified that core referenced futures 
contracts include options that expire into outright positions in such 
contracts.\287\
---------------------------------------------------------------------------

    \286\ The selection of the core referenced futures contracts is 
explained in the discussion of Sec.  150.2. See discussion below.
    \287\ See 78 FR at 75697 n. 166.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as originally proposed.
e. Eligible Affiliate
    Proposed Rule: The term ``eligible affiliate,'' used in proposed 
Sec.  150.2(c)(2), is not defined in current Sec.  150.1. The 
Commission proposed to amend Sec.  150.1 to define an ``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.\288\
---------------------------------------------------------------------------

    \288\ See proposed Sec.  150.1.
---------------------------------------------------------------------------

    The definition of ``eligible affiliate'' proposed in the December 
2013 Position Limits Proposal qualified persons as eligible affiliates 
based on requirements similar to those adopted by the Commission in a 
separate rulemaking.\289\ On April 1, 2013, the Commission provided 
relief from the mandatory clearing requirement of CEA 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.\290\ Under both Sec.  50.52 and the 
definition proposed in the December 2013 Position Limits Proposal, a 
person is an eligible affiliate if another person (e.g. a parent 
company), directly or indirectly, holds a majority ownership interest 
in such affiliates, 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 affiliates. In 
addition, for purposes of the position limits regime, that other person 
(e.g., a parent company) must be required to aggregate the positions of 
such affiliates under Sec.  150.4 and not claim an exemption from 
aggregation for such affiliates.\291\
---------------------------------------------------------------------------

    \289\ See December 2013 Position Limits Proposal, 78 FR at 
75698.
    \290\ 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.
    \291\ See December 2013 Position Limits Proposal, 78 FR at 
75698; see also definition of ``eligible affiliate'' in Sec.  150.1, 
as proposed therein.
---------------------------------------------------------------------------

    Comments Received: The Commission received few comments on the 
proposed definition of ``eligible affiliate.'' Commenters requested 
that the Commission harmonize the definition of ``eligible affiliate'' 
with the definition of ``eligible affiliate counterparty'' under Sec.  
50.52 in order to include ``sister affiliates'' within the 
definition.\292\
---------------------------------------------------------------------------

    \292\ See, e.g., CL-ISDA/SIFMA-59611 at 3 and 33, CL-Working 
Group-59693 at 66-7.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission notes that under Sec.  150.4, 
aggregation is required by a person that holds an ownership or equity 
interest of 10 percent or greater in another person, unless an 
exemption applies. Under reproposed Sec.  150.2(c)(2), sister 
affiliates would not be required to comply separately with position 
limits, provided such entities are eligible affiliates.\293\
---------------------------------------------------------------------------

    \293\ Of course, sister affiliates would be required to 
aggregate, as would any other market participants, if they were 
trading together pursuant to an express or implied agreement.
---------------------------------------------------------------------------

    As such, the Commission does not believe a there is a need to 
conform the ``eligible affiliate'' definition in reproposed Sec.  150.1 
to the definition of ``eligible affiliate counterparty'' in Sec.  50.52 
in order to accommodate sister affiliates. The Commission notes that a 
third person that holds an ownership or equity interest in each of the 
sister affiliates--e.g., the parent company--would be required to 
aggregate positions of such eligible affiliates. Thus, the Commission 
is reproposing the definition without changes.
f. Entity
    Proposed Rule: The December 2013 Position Limits Proposal defined 
``entity'' to mean ``a `person' as defined in section 1a of the Act.'' 
\294\ The term, not defined in current Sec.  150.1, is used in a number 
of contexts, and in various definitions in the proposed amendments to 
part 150. Thus, the definition originally proposed would provide a 
clear and unambiguous meaning for the term, and prevent confusion.
---------------------------------------------------------------------------

    \294\ CEA section 1a(38); 7 U.S.C. 1a(38). See also December 
2013 Position Limits Proposal, 78 FR at 75698.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as originally proposed, for the reasons provided above.
g. Excluded Commodity
    Proposed Rule: The phrase ``excluded commodity'' was added into the 
CEA in the CFMA, and is defined in CEA

[[Page 96732]]

section 1a(19), but is not defined or used in current part 150.\295\ 
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.\296\
---------------------------------------------------------------------------

    \295\ CEA section 1a(19); 7 U.S.C. 1a(19).
    \296\ CEA section 4a(2)(A); 7 U.S.C. 6a(2)(A).
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal included in Sec.  150.1, 
a definition of excluded commodity that simply incorporates the 
statutory meaning, as a useful term for purposes of a number of the 
proposed changes to part 150. For example, the phrase was used in the 
proposed amendments to Sec.  150.5, in its provision of requirements 
and acceptable practices for DCMs and SEFs in their adoption of rules 
and procedures for monitoring and enforcing position limits and 
accountability provisions; the phrase was also used in the definition 
of bona fide hedging position.
    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as previously proposed, for the reasons provided above.
h. First Delivery Month of the Crop Year
    Proposed Rule: 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 
had been pertinent for purposes of the spread exemption to the 
individual month limit in current Sec.  150.3(a)(3), which limits 
spreads to those between individual months in the same crop year and to 
a level no more than that of the all-months limit.\297\ Under the 
December 2013 Position Limits Proposal, the definition of ``crop year'' 
would be deleted from Sec.  150.1. The proposed elimination of the 
definition conformed with level of individual month limits set at the 
level of the all-months limits, thus negating the purpose of the 
existing spread exemption in current Sec.  150.3(a)(3), which the 
December 2013 Position Limits Proposal also eliminated.
---------------------------------------------------------------------------

    \297\ Prior to the adoption of Part 151, a single-month limit 
was set at a level that was lower than the all-months-combined 
limit. Operating in conjunction with the lower single-month limit 
level, as noted below, Sec.  150.3(a)(3) provides a limited 
exemption for calendar spread positions to exceed that single-month 
limit, as long as the single month position (including calendar 
spread positions) is no greater than the level of the all-months-
combined limit. In part 151, the Commission determined to set the 
single-month position limit levels in Sec.  150.2 at the same level 
as the all-months-combined limits; in vacating part 151, the court 
retained the amendments to Sec.  150.2, leaving the single-month 
limit at the same level as those of the all-months-combined limit 
levels. The December 2013 Position Limits Proposal retained parity 
of the single-month limit and all-months-combined limits levels.
---------------------------------------------------------------------------

    The Commission notes that in its 2016 Supplemental Position Limits 
Proposal, the Commission proposed to retain a spread exemption in Sec.  
150.3 and not, as proposed in the December 2013 Position Limits 
Proposal, to eliminate it altogether.\298\
---------------------------------------------------------------------------

    \298\ Moreover, the 2016 Supplemental Position Limits Proposal 
did not limit the exemption to spread positions held between 
individual months of a futures contract in the same crop year, nor 
limit the size of an individual month position to the all-months 
limit.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed deletion of the crop year definition.
    Commission Reproposal: The Commission has determined to repropose 
the deletion of the definition of the term ``first delivery month of 
the crop year'' as originally proposed. The Commission notes that, 
although in its 2016 Supplemental Position Limits Proposal, the 
Commission proposed to retain a spread exemption in Sec.  150.3 and, in 
fact, provides for the approval by exchanges of exemptions to spread 
positions beyond the limited exemption for spread positions in current 
Sec.  150.3(a)(3), the crop year definition remains unnecessary since 
the level of individual month limits has been set at the level of the 
all-months limits.
i. Futures Equivalent
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to broaden the definition of the term ``futures-
equivalent'' found in current Sec.  150.1(f) of the Commission's 
regulations,\299\ and to expand upon clarifications included in the 
current definition relating to adjustments and computation times.\300\ 
The Dodd-Frank Act amendments to CEA section 4a,\301\ in part, direct 
the Commission to apply aggregate federal position limits to physical 
commodity futures contracts and to swaps contracts that are 
economically equivalent to such physical commodity futures contracts on 
which the Commission has established limits. In order to aggregate 
positions in futures, options and swaps contracts, it is necessary to 
adjust the position sizes, since such contracts may have varying units 
of trading (e.g., the amount of a commodity underlying a particular 
swap contract could be larger than the amount of a commodity underlying 
a core referenced futures contract). The Commission proposed to adjust 
position sizes to an equivalent position based on the size of the unit 
of trading of the core referenced futures contract. Under the December 
2013 Position Limits Proposal, the definition of ``futures equivalent'' 
in current Sec.  150.1(f), which is applicable only to an option 
contract, would be extended to both options and swaps.
---------------------------------------------------------------------------

    \299\ 17 CFR 150.1(f) currently defines ``futures-equivalent'' 
only for an option contract, adjusting the open position in options 
by the previous day's risk factor, as calculated at the close of 
trading by the exchange.
    \300\ The December 2013 Position Limits Proposal defined 
``futures-equivalent'' for: (1) An option contact, adjusting the 
position size by an economically reasonable and analytically 
supported risk factor, computed as of the previous day's close or 
the current day's close or contemporaneously during the trading day; 
and (2) a swap, converting the position size to an economically 
equivalent amount of an open position in a core referenced futures 
contract. See December 2013 Position Limits Proposal, 78 FR at 
75698-9.
    \301\ Amendments to CEA section 4a(1) authorize the Commission 
to extend position limits beyond futures and option contracts to 
swaps traded on an exchange and swaps not traded on an exchange that 
perform or affect a significant price discovery function with 
respect to regulated entities. 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).
---------------------------------------------------------------------------

    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed two further clarifications to the definition of the term 
``futures-equivalent.'' First, the Commission proposed to address 
circumstances in which a referenced contract for which futures 
equivalents must be calculated is itself a futures contract. The 
Commission noted that this may occur, for example, when the referenced 
contract is a futures contract that is a mini-sized version of the core 
referenced futures contract (e.g., the mini-corn and the corn futures 
contracts).\302\ The Commission proposed to clarify in proposed Sec.  
150.1 that the term ``futures-equivalent'' includes a futures contract 
which has been converted to an economically equivalent amount of an 
open position in a core

[[Page 96733]]

referenced futures contract. This clarification would mirror the 
expanded definition of ``futures-equivalent'' in the December 2013 
Position Limits Proposal, as it would pertain to swaps.
---------------------------------------------------------------------------

    \302\ Under current Sec.  150.2, for purposes of compliance with 
federal position limits, positions in regular sized and mini-sized 
contracts are aggregated. The Commission's practice of aggregating 
futures contracts when a DCM lists for trading two or more futures 
contracts with substantially identical terms, is to scale down a 
position in the mini-sized contract, by multiplying the position in 
the mini-sized contract by the ratio of the unit of trading in the 
mini-sized contract to that of the regular sized contract. See 
paragraph (b)(2)(D) of app. C to part 38 of the Commission's 
regulations for guidance regarding the contract size or trading unit 
for a futures or futures option contract.
---------------------------------------------------------------------------

    Second, the Commission proposed in the 2016 Supplemental Position 
Limits Proposal to clarify the definition of the term ``futures-
equivalent'' to provide that, for purposes of calculating futures 
equivalents, an option contract must also be converted to an 
economically equivalent amount of an open position in a core referenced 
futures contract. This clarification would address situations, for 
example, where the unit of trading underlying an option contract (that 
is, the notional quantity underlying an option contract) may differ 
from the unit of trading underlying a core referenced futures 
contract.\303\
---------------------------------------------------------------------------

    \303\ For an example of a futures-equivalent conversion of a 
swaption, see example 6, WTI swaptions, Appendix A to part 20 of the 
Commission's regulations.
---------------------------------------------------------------------------

    The Commission expressed the view in the 2016 Supplemental Position 
Limits Proposal that these clarifications would be consistent with the 
methodology the Commission used to provide its analysis of unique 
persons over percentages of the proposed position limit levels in the 
December 2013 Position Limits Proposal.\304\
---------------------------------------------------------------------------

    \304\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38483. See also Table 11 in the December 2013 Position Limits 
Proposal, 78 FR at 75731-3.
---------------------------------------------------------------------------

    Comments Received: The Commission received two comments on the 
proposed definition of ``futures-equivalent'' in the December 2013 
Position Limits Proposal.\305\ Each comment was generally supportive of 
the proposed definition. Although one commenter commended the 
flexibility granted to market participants to use different option 
valuation models, it recommended that the Commission provide guidance 
on when it would consider an option valuation model unsatisfactory and 
what the factors the Commission would consider in arriving at such an 
opinion.\306\ According to the commenter, the Commission should utilize 
a ``reasonableness approach'' by explicitly providing a ``safe harbor'' 
for models that produce results within 10 percent of an exchange or 
Commission model, and should permit market participants to demonstrate 
the reasonableness under prevailing market conditions of any model that 
falls outside this safe harbor.\307\ It was also recommended that the 
Commission consider the exchanges' approach to option valuation where 
appropriate because these approaches are already in use and familiar to 
market participants.\308\
---------------------------------------------------------------------------

    \305\ CL-MFA-59606; CL-FIA-59595 at 15.
    \306\ CL-MFA-59606 at 16-17.
    \307\ MFA also stated that the Commission should not second 
guess the results of reasonable models and impose findings of 
violations after-the-fact as that would introduce tremendous 
uncertainty into compliance with the position limits regime. Id at 
17.
    \308\ Id at 17.
---------------------------------------------------------------------------

    Both MFA and FIA supported the optional use of the prior day's 
delta to calculate a futures-equivalent position for purposes of 
speculative position limit compliance.\309\ In addition, each requested 
that the Commission confirm or adopt a provision similar to CME Rule 
562. That exchange rule provides, among other things, that if a 
participant's position exceeds position limits as a result of an option 
assignment, that participant is allowed one business day to liquidate 
the excess position without being considered in violation of the 
limits. FIA urged the Commission to provide market participants with a 
reasonable period of time to reduce its position below the speculative 
position limit.\310\
---------------------------------------------------------------------------

    \309\ CL-MFA-59606 at 17; CL-FIA-59595 at 15.
    \310\ CL-FIA-59595 at 15.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
the definition of ``futures-equivalent'' as proposed in the 2016 
Supplemental Position Limits proposal, with the exception that it now 
proposes adopting the current exchange practice with regard to option 
assignments, as discussed below.
    Regarding risk (delta) models, the Reproposal does not provide a 
``safe harbor'' as requested since risk models, generally, should 
produce similar results. The Commission believes a difference of 10 
percent above or below the delta resulting from an exchange's model 
generally would be too great to be economically reasonable. However, 
the Commission notes that, under the Reproposal, should a market 
participant believe its model produces an economically reasonable and 
analytically supported risk factor for a particular trading session 
that differs significantly from a result published by an exchange for 
that same time,\311\ it may describe the circumstances that result in a 
significant difference and request that staff review that model for 
reasonableness.\312\
---------------------------------------------------------------------------

    \311\ Under Sec.  16.01(a)(2), a reporting market is required to 
record for each trading session the option delta, when a delta 
system is used, while Sec.  16.01(e) requires a reporting market to 
make that option delta readily available to the public. A reporting 
market for this purpose is defined in Sec.  15.00(q) as a DCM or a 
registered entity under CEA section 1a(40) (under CEA section 
1a(40), registered entities include, among others, DCMs, DCOs, SEFs, 
SDRs).
    \312\ Deltas are computed using an option pricing model. 
Different option pricing models incorporate different assumptions. 
For a discussion of circumstances where assumptions in an option 
pricing model may not hold, see, for example, Paul Wilmott, 
Derivatives: The Theory and Practice of Financial Engineering 
chapter 29 (1998) (describing circumstances where delta hedging an 
option position (i.e., replication trading) can move the price of 
the underlying asset, violating an assumption of certain option 
pricing models that replication trading has no influence on the 
price of the underlying asset).
---------------------------------------------------------------------------

    Regarding the time period for a participant to come into compliance 
because of option assignment, the Commission agrees that a participant 
in compliance only because of a previous day's delta, and no longer, 
after option assignment, in compliance on a subsequent day, should have 
one business day to liquidate the excess position resulting from option 
assignment without being considered in violation of the limits.\313\ 
Exchanges currently provide the same amount of time to come into 
compliance.
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    \313\ The Commission believes that, in the circumstance of 
option assignment, one business day is a reasonable amount of time 
to come into compliance because the markets for commodities subject 
to federal limits under Sec.  150.2 are generally liquid.
---------------------------------------------------------------------------

j. Intermarket Spread Position and Intramarket Spread Position
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to add to current Sec.  150.1 new definitions of 
the terms ``intermarket spread position'' and ``intramarket spread 
position.'' \314\ These terms were defined in the December 2013 
Position Limits Proposal within the definition of ``referenced 
contract.'' In connection with its 2016 Supplemental Position Limits 
Proposal to permit exchanges to process applications for exemptions 
from federal position limits for certain spread positions, the 
Commission proposed to expand the definitions of these terms as 
proposed in the December 2013 Position Limits Proposal.
---------------------------------------------------------------------------

    \314\ In the December 2013 Position Limits Proposal, the 
Commission proposed to define an ``intermarket spread position'' as 
``a long position in a commodity derivative contract in a particular 
commodity at a particular designated contract market or swap 
execution facility and a short position in another commodity 
derivative contract in that same commodity away from that particular 
designated contract market or swap execution facility.'' The 
Commission also proposed to define an ``intramarket spread 
position'' as ``a long position in a commodity derivative contract 
in a particular commodity and a short position in another commodity 
contract in the same commodity on the same designated contract 
market or swap execution facility.'' See December 2013 Position 
Limits Proposal, 78 FR at 75699-700.
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    In particular, in the 2016 Supplemental Position Limits Proposal,

[[Page 96734]]

the Commission proposed to define an ``intermarket spread position'' to 
mean ``a long (short) position in one or more commodity derivative 
contracts in a particular commodity, or its products or its by-
products, at a particular designated contract market, and a short 
(long) position in one or more commodity derivative contracts in that 
same, or similar, commodity, or its products or its by-products, away 
from that particular designated contract market.'' Similarly, the 
Commission proposed in the 2016 Supplemental Position Limits Proposal 
to define an ``intramarket spread position'' to mean ``a long position 
in one or more commodity derivative contracts in a particular 
commodity, or its products or its by-products, and a short position in 
one or more commodity derivative contracts in the same, or similar, 
commodity, or its products or its by-products, on the same designated 
contract market.''
    The Commission expressed the view that the expanded definitions 
proposed in the 2016 Supplemental Position Limits Proposal would take 
into account that a market participant may take positions in multiple 
commodity derivative contracts to establish an intermarket spread 
position or an intramarket spread position. The expanded definitions 
would also take into account that such spread positions may be 
established by taking positions in derivative contracts in the same 
commodity, in similar commodities, or in the products or by-products of 
the same or similar commodities. By way of example, the Commission 
noted that the expanded definitions would include a short position in a 
crude oil derivative contract and long positions in a gasoline 
derivative contract and a diesel fuel derivative contract 
(collectively, a reverse crack spread).
    Comments Received: The Commission did not receive any comments in 
response to the definitions of ``intermarket spread position'' and 
``intramarket spread position'' proposed in the December 2013 Position 
Limits Proposal \315\ or in response to the 2016 Supplemental Position 
Limits Proposal.
---------------------------------------------------------------------------

    \315\ As noted above, the definitions of ``intermarket spread 
position'' and ``intramarket spread position'' were included.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
the definitions of the terms ``intermarket spread position'' and 
``intramarket spread position'' as proposed in the 2016 Supplemental 
Position Limits Proposal.
k. Long Position
    Proposed Rule: 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.'' The Commission proposed to update 
the definition to make it also applicable to swaps such that a long 
position would include a long futures-equivalent swap.
    Commission Reproposal: Though no commenters suggested changes to 
the definition of ``long position,'' the Commission is concerned that 
the proposed definition does not clearly articulate that futures and 
options contracts are subject to position limits on a futures-
equivalent basis in terms of the core referenced futures contract. 
Longstanding market practice has applied position limits on futures and 
options on a futures-equivalent basis, and the Commission believes that 
practice ought to be made explicit in the definition in order to 
prevent confusion. Thus, the Commission is reproposing an amended 
definition to clarify that a long position is ``on a futures-equivalent 
basis, a long call option, a short put option, a long underlying 
futures contract, or a swap position that is equivalent to a long 
futures contract.'' This clarification is consistent with the 
clarification to the definition of futures-equivalent basis proposed in 
the 2016 Supplemental Position Limits Proposal. Though the substance of 
the definition is fundamentally unchanged, the revised language should 
prevent unnecessary confusion over the application of futures-
equivalency to different kinds of commodity derivative contracts.
l. Physical Commodity
    Proposed Rule: The December 2013 Position Limits Proposal would 
amend Sec.  150.1 by adding in a definition of the term ``physical 
commodity'' for position limit 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.\316\
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    \316\ 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.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on the 
proposed definition.
    Commission Reproposal: The Commission has determined to repropose 
the definition as originally proposed.
m. Pre-enactment Swap and Pre-Existing Position
    Proposed Rule: The December 2013 Position Limits Proposal would 
amend Sec.  150.1 by adding in new definitions of the terms ``pre-
enactment swap'' and ``pre-existing position'' for position limit 
purposes. Under the definitions proposed in the December 2013 Position 
Limits Proposal, ``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, while ``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.
    Comments Received: The Commission received no comments on the 
proposed definitions either of the terms ``pre-enactment swap'' or 
``pre-existing position.''
    Commission Reproposal: The Commission has determined to repropose 
both definitions as previously proposed.
n. Referenced Contract
    Proposed Rule: Part 150 currently does not include a definition of 
the phrase ``referenced contract,'' which was introduced and adopted in 
vacated part 151.\317\ 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.\318\ The 
definition of referenced contract proposed in the December 2013 
Position Limits Proposal was similar to that of vacated part 151,

[[Page 96735]]

but there were certain differences, including an exclusion of 
guarantees of swaps and the incorporation of other terms into the 
definition of referenced contract.
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    \317\ 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.''
    \318\ Position Limits for Futures and Swaps, 76 FR at 71629.
---------------------------------------------------------------------------

    In the December 2013 Position Limits Proposal, the term 
``referenced contract'' was proposed to be 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.  150.2(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.
    Comments Received: The Commission received numerous comments \319\ 
regarding various aspects of the definition of ``referenced contract.'' 
Some were generally supportive of the proposed definition while others 
suggested changes. One commenter expressly stated its support for 
speculative limits on futures, options, and swaps because each 
financial instrument ``can be used to develop market power and increase 
volatility.'' \320\ Another commenter expressed its support for the 
exclusion of guarantees of swaps from the definition of referenced 
contract.\321\ These comments and the Commission's response are 
detailed below.
---------------------------------------------------------------------------

    \319\ The commenters included AGA, APGA, Atmos, API, Better 
Markets, BG Group, Calpine, Citadel, CME, CMOC, COPE, DEU, EEI, 
EPSA, FIA, ICE, IECA, ISDA/SIFMA, GFMA, IATP, MFA, NEM, NFP, NGSA, 
OLAM, PAAP, SCS, and Vectra.
    \320\ CL-IECA-59713 at 4.
    \321\ CL-IECAssn-59679 at 31.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing the definition 
of referenced contract with two substantive modifications from the 
original proposal, both of which are discussed further below. First, 
the Commission is now proposing to amend the definition of ``referenced 
contract'' to expressly exclude trade options. Second, the Reproposal 
would clarify the meaning of ``indirectly linked.'' The Reproposal also 
moves four definitions that were embedded in the proposed definition of 
referenced contract, specifically ``calendar spread contract,'' 
``commodity index contract,'' ``spread contract,'' and ``intercommodity 
spread contract,'' to their own definitions in Sec.  150.1, while 
otherwise retaining those definitions as proposed. In addition, the 
Reproposal makes non-substantive modifications to the definition of 
referenced contract to make it easier to read.
    Comments Received: In response to a specific request for comment in 
the December 2013 Position Limits Proposal, many commenters recommended 
excluding trade options from the definition of referenced 
contract.\322\
---------------------------------------------------------------------------

    \322\ See, e.g., CL-FIA-59595 at 4 and 19, CL-EEI-EPSA-59602 at 
3, CL-ISDA/SIFMA-59611 at 3 and 34, CL-NEM-59620 at 2, CL-DEU-59627 
at 7, CL-AGA-59632 at 4-5, CL-AGA-60382 at 10, CL-Olam-59658 at 3, 
CL-BG Group-59656 at 4, CL-BG Group-60383 at 4, CL-COPE-59662 at 5 
and 8, CL-Calpine-59663 at 5, CL-PAAP-59664 at 4, CL-NGSA-59673 at 
27-33, CL-ICE-59669 at 13, CL-EPSA-60381 at 4-5, CL-A4A-59714 at 5, 
CL-NFP-59690 at 7-8, CL-Working Group-59693 at 55-58, CL-API-59694 
at 7, CL-IECAssn-59679 at 22, CL-IECAssn-59957 at 6-9, CL-Atmos-
59705 at 4, CL-APGA-59722 at 9, CL-EEI-59945 at 5-6, CL-EPSA-55953 
at 6-7, and CL-SCS-60399 at 3.
---------------------------------------------------------------------------

    Commission Reproposal: In response to numerous comments, the 
reproposed definition of ``referenced contract'' expressly excludes 
trade options that meet the requirements of Sec.  32.3. The Commission 
notes that in its trade options final rule,\323\ the cross-reference to 
vacated part 151 position limits was deleted from Sec.  32.3(c). At 
that time, the Commission stated its belief that federal speculative 
position limits should not apply to trade options, as well as its 
intention to address trade options in the context of the any final 
rulemaking on position limits.\324\ Therefore, the Commission is 
reproposing the definition of ``referenced contract'' to expressly 
exclude trade options that meet the requirements of Sec.  32.3 of this 
chapter.
---------------------------------------------------------------------------

    \323\ Trade Options, 81 FR 14966 (Mar. 21, 2016).
    \324\ Id. at 14971.
---------------------------------------------------------------------------

    Comments Received: Commenters asserted that certain aspects of the 
definition of referenced contract are unclear and/or unworkable. For 
example, commenters suggested that the concept of ``indirectly linked'' 
is unclear and so market participants may not know whether a particular 
contract is subject to limits.\325\ Some commenters believe that the 
definition is overbroad and captures products that they state do not 
affect price discovery or impair hedging and are not truly 
economically-equivalent.\326\ Commenters request that the Commission 
support its determination regarding which contracts are economically 
equivalent by providing a description of the methodology used to 
determine the contracts considered to be economically-equivalent, 
including examples of over-the-counter (``OTC'') and FBOT 
contracts.\327\ One commenter stated that support is necessary because 
``mechanically assign[ing]'' the label of economically-equivalent to 
any contract that references a core referenced futures contract does 
not make it equivalent.\328\
---------------------------------------------------------------------------

    \325\ See, e.g., CL-CMC-59634 at 14, and CL-COPE-59662 at 7, n. 
20 (stating ``[i]t is one thing if the Commission means a reference 
to a contract that itself directly references a core referenced 
futures contract. It is more troubling and likely unworkable if the 
Commission means a more subjective economic link to a delivery 
location that is used in a core referenced futures contract. At a 
minimum, the Commission should provide examples of indirect linkage 
that triggers referenced contract status'').
    \326\ See, e.g., CL-COPE-59662 at 7, and CL-BG Group-59656 at 4.
    \327\ See, e.g., CL-MFA-59606 at 4 and 15-16.
    \328\ CL-COPE-59950 at 7.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission agrees with commenters that 
there is a need to clarify the meaning of ``indirectly linked.'' The 
Commission notes that including contracts that are ``indirectly 
linked'' to the core referenced futures contract under the definition 
of referenced contract is intended to prevent the evasion of position 
limits through the creation of an economically equivalent contract that 
does not directly reference the core referenced futures contract price. 
Under the reproposed definition, ``indirectly linked'' means a contract 
that settles to a price based on another derivative contract that, 
either directly or through linkage to another derivative contract, has 
a settlement price based on

[[Page 96736]]

the price of a core referenced futures contract or based on the price 
of the same commodity underlying that particular core referenced 
futures contract for delivery at the same location specified in that 
particular core referenced futures contract. Therefore, contracts that 
settle to the price of a referenced contract, for example, would be 
indirectly linked to the core referenced futures contract (e.g., a swap 
that prices to the ICE Futures US Henry LD1 Fixed Price Futures (H) 
contract, which is a referenced contract that settles directly to the 
price of the NYMEX Henry Hub Natural Gas (NG) core referenced futures 
contract).
    On the other hand, an outright derivative contract whose settlement 
price is based on an index published by a price reporting agency 
(``PRA'') that surveys cash market transaction prices (even if the cash 
market practice is to price at a differential to a futures contract) 
would not be directly or indirectly linked to the core referenced 
futures contract.\329\ Similarly, a derivative contract whose 
settlement price was based on the same underlying commodity at a 
different delivery location (e.g., ultra-low sulfur diesel delivered at 
L.A. Harbor) would not be linked, directly or indirectly, to the core 
referenced futures contract. The Commission is publishing an updated 
CFTC Staff Workbook of Commodity Derivative Contracts Under the 
Regulations Regarding Position Limits for Derivatives along with this 
release, which provides a non-exhaustive list of referenced contracts 
and may be helpful to market participants in determining categories of 
contracts that fit within the definition. Under the Reproposal, as 
always, market participants may request clarification from the 
Commission when necessary.
---------------------------------------------------------------------------

    \329\ The Commission notes that while the outright derivative 
contract would not be indirectly linked to the core referenced 
contract, a derivative contract that settles to the difference 
between the core referenced futures contract and the PRA index would 
be directly linked because it settles in part to the core referenced 
futures contract price.
---------------------------------------------------------------------------

    Regarding comments that the definition is overbroad and captures 
products that commenters state do not affect price discovery or are not 
truly economically-equivalent, the Commission notes that commenters 
seem to be confusing the statutory definitions of ``significant price 
discovery function'' (in CEA section 4a(a)(4)) and ``economically 
equivalent'' (in CEA section 4a(a)(5)). As a matter of course, 
contracts can be economically equivalent without serving a significant 
price discovery function. The Commission notes that there is no 
unpublished methodology used to determine which contracts are 
referenced contracts. Instead, the Commission proposed, and, following 
notice and comment, is now reproposing a definition for referenced 
contracts, and contracts that fit under that definition will be subject 
to federal speculative position limits.
    Comments Received: Several commenters suggested that cash-settled 
contracts should not be subject to position limits.\330\ One commenter 
asserted that non-deliverable cash-settled contracts are 
``fundamentally different'' from deliverable commodity contracts and 
should not be subject to position limits.\331\ The commenter also 
asserted that subjecting penultimate-day contracts such as options to a 
limit structure would make managing an option portfolio ``virtually 
impossible'' and would result in confusion and uncertainty.\332\
---------------------------------------------------------------------------

    \330\ See, e.g., CL-Vectra-60369 at 3, and CL-Citadel-59717 at 
9.
    \331\ CL-Vectra-60369 at 3.
    \332\ Id.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined not to make 
any changes in the Reproposal that would broadly exempt cash-settled 
contracts from position limits. Cash-settled contracts are economically 
equivalent to deliverable contracts, and Congress has required that the 
Commission impose limits on economically equivalent swaps. The 
Commission notes that Congress took action twice to address this issue. 
In CEA section 4a(a)(5)(A), Congress required the Commission to adopt 
position limits for swaps that are economically equivalent to futures 
or options on futures or commodities traded on a futures exchange, for 
which the Commission has adopted position limits. Previously, in the 
CFTC Reauthorization Act of 2008,\333\ Congress imposed a core 
principle for position limitations on swaps that are significant price 
discovery contracts.\334\ In addition, because cash-settled referenced 
contracts are economically equivalent to the physical delivery contract 
in the same commodity, a trader has an incentive to manipulate one 
contract in order to benefit the other.\335\ The Commission notes that 
a trader with positions in both the physically delivered and cash-
settled referenced contracts would have, in the absence of position 
limits, increased ability to manipulate one contract to benefit 
positions in the other.
---------------------------------------------------------------------------

    \333\ Incorporated as Title XIII of the Food, Conservation and 
Energy Act of 2008, Pub. L. 110-246, 122 Stat. 1624 (June 18, 2008),
    \334\ CEA section 2(h)(7) (2009).
    \335\ Under the reproposed definition, a cash-settled contract 
must be linked, directly or indirectly, to the core referenced 
futures contract or the same underlying commodity in the same 
delivery location in order to be considered a ``referenced 
contract.''
---------------------------------------------------------------------------

    Moreover, if speculators were incentivized to abandon physical 
delivery contracts for cash-settled contracts so as to avoid position 
limits, it could result in degradation of the physical delivery 
contract markets that position limits are intended and designed to 
protect.
    Comments Received: One commenter asked the Commission to confirm 
that a non-transferable repurchase right granted in connection with a 
hedged commodity transaction does not count towards position limits, 
citing CME Group and ICE Futures rules to that effect. The commenter is 
concerned that such a transaction could be deemed a commodity option 
and therefore legally a swap, but that it believed the transaction 
satisfies the criteria for exemption from definition as a swap.\336\
---------------------------------------------------------------------------

    \336\ CL-Olam-59658 at 8-9.
---------------------------------------------------------------------------

    Commission Reproposal: As the commenter notes, whether the contract 
is subject to position limits depends on whether it is a swap. The 
Commission points out that the release adopting the definition of swap 
noted the Commission's belief that its forward contract interpretation 
``provides sufficient clarity with respect to the forward contract 
exclusion from the swap and future delivery definitions.'' \337\ Also 
in that release, the Commission noted that commodity options are 
swaps.\338\ Separately, the Commission adopted Commission Sec.  32.3, 
providing an exemption from the commodity option definition for trade 
options; the exemption was recently further amended.\339\ The commenter 
should apply these rules to determine whether a given contract is a 
swap. In addition, the Commission notes that under Commission Sec.  
140.99, the commenter may request clarification or exemptive relief 
regarding whether a non-transferable repurchase right falls under the 
definition of a ``swap.'' To the extent the commenter seeks a 
clarification or change to the definition of a swap, the current 
rulemaking has not been expanded to revisit that definition.
---------------------------------------------------------------------------

    \337\ See, Further Definition of ``Swap,'' ``Security-Based 
Swap,'' and ``Security-Based Swap Agreement''; Mixed Swaps; 
Security-Based Swap Agreement Recordkeeping; Final Rule (``Swap 
Definition Rulemaking''), 77 FR 48208, 48231 (Aug. 13, 2012).
    \338\ Id. at 48237.
    \339\ See Commodity Options, 77 FR 25320, 75326 (Apr. 27, 2012); 
see also Trade Options, 81 FR 14966 (Mar. 21, 2016).

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

[[Page 96737]]

    Comments Received: One commenter \340\ requested clarification that 
a bid, offer, or indication of interest for an OTC swap that does not 
constitute a binding transaction will not count towards position 
limits, noting that current CME Rule 562 provides that such bids or 
offers would be in violation of the limit.
---------------------------------------------------------------------------

    \340\ See, e.g., CL-MFA-59606 at 5 and 23.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal does not change the 
definition originally proposed in response to the comment requesting 
clarification that a bid, offer, or indication of interest for an OTC 
swap that does not constitute a binding transaction will not count 
towards position limits. Nevertheless, the Commission clarifies that 
under the Reproposal, such bids, offers, or indications of interest do 
not count toward position limits.\341\
---------------------------------------------------------------------------

    \341\ The Commission notes that it is discussing bids, offers, 
and indications of interest in the context of whether these would 
violate position limits, and is not addressing other issues such as 
whether or not their use may indicate spoofing in violation of CEA 
section 4(c)(a)(5).
---------------------------------------------------------------------------

    Comments Received: One commenter requested that the Commission 
exclude from the definition of referenced contract any agreement, 
contract, and transaction exempted from swap regulations by virtue of 
an exemption order, interpretation, no-action letter, or other 
guidance; the commenter stated that it believes the Commission can use 
its surveillance capacity and anti-manipulation authority, along with 
its MOU with FERC, to monitor these nonfinancial commodity transactions 
as well as the market participants relying on the exemptive 
relief.\342\
---------------------------------------------------------------------------

    \342\ CL-NFP-59690 at 14-15.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal does not change the proposed 
definition in response to the comment requesting that the Commission 
exclude from the definition of referenced contract any agreement, 
contract, and transaction exempted from swap regulations by virtue of 
an exemption order, interpretation, no-action letter, or other 
guidance. The Commission notes that any contract that is not a 
commodity derivative contract, including one that has been excluded 
from the definition of swap, is not subject to position limits. The 
commenter is requesting a broad exclusion from the definition of 
referenced contract, based on other regulatory relief which may have 
been adopted for a variety of policy reasons unrelated to position 
limits. Consequently, in light of the many and varied policy reasons 
for issuing an exemption order, interpretation, no-action letter or 
other guidance from swap regulation, each such action would need to be 
considered in the context of the goals of the Commission's position 
limits regime. Rather than issuing a blanket exemption from the 
definition of referenced contract for any agreement, contract, and 
transaction exempted from swap regulations, therefore, the Commission 
believes it would be better to consider each such action on its own 
merits prior to issuing an exemption from position limits. Under the 
Reproposal, if a market participant desires to extend a previously 
taken exemptive action by exempting certain agreements, contracts, and 
transactions from the definition of referenced contract, the market 
participant can request that the particular exemption order, 
interpretation, no-action letter, or other guidance be so extended. 
This would allow the Commission to consider the particular action taken 
and the merits of that particular exemption in the context of the 
position limits regime.
    The Commission notes that in the particular exemptive order cited 
by the commenter,\343\ certain delineated non-financial energy 
transactions between certain specifically defined entities were 
exempted, pursuant to CEA sections 4(c)(1) and 4(c)(6), from all 
requirements of the CEA and Commission regulations issued thereunder, 
subject to certain anti-fraud, anti-manipulation, and record inspection 
conditions. All entities that meet the requirements for the exemption 
provided by the Federal Power Act 201(f) Order are, therefore, already 
exempt from position limits compliance for all transactions that meet 
the Order's conditions.
---------------------------------------------------------------------------

    \343\ See the Between NFP Electrics Exemptive Order (Order 
Exempting, Pursuant to Authority of the Commodity Exchange Act, 
Certain Transactions Between Entities Described in the Federal Power 
Act, and Other Electric Cooperatives, 78 FR 19670 (Apr. 2, 2013) 
(``Federal Power Act 201(f) Order''). See also CL-NFP-59690 at 14-
15. The Federal Power Act 201(f) Order exempted all ``Exempt Non-
Financial Energy Transactions'' (as defined in the Federal Power Act 
201(f) Order) that are entered into solely between ``Exempt 
Entities'' (also as defined in the Federal Power Act 201(f) Order, 
namely any electric facility or utility that is wholly owned by a 
government entity as described in the Federal Power Act (`FPA') 
section 201(f); (ii) any electric facility or utility that is wholly 
owned by an Indian tribe recognized by the U.S. government pursuant 
to section 104 of the Act of November 2, 1994; (iii) any electric 
facility or utility that is wholly owned by a cooperative, 
regardless of such cooperative's status pursuant to FPA section 
201(f), so long as the cooperative is treated as such under Internal 
Revenue Code section 501(c)(12) or 1381(a)(2)(C), and exists for the 
primary purpose of providing electric energy service to its member/
owner customers at cost; or (iv) any other entity that is wholly 
owned, directly or indirectly, by any one or more of the 
foregoing.). See Federal Power Act 201(f) Order at 19688.
---------------------------------------------------------------------------

    Comments Received: Commenters were divided with respect to the 
exclusion of ``commodity index contracts'' from the definition of 
referenced contract. As a result of the exclusion, the position of a 
market participant who enters into a commodity index contract with a 
dealer will not be subject to position limits. One commenter supported 
the exclusion of commodity index contracts from the definition of 
referenced contracts.\344\ The commenter was concerned, however, that a 
dealer who offsets his or her exposure in such contracts by purchasing 
futures contracts on the constituent components of the commodity index 
will be subject to position limits in the referenced contracts. The 
commenter urged the Commission to recognize as a bona fide hedge ``the 
offsetting nature of the dealer's position by exempting the futures 
contracts that a dealer acquires to hedge its commitments under 
commodity index contracts.'' \345\ Alternatively, the Commission should 
``modify the definition of `referenced contract' and the definition of 
`commodity derivative contract' by excluding core referenced futures 
contracts and related futures contracts, options contracts or swaps 
that are offset on an economically equivalent basis by the constituent 
portions of commodity index contracts.'' \346\ Another commenter 
supported the Commission's proposal to exclude swaps that reference 
indices such as the Goldman Sachs Commodity Index (GSCI) from the 
definition of a referenced contract.\347\
---------------------------------------------------------------------------

    \344\ CL-GFMA-60314 at 4.
    \345\ Id.
    \346\ Id.
    \347\ CL-CMOC-59720 at 4.
---------------------------------------------------------------------------

    One commenter asked that the Commission reconsider excluding 
commodity index contracts from the definition of referenced 
contract.\348\ Another commenter urged that commodity index contracts 
should be included in the definition of referenced contract in 
conjunction with (1) a class limit (as was proposed for vacated part 
151, but not included in final part 151); and (2) a lower position 
limit set at a level ``aimed to maintain no more than'' 30 percent 
speculation in each commodity (based on COT report classifications) 
that is reset every 6 months.\349\ The same commenter noted that 
trading by passive, long only

[[Page 96738]]

commodity index fund speculators does not provide liquidity, but rather 
takes net liquidity, dilutes the pool of market information to be less 
reflective of fundamental forces, causes volatility, and causes an 
increased frequency of contango attributed to frequent rolls from 
selling a nearby contract and buying a deferred (second month) 
contract. The commenter noted that, broadly, speculators in commodity 
futures historically constituted between 15 and 30 percent of open 
interest without meaningfully disrupting the market and providing 
beneficial intermediation between hedging producers and hedging 
consumers.\350\
---------------------------------------------------------------------------

    \348\ CL-IATP-59701 at 2.
    \349\ CL-Better Markets-59716 at 1-35, and particularly at 32.
    \350\ CL-Better Markets-59716 at 5, and CL-Better Markets-60401 
at 4, 16-17.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing the provision 
excluding commodity index contracts from the definition of referenced 
contract as previously proposed.
    Regarding commenters who requested that the Commission alter the 
proposed definition to include commodity index derivative contracts, 
the Commission notes that if it were to include such contracts, the 
Commission's rules would allow netting of such positions in commodity 
index contracts with other offsetting referenced contracts. The ability 
to net such commodity index derivative contracts positions with other 
offsetting referenced contracts would eliminate the need for a bona 
fide hedging exemption for such contracts. Thus, the Commission 
believes such netting would contravene Congressional intent, as 
expressed in CEA section 4a(c)(B)(i) in its requirement to permit a 
pass-thru swap offset only if the counterparty's position would qualify 
as a bona fide hedge.
    Another commenter suggested including commodity index contracts 
under the definition of referenced contract in conjunction with a class 
limit (e.g., a separate limit for commodity index contracts compared to 
all other categories of derivative contracts). The commenter suggested 
that the limit be set at a level aimed at maintaining a particular 
ratio of speculative trading in the market. In response to this 
commenter, the Commission declines in this Reproposal to propose class 
limits because it believes any adoption of a class limit would require 
a rationing scheme wherein unrelated legal entities would be limited by 
the positions of other unrelated legal entities. Further, the 
Commission is concerned that class limits (including the one proposed 
by the commenter) could impair liquidity in the relevant markets.\351\ 
The Commission also notes that it currently does not collect 
information to effectively enforce any ratio of speculative trading, 
and has not done so since the Commission eliminated Series '03 
reporting in 1981.\352\ The Reproposal does not make any changes to the 
definition of referenced contract pursuant to this comment.
---------------------------------------------------------------------------

    \351\ See also, December 2013 Position Limits Proposal, 78 FR at 
75741.
    \352\ The Commission's Series '03 reports required large traders 
to classify how much of their position was speculative and how much 
was hedging and formed the basis of the earliest versions of the 
CFTC Commitments of Traders Reports. See ``Reporting Requirements 
for Contract Markets, Futures Commission Merchants, Members of 
Exchanges and Large Traders,'' 46 FR 59960 (Dec. 8, 1981) 
(eliminating the routine of Series '03 reports by large traders).
---------------------------------------------------------------------------

    Finally, in response to the commenter who suggested that, in 
addition to excluding commodity index contracts as proposed, the 
Commission should recognize as bona fide hedge positions those 
positions that offset a position in a commodity index derivative 
contract by using the component futures contracts, the Commission 
observes that it still believes, as discussed in the December 2013 
Position Limits Proposal, that financial products do not meet the 
temporary substitute test. As such, the offset of financial risks 
arising from financial products is inconsistent with the statutory 
definition of a bona fide hedging position. The Commission also 
declines in this Reproposal to accept the commenter's request to exempt 
these offsetting positions using its authority under CEA section 
4a(a)(7) because it does not believe that permitting the offset of 
financial risks furthers the purposes of the Commission's position 
limits regime as described in CEA section 4a(a)(3)(B). Finally, the 
commenter suggested as an alternative that the Commission modify the 
definition of referenced contract to broadly exclude any derivative 
contracts that are used to offset commodity index exposure. However, 
the Commission believes such a broad exclusion would, at best, be too 
difficult to administer and, at worst, provide an easy vehicle for 
entities to evade position limits regulations.
    Comments Received: One commenter suggested that the Commission 
unnecessarily limited the scope of permissible netting by not 
recognizing cross-commodity netting, recommending either a threshold 
correlation factor of 60 percent or an approach that would permit pro 
rata netting to the extent of demonstrated correlation.\353\
---------------------------------------------------------------------------

    \353\ CL-ISDA/SIFMA-59611 at 3 and 32-33.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission believes that recognizing 
cross-commodity netting as requested by the commenter would 
substantially expand the definition of referenced contract and, thus, 
may weaken: (1) The protection of the price discovery function in the 
core referenced futures contract; (2) the prevention of excessive 
speculation; and (3) the prevention of market manipulation. Therefore, 
this Reproposal does not change the definition of referenced contract 
to accommodate cross-commodity netting.
    Comments Received: One commenter requested that all ``nonfinancial 
commodity derivatives'' used by commercial end-users for hedging 
purposes be expressly excluded from the definition of referenced 
contract (and so excluded from position limits). The commenter also 
suggested that the Commission allow an end-user to identify a swap as 
being used to ``hedge or mitigate commercial risks'' at the time the 
swap is executed and noted that such trades are highly-customized 
bilateral agreements that are difficult to convert into futures 
equivalents.\354\ The commenter also requested that ``customary 
commercial agreements'' be excluded from referenced contract 
definition. The commenter stated that these contracts may reference a 
core referenced futures contract or may be misinterpreted as directly 
or indirectly linking to a core referenced futures contract, but that 
the Commission has already determined that Congress did not intend to 
regulate such agreements as swaps.\355\
---------------------------------------------------------------------------

    \354\ CL-NFP-59690 at 9-12.
    \355\ CL-NFP-59690 at 13 (citing to 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).
---------------------------------------------------------------------------

    Commission Reproposal: This Reproposal does not amend the 
definition of referenced contract in response to the request that 
``nonfinancial commodity derivatives'' used by commercial end-users for 
hedging purposes be expressly excluded from the definition of 
referenced contract. The Commission understands the comment to mean 
that when a particular transaction qualifies for the end-user 
exemption, it should also be exempt from position limits by excluding 
such transactions from the definition of ``referenced contract.'' The 
commenter quotes language from the end-user exemption definition, which 
was issued to provide relief from the clearing and trade execution 
mandates. The Commission notes that under the CEA's statutory language, 
the commercial end user exemption

[[Page 96739]]

definition is broader than the bona fide hedging definition. Under the 
canons of statutory construction, when Congress writes one section 
differently than another, the differences should be assumed to have 
different meaning. Thus, the Commission believes that the more 
restrictive language in the bona fide hedging definition should be 
applied here. The definition of bona fide hedging position, as proposed 
in the December 2013 Position Limits Proposal, as amended by the 2016 
Supplemental Position Limits Proposal, and as reproposed here, would be 
consistent with the differences in the two definitions, as adopted by 
Congress. The Commission notes that under this Reproposal, commercial 
end-users may rely on any applicable bona fide hedge exemption.
    In response to the commenter's concern regarding ``customary 
commercial agreements,'' the Commission reiterates its belief that 
contracts that are exempted or excluded from the definition of ``swap'' 
are not considered referenced contracts and so are not subject to 
position limits.
o. Short Position
    Proposed Rule: 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. In the December 2013 Position Limits 
Proposal, the Commission proposed to 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 proposed revision reflects the fact that under the Dodd-Frank Act, 
the Commission is charged with applying the position limits regime to 
swaps.
    Comments Received: The Commission received no comments regarding 
the proposed amendment to the definition of ``short position.''
    Commission Reproposal: Though no commenters suggested changes to 
the definition of ``short position,'' the Commission is concerned that 
the proposed definition, like the proposed definition of ``long 
position'' described supra, does not clearly articulate that futures 
and options contracts are subject to position limits on a futures-
equivalent basis in terms of the core referenced futures contract. 
Longstanding market practice has applied position limits to futures and 
options on a futures-equivalent basis, and the Commission believes that 
practice ought to be made explicit in the definition in order to 
prevent confusion. Thus, in this Reproposal, the Commission is 
proposing to amend the definition to clarify that a short position is 
on a futures-equivalent basis, a short call option, a long put option, 
a short underlying futures contract, or a swap position that is 
equivalent to a short futures contract. Though the substance of the 
definition is fundamentally unchanged, the revised language should 
prevent unnecessary confusion over the application of futures-
equivalency to different kinds of commodity derivative contracts.
p. Speculative Position Limit
    The term ``speculative position limit'' is currently not defined in 
Sec.  150.1. In the December 2013 Position Limits Proposal, the 
Commission proposed 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.'' \356\
---------------------------------------------------------------------------

    \356\ December 2013 Position Limits Proposal, 78 FR at 75825.
---------------------------------------------------------------------------

    As explained in the December 2013 Position Limits Proposal, the 
proposed definition is similar to definitions for position limits used 
by the Commission for many years,\357\ as well as glossaries published 
by the Commission for many years.\358\ For example, the December 2013 
Position Limits Proposal noted that 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.''
---------------------------------------------------------------------------

    \357\ Id. at 75701. As noted in the December 2013 Position 
Limits Proposal, ``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.' [CEA section 6a(1) (Supp. II 
1936)] It also noted that the first speculative position limits were 
issued by the CEC in December 1938, 3 FR 3145, Dec. 24, 1938, and 
that those first speculative position limits rules provided, also in 
Sec.  150.1, for limits on position and daily trading in grain for 
future delivery, and adopted 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.'' Id.
    \358\ For example, the December 2013 Position Limits Proposal 
noted that 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.'' Id.
---------------------------------------------------------------------------

    The Commission received no comments on the proposed definition, and 
is reproposing the definition without amendment.
q. Spot-Month
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to adopt a definition of ``spot-month'' that 
expands upon the current Sec.  150.1 definition.\359\ The definition, 
as proposed, specifically addressed both physical-delivery contracts 
and cash-settled contracts, and clarified the duration of ``spot-
month.'' Under the proposed definition, the ``spot-month'' for 
physical-delivery commodity derivatives contracts would be the period 
of time beginning at of the close of trading on the trading day 
preceding the first day on which delivery notices could be issued or 
the close of trading on the trading day preceding the third-to-last 
trading day, until the contract was no longer listed for trading (or 
available for transfer, such as through exchange for physical 
transactions). The proposed definition included similar, but slightly 
different language for cash-settled contracts, providing that the spot 
month would begin at the earlier of the start of the period in which 
the underlying cash-settlement price was calculated or the close of 
trading on the trading day preceding the third-to-last trading day and 
would continue until the contract

[[Page 96740]]

cash-settlement price was determined. In addition, the proposed 
definition included a proviso that, if the cash-settlement price was 
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 would be the same as the 
spot month for that core referenced futures contract.\360\
---------------------------------------------------------------------------

    \359\ December 2013 Position Limits Proposal, 78 FR at 75701-02; 
As noted in in the December 2013 Position Limits Proposal, the 
definition proposed would be an expansion upon the definition 
currently found in Sec.  150.1, but greatly simplified from the 
definition adopted in vacated Sec.  151.3 (in the Part 151 
regulations, the ``spot month'' definition in Sec.  151.1 simply 
cited to the ``spot month'' definition provided in Sec.  151.3).
    \360\ See id. at 75825-6.
---------------------------------------------------------------------------

    Comments Received: The Commission received several comments 
regarding the definition of spot month.\361\ One commenter noted that 
the definition of the spot month for federal limits does not always 
coincide with the definition of spot month for purposes of any exchange 
limits and assumes that the Commission did not intend for this to 
happen. For example, the commenter noted the proposed definition of 
spot month would commence at the close of trading on the trading day 
preceding the first notice day, while the ICE Futures US definition 
commences as of the opening of trading on the second business day 
following the expiration of regular option trading on the expiring 
futures contract. Regarding the COMEX contracts, the commenter stated 
that the exchange spot month commences at the close of business, rather 
than at the close of trading, which would allow market participants to 
incorporate exchange of futures for related position transactions 
(EFRPs) that occur after the close of trading, but before the close of 
business.\362\ Finally, the commenter requested the Commission ensure 
the definition of spot month for federal limits is the same as the 
definition of spot month for exchange limits for all referenced 
contracts.\363\
---------------------------------------------------------------------------

    \361\ See, e.g., CL-FIA-59595 at 10, CL-NFP-59690 at 19, CL-
NGSA-59673 at 44, and CL-ICE-59669 at 5-6.
    \362\ CL-FIA-59595 at 10.
    \363\ Id.
---------------------------------------------------------------------------

    Two commenters urged the Commission to reconsider its proposed 
definition of spot month for cash-settled contracts that encompasses 
the entire period for calculation of the settlement price, preferring 
the current exchange practice which is to apply the spot month limit 
during the last three days before final settlement.\364\ One commenter 
noted its concern that the proposed definition would discourage use of 
calendar month average price contracts.\365\
---------------------------------------------------------------------------

    \364\ See, e.g., CL-NGSA-59673 at 44, CL-ICE-59669 at 5-6.
    \365\ See, CL-ICE-59669 at 5-6.
---------------------------------------------------------------------------

    Another commenter recommended that the Commission define ``spot 
month'' in relation to each core referenced futures contract and all 
related physically-settled and cash-settled referenced contracts, to 
assure that the definition works appropriately in terms of how each 
underlying nonfinancial commodity market operates, and to ensure that 
commercial end-users of such nonfinancial commodities can effectively 
use such referenced contracts to hedge or mitigate commercial 
risks.\366\
---------------------------------------------------------------------------

    \366\ CL-NFP-59690 at 19.
---------------------------------------------------------------------------

    The Commission also received the recommendation from one commenter 
that the Commission should publish a calendar listing the spot month 
for each Core Referenced Futures Contract to provide clarity to market 
participants and reduce the cost of identifying and tracking the spot 
month.\367\
---------------------------------------------------------------------------

    \367\ CL-FIA-59595 at 10-11.
---------------------------------------------------------------------------

    Commission Reproposal: For core referenced futures contracts, the 
Commission agrees with the commenter that the definition of spot month 
for federal limits should be the same as the definition of spot month 
for exchange limits. The Commission is therefore the definition of spot 
month in this Reproposal generally follows exchange practices. In the 
reproposed version, spot month means the period of time beginning at 
the earlier of the close of business on the trading day preceding the 
first day on which delivery notices can be issued by the clearing 
organization of a contract market, or the close of business on the 
trading day preceding the third-to-last trading day, until the contract 
expires for physical delivery core referenced futures contracts,\368\ 
except for the following: (a) ICE Futures U.S. Sugar No. 11 (SB) 
referenced contract for which the spot month means the period of time 
beginning at the opening of trading on the second business day 
following the expiration of the regular option contract traded on the 
expiring futures contract; (b) ICE Futures U.S. Sugar No. 16 (SF) 
referenced contract,\369\ for which the spot month means the period of 
time beginning on the third-to-last trading day of the contract month 
until the contract expires \370\ and (c) Chicago Mercantile Exchange 
Live Cattle (LC) referenced contract, for which the spot month means 
the period of time beginning at the close trading on the fifth business 
day of the contract month.\371\
---------------------------------------------------------------------------

    \368\ As noted above, this Reproposal does not address the three 
cash-settled contracts (Class III Milk, Feeder Cattle, and Lean 
Hogs) which, under the December 2013 Position Limits Proposal, were 
included in the list of core referenced futures contracts. 
Therefore, the reproposed spot month definition does not address 
those three contracts.
    \369\ While the Commission realized that Sugar 16 does not 
currently have a spot month, its delivery period takes place after 
the last trading day (similar to crude oil). Therefore, the 
Reproposal amends the spot month definition for Sugar No. 16 to 
mirror the three day period for other contracts that deliver after 
the end of trading.
    \370\ In regard to the modifier ``until the contract expires,'' 
the Commission views ``expires'' as meaning the end of delivery 
period or until cash-settled.
    \371\ In response to FIA's comment, CL-FIA-59595 at 10, the 
Commission notes that the spot periods for exchange-set limits on 
COMEX products begin at the close of trading and not the close of 
business. See http://www.cmegroup.com/market-regulation/position-limits.html. However, the Commission understands that CME Group 
staff determines compliance with spot month limits in conjunction 
with the receipt of futures large trader reports. In consideration 
of the practicality of this approach, and in light of the definition 
of reportable position, the Commission believes that it would be 
more practical, clear, and consistent with existing exchange 
practices, for the spot month to begin ``at the close of the 
market.'' See CFTC Regulation 15.00(p).
---------------------------------------------------------------------------

    As noted above, in the December 2013 Position Limits Proposal, spot 
month was proposed to be defined to begin at the earlier of: (1) ``the 
close of trading on the trading day preceding the first day on which 
delivery notices can be issued to the clearing organization''; or (2) 
``the close of trading on the trading day preceding the third-to-last 
trading day''--based on the comment letters received, the proposed 
definition resulted in some confusion.\372\ The Commission observes 
that the current definition also seems to be a source of some confusion 
when it defines ``spot month,'' in current CFTC Regulation 150.1(a), to 
begin ``at the close of trading on the trading day preceding the first 
day on which delivery notices can be issued to the clearing 
organization.''
---------------------------------------------------------------------------

    \372\ As a note of clarification, in light of the confusion of 
some commenters, position limits apply to open positions; once the 
position isn't open the limits don't apply.
---------------------------------------------------------------------------

    The Commission understands current DCM practice for physical-
delivery contracts permitting delivery before the close of trading 
generally is that the spot month begins at the start of the first 
business day on which the clearing house can issue ``stop'' notices to 
a clearing member carrying a long position, or, at the close of 
business on the day preceding the first business day on which the 
clearing house can issue ``stop'' notices to a clearing member carrying 
a long position, but current DCM rules vary somewhat. For some ICE 
contracts,\373\ the spot month includes ``any month for which delivery 
notices have been or may be issued,'' \374\ and begins at the open of 
trading; \375\ the

[[Page 96741]]

CME spot month, as noted above, begins at the close of trading. 
However, the Commission understands that the amended ``spot month'' 
definition, as reproposed herein, would be consistent with the existing 
spot month practices of exchanges when enforcing the start of the spot 
month limits in any of the 25 core referenced futures contracts, based 
on the timing of futures large trader reports, discussed below.
---------------------------------------------------------------------------

    \373\ See, e.g., Cotton No. 2.
    \374\ See ICE Rule 6.19.
    \375\ See, e.g., Cotton No. 2 Position Limits and Position 
Accountability information: ``ICE (1) Delivery Month: Cocoa, Coffee 
``C'', Cotton, World Cotton, FCOJ, Precious Metals--on and after 
First Notice Day Sugar#11 on and after the Second Business Day 
following the expiration of the regular option contract traded on 
the expiring futures contract.'' https://www.theice.com/products/254/Cotton-No-2-Futures.
---------------------------------------------------------------------------

    Furthermore, based on Commission staff discussions with staff from 
several DCMs regarding exchange current practices, the Commission 
believes that the spot month should begin at the same time as futures 
large trader reports are submitted--that is, under the definition of 
reportable position, the spot month should begin ``at the close of the 
market.'' \376\ The Commission views the ``close of the market'' as 
consistent with ``the close of business.''
---------------------------------------------------------------------------

    \376\ See current Sec.  15.00(p).
---------------------------------------------------------------------------

    In consideration of the practicality of this approach, and in light 
of the definition of ``reportable position,'' the Commission believes 
that it would be more practical, clear, and consistent with existing 
exchange practices, for the spot month to begin ``at the close of 
business.'' In addition, as noted by one commenter,\377\ when the 
exchange spot month commences at the close of business, rather than at 
the close of trading, it would allow market participants to incorporate 
exchange of futures for related position transactions (``EFRPs'') \378\ 
that occur after the close of trading, but before the close of 
business.
---------------------------------------------------------------------------

    \377\ CL-FIA-59595 at 10.
    \378\ The Commission notes that DCM determinations of allowable 
blocks, EFRPs, and transfer trades, in regards to position limits, 
must also consider compliance with DCM Core Principle 9; discussion 
of the interplay is beyond the scope of this Reproposal.
---------------------------------------------------------------------------

    The Commission points out an additional correction made to the 
reproposed definition, changing it from ``preceding the first day on 
which delivery notices can be issued to the clearing organization of a 
contract market'' to ``preceding the first day on which delivery 
notices can be issued by the clearing organization of a contract 
market'' [emphasis added]. The Commission understands that the spot 
periods on the exchanges commence the day preceding the first day on 
which delivery notices can be issued by the clearing organization of a 
contract market, not the first day on which notices can be issued to 
the clearing organization. The ``spot month'' definition in this 
Reproposal, therefore, has been changed to correct this error.
    The revisions included in the reproposed definition addresses the 
concerns of the commenter who suggested the Commission define the spot 
month according to each core referenced futures contract and for cash-
settled and physical delivery referenced contracts that are not core 
referenced futures contracts, although for clarity and brevity the 
Commission has chosen to highlight contracts that are the exception to 
the general definition rather than list each of the 25 core referenced 
futures contracts and multitude of referenced contracts separately.
    In response to the commenters' concern regarding cash-settled 
referenced contracts, the Reproposal changes the definition of spot 
month to agree with the limits proposed in Sec.  150.2. In the December 
2013 Position Limits Proposal, the Commission defined the spot month 
for certain cash-settled referenced contracts, including calendar month 
averaging contracts, to be a longer period than the spot month period 
for the related core referenced futures contract. However, the 
Commission did not propose a limit for such contracts in proposed Sec.  
150.2, rendering superfluous that aspect of the proposed definition of 
spot month, at this time. The Commission is reproposing the definition 
of spot month without this provision, thereby addressing the concerns 
of the commenters regarding the impact of the definition on calendar 
month averaging contracts outside of the spot month for the relevant 
core referenced futures contract. In order to make clearer the relevant 
spot month periods for referenced contracts other than core referenced 
futures contracts, the Commission has included subsection (3) of the 
definition that states that the spot month for such referenced 
contracts is the same period as that of the relevant core referenced 
futures contract.
    The Commission believes that the revised definition reproposed here 
sufficiently clarifies the applicable spot month periods, which can 
also be determined via exchange rulebooks and defined contract 
specifications, such that a defined calendar of spot months is not 
necessary. Further, a published calendar would need to be revised every 
year to update spot month periods for each contract and each 
expiration. The Commission believes this constant revision may lead to 
more confusion than it is meant to correct.
r. Spot-Month, Single-Month, and All-Months-Combined Position Limits
    Proposed Rule: 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.''
    As noted in the December 2013 Position Limits proposal, 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 specified that, for 
Referenced Contracts based on a commodity identified in Sec.  151.2, 
the maximum number of contracts a trader could hold was as provided in 
Sec.  151.4.
    In the December 2013 Position Limits Proposal, as noted above, the 
Commission proposed to amend Sec.  150.1 by deleting the definitions 
for ``single month,'' and for ``all-months,'' but, unlike the vacated 
part 151, the proposal did not include a definition for ``spot-month, 
single-month, and all-months-combined position limits.'' Instead, it 
proposed to adopt a definition for ``speculative position limits'' that 
should obviate the need for these definitions.\379\
---------------------------------------------------------------------------

    \379\ See Section III.A.1.r (Spot-month, single-month, and all-
months-combined position limits) above for a discussion of the 
proposed definition of ``speculative position limit.''
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments regarding 
the deletion of these definitions.
    Commission Reproposal: This Reproposal, consistent with the 
December 2013 Position Limits Proposal, eliminates the definitions for 
``single month,'' and for ``all-months,'' for the reasons provided 
above.
s. Swap and Swap Dealer
    Proposed Rule: While the terms ``swap'' and ``swap dealer'' are not 
currently defined in Sec.  150.1, the December 2013 Position Limits 
Proposal amended Sec.  150.1 to define these terms as they are defined 
in section 1a of the Act and as further defined in section 1.3 of this 
chapter.'' \380\
---------------------------------------------------------------------------

    \380\ 7 U.S.C. 1a(47) and 1a(49); Sec.  1.3(xxx) (``swap'') and 
Sec.  1.3(ggg) (``swap dealer''). See Further Definition of ``Swap 
Dealer,'' ``Security-Based Swap Dealer,'' ``Major Swap 
Participant,'' ``Major Security-Based Swap Participant'' and 
``Eligible Contract Participant,'' 77 FR 30596 (May 23, 2012); see 
also, Swap Definition Rulemaking.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on these 
definitions.

[[Page 96742]]

    Commission Reproposal: The Commission has determined to repropose 
these definitions as originally proposed, for the reasons provided 
above.
2. Bona Fide Hedging Definition
a. Bona Fide Hedging Position (BFH) Definition--Background
    Prior to the 1974 amendments to the CEA, the definition of a bona 
fide hedging position was found in the statute. The 1974 amendments 
authorized the newly formed Commission to define a bona fide hedging 
position.\381\ The Commission published a final rule in 1977, providing 
a general definition of a bona fide hedging position in Sec.  
1.3(z)(1).\382\ The Commission listed certain positions, meeting the 
requirements of the general definition of a bona fide hedging position, 
in Sec.  1.3(z)(2) (i.e., enumerated bona fide hedging positions). The 
Commission provided an application process for market participants to 
seek recognition of non-enumerated bona fide hedging positions in 
Sec. Sec.  1.3(z)(3) and 1.48.
---------------------------------------------------------------------------

    \381\ Those amendments to CEA section 4a(3), subsequently re-
designated Sec.  4a(c)(1), 7 U.S.C. 6a(c)(1), provide that no rule 
of the Commission shall apply to positions which are shown to be 
bona fide hedging positions, as such term is defined by the 
Commission. See, sec. 404 of the Commodity Futures Trading 
Commission Act of 1974, Pub. L. 93-463, 88 Stat. 1389 (Oct. 23, 
1974). See 2013 Position Limits Proposal, 78 FR at 75703 for 
additional discussion of the history of the definition of a bona 
fide hedging position.
    \382\ 42 FR 42748 (Aug. 24, 1977). Previously, the Secretary of 
Agriculture, pursuant to section 404 of the Commodity Futures 
Trading Commission Act of 1974 (Pub. L. 93-463), promulgated a 
definition of bona fide hedging transactions and positions. 40 FR 
111560 (March 12, 1975). That definition, largely reflecting the 
statutory definition previously in effect, remained in effect until 
the newly-established Commission defined that term. Id.
---------------------------------------------------------------------------

    During the 1980's, exchanges were required to incorporate the 
Commission's general definition of bona fide hedging position into 
their exchange-set position limit regulations.\383\ While the 
Commission had established position limits on only a few commodity 
futures contracts in Sec.  150.2, Commission rule Sec.  1.61 
(subsequently incorporated into Sec.  150.5) required DCMs to establish 
limits on commodities futures not subject to federal limits. The 
Commission directed in Sec.  1.61(a)(3) (subsequently incorporated into 
Sec.  150.5(d)(1)) that no DCM regulation regarding position limits 
would apply to bona fide hedging positions as defined by a DCM in 
accordance with Sec.  1.3(z)(1).
---------------------------------------------------------------------------

    \383\ 46 FR 50938 at 50945 (Oct. 16, 1981).
---------------------------------------------------------------------------

    In 1987, the Commission provided interpretive guidance regarding 
the bona fide hedging definition and risk management exemptions for 
futures in financial instruments (now termed excluded 
commodities).\384\ This guidance permitted exchanges, for purposes of 
exchange-set limits on excluded commodities, to recognize risk 
management exemptions.\385\
---------------------------------------------------------------------------

    \384\ 52 FR 34633 (Sept. 14, 1987) and 52 FR 27195 (July 20, 
1987).
    \385\ See December 2013 Position Limits Proposal, 78 FR at 
75704.
---------------------------------------------------------------------------

    In the 1990's, the Commission allowed exchanges to experiment with 
substituting position accountability levels for position limits.\386\ 
The CFMA, in 2000, codified, in DCM Core Principle 5, position 
accountability as an acceptable practice.\387\ The CFMA, however, did 
not address the definition of a bona fide hedging position.
---------------------------------------------------------------------------

    \386\ Exchange rules for position accountability levels require 
a market participant whose position exceeds an accountability level 
to consent automatically to requests of the exchange: (1) To provide 
information about a position; and (2) to not increase or to reduce a 
position, if so ordered by the exchange. In contrast, a speculative 
position limit rule does not authorize an exchange to order a market 
participant to reduce a position. Rather, a position limit sets a 
maximum permissible size for a speculative position. The Commission 
notes that it may require a market participant to provide 
information about a position, for example, by issuing a special call 
under Sec.  18.05 to a trader with a reportable position in futures 
contracts.
    \387\ DCM Core Principle 5 is codified in CEA section 5(d)(5), 7 
U.S.C. 7(d)(5). See Section 111 of the Commodity Futures 
Modernization Act of 2000, Pub. L. No. 106-554, 114 Stat. 2763 (Dec. 
21, 2000) (CFMA).
---------------------------------------------------------------------------

    With the passing of the CFMA in 2000, the Commission's requirements 
for exchanges to adopt position limits and associated bona fide hedging 
exemptions, in Sec.  150.5, were rendered mere guidance. That is, 
exchanges were no longer required to establish limits and no longer 
required to use the Commission's general definition of a bona fide 
hedging position. Nonetheless, the Commission continued to guide 
exchanges to adopt position limits, particularly for the spot month in 
physical-delivery physical commodity derivatives, and to provide for 
exemptions.
    The Farm Bill of 2008 authorized the Commission to regulate swaps 
traded on exempt commercial markets (ECM) that the Commission 
determined to be a significant price discovery contract (SPDC).\388\ 
The Commission implemented these provisions in part 36 of its 
rules.\389\ The Commission provided guidance to ECMs in complying with 
Core Principle IV regarding position limitations or 
accountability.\390\ That guidance provided, as an acceptable practice 
for cleared trades, that the ECM's position limit rules may exempt bona 
fide hedging positions.
---------------------------------------------------------------------------

    \388\ See Sec.  13201 of the Food, Conservation and Energy Act 
of 2008, Pub. L. No. 110-246, 122 Stat. 1624 (June 18, 2008) (Farm 
Bill of 2008). These provisions were subsequently superseded by the 
Dodd-Frank Act.
    \389\ 66 FR 42270 (Aug. 10, 2001). Part 36 was removed and 
reserved to conform to the amendments to the CEA by the Dodd-Frank 
Act.
    \390\ 17 CFR part 36, App. B (2010).
---------------------------------------------------------------------------

    In 2010, the Dodd-Frank Act added a directive, for purposes of 
implementation of CEA section 4a(a)(2), for the Commission to define a 
bona fide hedging position for physical commodity derivatives 
consistent with, in the Commission's opinion, the reasonably certain 
statutory standards in CEA section 4a(c)(2). Those statutory standards 
build on, but differ slightly from, the Commission's general definition 
in rule 1.3(z)(1).\391\ The Commission interprets those statutory 
standards as directing the Commission to narrow the bona fide hedging 
position definition for physical commodities.\392\ The Commission 
discusses those differences, below.
---------------------------------------------------------------------------

    \391\ It should be noted that a 2011 final rule of the 
Commission would have amended the definition of a bona fide hedging 
position in Sec.  1.3(z), to be applicable only to excluded 
commodities, and would have added a new definition of a bona fide 
hedging position to Part 151, to be applicable to physical 
commodities. Position Limits for Futures and Swaps, 76 FR 71626 
(Nov.18, 2011). However, prior to the compliance date for that 2011 
rulemaking, a federal court vacated most provisions of that 
rulemaking, including the amendments to the definition of a bona 
fide hedging position. International Swaps and Derivatives Ass'n v. 
United State Commodity Futures Trading Comm'n, 887 F. Supp. 2d 259 
(D.D.C. 2012). Because the Commission has not instructed Federal 
Register to roll back the 2011 changes to the CFR, the current 
definition of a bona fide hedging position is found in the 2010 
version of the Code of Federal Regulations. 17 CFR 1.3(z) (2010).
    \392\ See December 2013 Position Limits Proposal, 78 FR at 
75705.
---------------------------------------------------------------------------

b. BFH Definition Summary
    Under the December 2013 Position Limits Proposal, the Commission 
proposed a new definition of bona fide hedging position, to replace the 
current definition in Sec.  1.3(z), that would be applicable to 
positions in excluded commodities and in physical commodities.\393\ The 
proposed definition was organized into an opening paragraph and five 
numbered paragraphs. In the opening paragraph, for positions in either 
excluded commodities or physical commodities, the proposed definition 
would have applied two general requirements: The incidental test; and 
the orderly trading requirement. For excluded commodities, the 
Commission proposed in paragraph (1) a definition that conformed to the 
Commission's 1987

[[Page 96743]]

interpretations permitting risk management exemptions in excluded 
commodity contracts. For physical commodities, the Commission proposed 
in paragraph (2) to amend the current general definition to conform to 
CEA section 4a(c) and to remove the application process in Sec. Sec.  
1.3(z)(3) and 1.48, that permits market participants to seek 
recognition of non-enumerated bona fide hedging positions. Rather, the 
Commission proposed that a market participant may request either a 
staff interpretative letter under Sec.  140.99 \394\ or seek CEA 
section 4a(a)(7) exemptive relief.\395\ Paragraphs (3) and (4) listed 
enumerated exemptions. Paragraph (5) listed the requirements for cross-
commodity hedges of enumerated exemptions.
---------------------------------------------------------------------------

    \393\ See December 2013 Position Limits Proposal, 78 FR at 
75702-23. In doing so, the Commission proposed to remove and reserve 
Sec.  1.3(z).
    \394\ Section 140.99 sets out general procedures and 
requirements for requests to Commission staff for exemptive, no-
action and interpretative letters.
    \395\ See December 2013 Position Limits Proposal, 78 FR 75719.
---------------------------------------------------------------------------

    In response to comments on the December 2013 Position Limits 
Proposal, in the 2016 Supplemental Proposal, the Commission amended the 
proposed definition of bona fide hedging position.\396\ The amended 
definition proposed in the 2016 Supplemental Proposal would no longer 
apply the two general requirements (the incidental test and the orderly 
trading requirement). For excluded commodities, the Commission again 
proposed paragraph (1) of the definition, substantially as in 2013. For 
physical commodities, the Commission again proposed to conform 
paragraph (2) more closely to CEA section 4a(c), but also proposed an 
application process for market participants to seek recognition of non-
enumerated bona fide hedging positions, without the need to petition 
the Commission. The Commission again proposed paragraphs (3) through 
(5).
---------------------------------------------------------------------------

    \396\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38462-64.
---------------------------------------------------------------------------

    In response to comments on both the December 2013 Position Limits 
Proposal and the 2016 Supplemental Proposal, the Commission is now 
reproposing the definition of bona fide hedging position, generally as 
proposed in the 2016 Supplemental Proposal, but with a few further 
amendments. First, for excluded commodities, the Commission clarifies 
further the discretion of exchanges in recognizing risk management 
exemptions. Second, for physical commodities, the Commission: (a) 
Clarifies the scope of the general definition of a bona fide hedging 
position; (b) conforms that general definition more closely to CEA 
section 4a(c) by including recognition of positions that reduce risks 
attendant to a swap that was used as a hedge; and, (c) re-organizes 
additional requirements for enumerated hedges and requirements for 
other recognition as a non-enumerated bona fide hedging position, apart 
from the general definition.
c. BFH Definition Discussion--Remove Incidental Test and Orderly 
Trading Requirement
    Proposed Rule: As noted above, the Commission proposed to retain, 
in its December 2013 Position Limits Proposal,\397\ then proposed to 
remove, in its 2016 Supplemental Position Limits Proposal,\398\ two 
general requirements contained in the Sec.  1.3(z)(1) definition of 
bona fide hedging position: the incidental test; and the orderly 
trading requirement. The incidental test requires, for a position to be 
recognized as a bona fide hedging position, that the ``purpose is to 
offset price risks incidental to commercial cash, spot, or forward 
operations.'' The orderly trading requirement mandates that ``such 
position is established and liquidated in an orderly manner in 
accordance with sound commercial practices.''
---------------------------------------------------------------------------

    \397\ 78 FR at 75706.
    \398\ 81 FR at 38462.
---------------------------------------------------------------------------

    Comments Received: Commenters generally objected to retaining the 
incidental test and the orderly trading requirement in the definition 
of bona fide hedging position, as proposed in 2013.\399\ A number of 
commenters supported the Commission's 2016 Supplemental Proposal to 
remove the incidental test and the orderly trading requirement.\400\
---------------------------------------------------------------------------

    \399\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38462.
    \400\ See, e.g., CL-NCFC-60930 at 2, CL-FIA-60937 at 5 and 23, 
and CL-IECAssn-60949 at 5-7.
---------------------------------------------------------------------------

    Incidental Test: Commenters objected to the incidental test, 
because that test is not included in the standards in CEA section 4a(c) 
for the Commission to define a bona fide hedging position for physical 
commodities.\401\
---------------------------------------------------------------------------

    \401\ See, e.g., CL-CME-58718 at 47, and CL-NGFA-60941 at 2.
---------------------------------------------------------------------------

    However, other commenters noted their belief that eliminating the 
incidental test would permit swap dealers or purely financial entities 
to avail themselves of bona fide hedging exemptions, to the detriment 
of commercial hedgers.\402\
---------------------------------------------------------------------------

    \402\ See, e.g., CL-IATP-60951 at 4, CL-AFR-60953 at 2, CL-
Better Markets-60928 at 5, and CL-Rutkowski-60962 at 1.
---------------------------------------------------------------------------

    Orderly trading requirement: One commenter urged the Commission to 
eliminate the orderly trading requirement, because this requirement 
does not apply to over-the-counter markets, the Commission does not 
define orderly trading in a bi-lateral market, and this requirement 
imposes a duty on end users to monitor market activities to ensure they 
do not cause a significant market impact; additionally, the commenter 
noted the anti-disruptive trading prohibitions and polices apply 
regardless of whether the orderly trading requirement is imposed.\403\ 
Similarly, another commenter urged the Commission to exempt commercial 
end-users from the orderly trading requirement, arguing that an orderly 
trading requirement unreasonably requires commercial end-users to 
monitor markets to measure the impact of their activities without clear 
guidance from the Commission on what would constitute significant 
market impact.\404\
---------------------------------------------------------------------------

    \403\ See CL-COPE-59662 at 13.
    \404\ See CL-DEU-59627 at 5-7.
---------------------------------------------------------------------------

    Other commenters to the 2013 Proposal requested the Commission 
interpret the orderly trading requirement consistently with the 
Commission's disruptive trading practices interpretation (i.e., a 
standard of intentional or reckless conduct) and not to apply a 
negligence standard.\405\ Yet another commenter requested clarification 
on the process the Commission would use to determine whether a position 
has been established and liquidated in an orderly manner, whether any 
defenses may be available, and what would be the consequences of 
failing the requirement.\406\
---------------------------------------------------------------------------

    \405\ See, e.g., CL-FIA-59595 at 5, 33-34, CL-EEI-EPSA-59602 at 
14-15, CL-ISDA/SIFMA-59611 at 4, 39, CL-CME-59718 at 67, and CL-ICE-
59669 at 11.
    \406\ See CL-Working Group-59693 at 14.
---------------------------------------------------------------------------

    However, one commenter is concerned that eliminating the orderly 
trading requirement for bona fide hedging for swaps positions would 
discriminate against market participants in the futures and options 
markets. The commenter noted that, if the Commission eliminates this 
requirement, the Commission could not use its authority effectively to 
review exchange-granted exemptions for swaps from position limits to 
prevent or diminish excessive speculation.\407\
---------------------------------------------------------------------------

    \407\ See CL-IATP-60951 at 4.
---------------------------------------------------------------------------

    Commission Reproposal: In the reproposed definition of bona fide 
hedging position, the Commission is eliminating the incidental test and 
the orderly trading requirement.
    Incidental Test: Under the Reproposal, the incidental test has been 
eliminated, because the Commission views the economically appropriate 
test (discussed below) as including the concept of the offset of price 
risks

[[Page 96744]]

incidental to commercial cash, spot, or forward operations. It was 
noted in the 2013 Position Limits Proposal that, ``The Commission 
believes the concept of commercial cash market activities is also 
embodied in the economically appropriate test for physical commodities 
in [CEA section 4a(c)(2)].'' \408\ It should be noted the incidental 
test has been part of the regulatory definition of bona fide hedging 
since 1975,\409\ but that the requirement was not explained in the 1974 
proposing notice (``proposed definition otherwise deviates in only 
minor ways from the hedging definition presently contained in [CEA 
section 4a(3)]'').\410\
---------------------------------------------------------------------------

    \408\ See December 2013 Position Limits Proposal, 78 FR at 
75707.
    \409\ 40 FR 11560 (March 12, 1975).
    \410\ 39 FR 39731 (Nov. 11, 1974).
---------------------------------------------------------------------------

    The Commission is not persuaded by the commenters who believe 
eliminating the incidental test would permit financial entities to 
avail themselves of a bona fide hedging exemption, because the 
incidental test is essentially embedded in the economically appropriate 
test. In addition, for a physical-commodity derivative, the reproposed 
definition, in mirroring the statutory standards of CEA section 4a(c), 
requires a bona fide hedging position to be a substitute for a 
transaction taken or to be taken in the cash market (either for the 
market participant itself or for the market participant's pass-through 
swap counterparty), which generally would preclude financial entities 
from availing themselves of a bona fide hedging exemption (in the 
absence of qualifying for a pass-through swap offset exemption, 
discussed below).
    Orderly Trading Requirement: The Reproposal also eliminates the 
orderly trading requirement. That provision has been a part of the 
regulatory definition of bona fide hedging since March 12, 1975 \411\ 
and previously was found in the statutory definition of bona fide 
hedging position prior to the 1974 amendment removing the statutory 
definition from CEA section 4a(3). However, the Commission is not aware 
of a denial of recognition of a position as a bona fide hedging 
position, as a result of a lack of orderly trading. Further, the 
Commission notes that the meaning of the orderly trading requirement is 
unclear in the context of the over-the-counter (OTC) swap market or in 
the context of permitted off-exchange transactions (e.g., exchange of 
futures for physicals).
---------------------------------------------------------------------------

    \411\ 40 FR 11560 (Mar. 12, 1975).
---------------------------------------------------------------------------

    In regard to the anti-disruptive trading prohibitions of CEA 
section 4c(a)(5), those prohibitions apply to trading on registered 
entities, but not to OTC transactions. It should be noted that the 
anti-disruptive trading prohibitions in CEA section 4c(a)(5) make it 
unlawful to engage in trading on a registered entity that 
``demonstrates intentional or reckless disregard for orderly execution 
of trading during the closing period'' (emphasis added); however, the 
Commission has not, under the authority of CEA section 4c(a)(6), 
prohibited the intentional or reckless disregard for the orderly 
execution of transactions on a registered entity outside of the closing 
period.
    The Commission notes that an exchange may impose a general orderly 
trading on all market participants. Market participants may request 
clarification from exchanges on their trading rules. The Commission 
does not believe that the absence of an orderly trading requirement in 
the definition of bona fide hedging position would discriminate against 
any particular trading venue for commodity derivative contracts.
d. BFH Definition Discussion-- Excluded Commodities
    Proposed Rule: In both the 2013 Position Limits Proposal and the 
2016 Supplement Proposal, the proposed definition of bona fide hedging 
position for contracts in an excluded commodity included a standard 
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 also specified that such position 
should be either (i) specifically enumerated in paragraphs (3) through 
(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.\412\ As noted above, the 2016 Supplemental Proposal would 
eliminate the two additional general requirements (the incidental test 
and the orderly trading requirement).
---------------------------------------------------------------------------

    \412\ December 2013 Position Limits Proposal, 78 FR at 75707; 
2016 Supplemental Position Limits Proposal, 81 FR at 38505.
---------------------------------------------------------------------------

    Comments Received: One commenter believed that, to avoid an overly 
restrictive definition due to the limited set of examples provided by 
the Commission, only the general definition of a bona fide hedging 
position should be applicable to hedges of an excluded commodity.\413\
---------------------------------------------------------------------------

    \413\ CL-BG Group-59656 at 9.
---------------------------------------------------------------------------

    Commission Reproposal: After consideration of comments and review 
of the record, the Commission has determined in the Reproposal to apply 
the economically appropriate test to enumerated exemptions, as 
proposed.\414\ However, the Reproposal amends the proposed definition 
of a bona fide hedging position for an excluded commodity, to clarify 
that an exchange may otherwise recognize risk management exemptions in 
an excluded commodity, without regard to the economically appropriate 
test. Regarding risk management exemptions, the Commission notes that 
Appendix A (which codifies the Commission's two 1987 interpretations of 
the bona fide hedging definition in the context of excluded 
commodities) includes examples of risk altering transactions, such as a 
temporary increase in equity exposure relative to cash bond holdings. 
Such risk altering transactions appear inconsistent with the 
Commission's interpretation of the economically appropriate test. 
Accordingly, the Reproposal removes the economically appropriate test 
from the guidance for exchange-recognized risk management exemptions in 
excluded commodities.
---------------------------------------------------------------------------

    \414\ The Commission did not propose to apply to excluded 
commodities any of the additional standards in the general 
definition applicable to hedges of a physical commodity.
---------------------------------------------------------------------------

    Regarding an exchange's obligation to comply with core principles 
pertaining to position limits on excluded commodities, as discussed 
further in Sec.  150.5, the Commission clarifies that under the 
Reproposal, exchanges have reasonable discretion as to whether to adopt 
the Commission's definition of a bona fide hedging position, including 
whether to grant risk management exemptions, such as those that would 
be consistent with, but not limited to, the examples in Appendix A to 
part 150. That is, the set of examples in Appendix A to part 150 is 
non-restrictive, as it is guidance. The Reproposal also makes minor 
wording changes in Appendix A to part 150, including to clarify an 
exchange's reasonable discretion in granting risk management exemptions 
and to eliminate a reference to the orderly trading requirement which 
has been deleted, as discussed above, but otherwise is adopting 
Appendix A as proposed.
e. BFH Definition Discussion--Physical Commodities General Definition
    As noted in its proposal, the core of the Commission's approach to 
defining bona fide hedging over the years has focused on transactions 
that offset a

[[Page 96745]]

recognized price risk.\415\ Once a bona fide 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.
---------------------------------------------------------------------------

    \415\ December 2013 Position Limits Proposal, 78 FR at 75702-3.
---------------------------------------------------------------------------

    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 it 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.
    CEA section 4a(c)(1),\416\ as re-designated by the Dodd-Frank Act, 
authorizes the Commission to define bona fide hedging positions 
``consistent with the purposes of this Act.'' CEA section 4a(c)(2), as 
added by the Dodd-Frank Act, provides new requirements for the 
Commission to define bona fide hedging positions in physical commodity 
derivatives ``[f]or the purposes of implementation of [CEA section 
4a(a)(2)] for contracts of sale for future delivery or options on the 
contracts of commodities [traded on DCMs].'' \417\
---------------------------------------------------------------------------

    \416\ 7 U.S.C. 6a(c)(1).
    \417\ The Reproposal provides for a phased approach to 
implementation of CEA section 4a(a)(2), to reduce the potential 
administrative burden on exchanges and market participants, and to 
facilitate adoption of monitoring policies, procedures and systems. 
See, e.g., December 2013 Position Limits Proposal, 78 FR at 75725. 
The first phase of implementation of CEA section 4a(a)(2), in this 
Reproposal, initially sets federal limits on 25 core referenced 
futures contracts and their associated referenced contracts. The 
Commission is establishing a definition of bona fide hedging 
position for physical commodities in connection with its 
implementation of CEA section 4a(a)(2), applicable to federal 
limits. However, the Reproposal does not mandate adoption of that 
definition of a bona fide hedging position for purposes of exchange-
set limits in contracts that are not yet subject to a federal limit. 
See below regarding guidance and requirements under reproposed Sec.  
150.5 for exchange-set limits in physical commodities.
---------------------------------------------------------------------------

    General Definition: The Commission's proposed general definition 
for physical commodity derivative contracts, mirroring CEA section 
4a(c)(2)(a), specifies a bona fide hedging position is one that:
    (a) Temporary substitute test: represents a substitute for 
transactions made or to be made or positions taken or to be taken at a 
later time in the physical marketing channel;
    (b) Economically appropriate test: is economically appropriate to 
the reduction of risks in the conduct and management of a commercial 
enterprise; and
    (c) Change in value requirement: arises from the potential change 
in the value of assets, liabilities, or services, whether current or 
anticipated.
    In addition to the above, the Commission's proposed general 
definition, mirroring CEA section 4a(c)(2)(B)(i), also recognizes a 
bona fide hedging position that:
    (d) Pass-through swap offset: reduces risks attendant to a position 
resulting from a swap that was executed opposite a counterparty for 
which the transaction would qualify as a bona fide hedging transaction 
under the general definition above.
    The Commission proposed another provision, based on the statutory 
standards, to recognize as a bona fide a position that:
    (e) Pass-through swap: is itself the swap executed opposite a pass-
through swap counterparty, provided that the risk of that swap has been 
offset.
    The Commission received a number of comments on the December 2013 
Position Limits Proposal and the 2016 Supplemental Proposal. Those 
concerning the incidental test and the orderly trading requirement are 
discussed above. Others are discussed below.
i. Temporary Substitute Test and Risk Management Exemptions
    Proposed Rule: The temporary substitute test is discussed in the 
2013 Position Limits Proposal at 75708-9. As the Commission noted in 
the proposal, it believes that the temporary substitute test is a 
necessary condition for classification of positions in physical 
commodities as bona fide hedging positions. The proposed test mirrors 
the statutory test in CEA section 4a(c)(2)(a)(i). The statutory test 
does not include the adverb ``normally'' to modify the verb 
``represents'' in the phrase ``represents a substitute for transactions 
taken or to be taken at a later time in a physical marketing channel.'' 
Because the definition in Sec.  1.3(z)(1) includes the adverb 
``normally,'' the Commission interpreted that provision to be merely a 
temporary substitute criterion, rather than a test. Accordingly, the 
Commission previously granted risk management exemptions for persons to 
offset the risk of swaps and other financial instruments that did not 
represent substitutes for transactions or positions to be taken in a 
physical marketing channel. However, given the statutory change in 
direction, positions that reduce the risk of such speculative swaps and 
financial instruments would no longer meet the requirements for a bona 
fide hedging position under the proposed definition in Sec.  150.1.
    Comments Received: A number of commenters urged the Commission not 
to deny risk-management exemptions for financial intermediaries who 
utilize referenced contracts to offset the risks arising from the 
provision of diversified, commodity-based returns to the 
intermediaries' clients.\418\
---------------------------------------------------------------------------

    \418\ See, e.g., CL-FIA-59595 at 5, 34-35; CL-AMG-59709 at 2, 
12-15; and CL-CME-59718 at 67-69.
---------------------------------------------------------------------------

    However, other commenters noted the ``proposed rules properly 
refrain from providing a general exemption to financial firms seeking 
to hedge their financial risks from the sale of commodity-related 
instruments such as index swaps, Exchange Traded Funds (ETFs), and 
Exchange Traded Notes (ETNs),'' because such instruments are inherently 
speculative and may overwhelm the price discovery function of the 
derivative market.\419\
---------------------------------------------------------------------------

    \419\ See, e.g., CL-Sen. Levin-59637 at 8, and CL-Better 
Markets-60325 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal would retain the temporary 
substitute test, as proposed. The Commission interprets the statutory 
temporary substitute test as more stringent than the temporary 
substitute criterion in Sec.  1.3(z)(1); \420\ that is, the Commission 
views the statutory test as narrowing the standards for a bona fide 
hedging position. Further, the Commission believes that retaining a 
risk management exemption for swap intermediaries, without regard to 
the purpose of the counterparty's swap, would fly in the face of the 
statutory restrictions on pass-through swap offsets (requiring the 
position of the pass-through swap counterparty to

[[Page 96746]]

qualify as a bona fide hedging transaction).\421\
---------------------------------------------------------------------------

    \420\ See December 2013 Position Limits Proposal, 78 FR at 
75709.
    \421\ See CEA section 4a(c)(2)(B)(i).
---------------------------------------------------------------------------

    Proposed Rule on risk management exemption grandfather provisions: 
The Commission proposed in Sec.  150.2(f) and Sec.  150.3(f) to 
grandfather previously granted risk-management exemptions, as applied 
to pre-existing positions.\422\
---------------------------------------------------------------------------

    \422\ See December 2013 Position Limits Proposal, 78 FR at 
75734-5 and 75739-41.
---------------------------------------------------------------------------

    Comments Received: Commenters requested that the Commission extend 
the grandfather relief to permit pre-existing risk management positions 
to be increased after the effective date of a limit.\423\ Commenters 
also requested that the Commission permit the risk associated with a 
pre-existing position to be offset by a futures position in a deferred 
contract month, after the liquidation of an offsetting position in a 
nearby futures contract month.\424\
---------------------------------------------------------------------------

    \423\ See, e.g., CL-AMG-59709 at 2, 18.
    \424\ See, e.g., id. at 18-19.
---------------------------------------------------------------------------

    Some commenters urged the Commission not to deny risk-management 
exemptions for financial intermediaries who utilize referenced 
contracts to offset the risks arising from the provision of diversified 
commodity-based returns to the intermediaries' clients.\425\
---------------------------------------------------------------------------

    \425\ CL-FIA-59595 at 5,34-35; CL-AMG-59709 at 2, 12-15; and CL-
CME-59718 at 67-69.
---------------------------------------------------------------------------

    In contrast, other commenters noted that the proposed rules 
``properly refrain'' from providing a general exemption to financial 
firms seeking to hedge their financial risks from the sale of 
commodity-related instruments such as index swaps, ETFs, and ETNs 
because such instruments are ``inherently speculative'' and may 
overwhelm the price discovery function of the derivative market.\426\ 
Another commenter noted, because commodity index contracts are 
speculative, the Commission should not provide a regulatory exemption 
for such contracts.\427\
---------------------------------------------------------------------------

    \426\ CL-Sen. Levin-59637 at 8; and CL-Better Markets-60325 at 
2.
    \427\ CL-CMOC-59720 at 4-5.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal clarifies and expands the 
relief in Sec.  150.3(f) (previously granted exemptions) by: (1) 
Clarifying that such previously granted exemptions may apply to pre-
existing financial instruments that are within the scope of existing 
Sec.  1.47 exemptions, rather than only to pre-existing swaps; and (2) 
recognizing exchange-granted non-enumerated exemptions in non-legacy 
commodity derivatives outside of the spot month (consistent with the 
Commission's recognition of risk management exemptions outside of the 
spot month), and provided such exemptions are granted prior to the 
compliance date of the final rule, once adopted, and apply only to pre-
existing financial instruments as of the effective date of that final 
rule. These two changes are intended to reduce the potential for market 
disruption by forced liquidations, since a market intermediary would 
continue to be able to offset risks of pre-effective-date financial 
instruments, pursuant to previously-granted federal or exchange risk 
management exemptions.
    The Reproposal clarifies that the Commission will continue to 
recognize the offset of the risk of a pre-existing financial instrument 
as bona fide using a derivative position, including a deferred 
derivative contract month entered after the effective date of a final 
rule, provided a nearby derivative contract month is liquidated. 
However, under the Reproposal, such relief will not be extended to an 
increase in positions after the effective date of a limit, because that 
appears contrary to Congressional intent to narrow the definition of a 
bona fide hedging position, as discussed above.
ii. Economically Appropriate Test
    Commission proposal: The economically appropriate test is discussed 
in the 2013 Position Limits Proposal at 75709-10. The proposed 
economically appropriate test mirrors the statutory test, which, in 
turn, mirrors the test in current Sec.  1.3(z)(1).
    Comments received: Several commenters requested that the Commission 
broadly interpret the phrase ``economically appropriate'' to include 
more than just price risk, stating that there are other types of risk 
that are economically appropriate to address in the management of a 
commercial enterprise including operational risk, liquidity risk, 
credit risk, locational risk, and seasonal risk.\428\
---------------------------------------------------------------------------

    \428\ See, e.g., CL-NCGA-NGSA-60919 at 4, CL-EEI-EPSA-60925 at 
14, CL-API-60939 at 2, CL-CMC-60950 at 4-5, CL-NCFC-60930 at 2, CL-
ADM-60934 at 2-6, CL-FIA-60937 at 5 and 20, CL-NGFA-60941 at 4, and 
CL-Associations-60972 at 2.
---------------------------------------------------------------------------

    Commenters suggested that if the Commission objected to expanding 
its interpretation of ``economically appropriate'' risks, then the 
Commission should allow the exchanges to utilize discretion in their 
interpretations of the economically appropriate test.\429\ Another 
commenter believed that the Commission should provide ``greater 
flexibility'' in the various bona fide hedging tests, because hedging 
that reduces all the various types of risk should be deemed 
``economically appropriate.'' \430\ Commenters suggested that a broader 
view of the types of risks considered to be ``economically 
appropriate'' should not be perceived as being at odds with the 
Commission's view of ``price risk'' because all of these risks can 
inform and determine price, noting that firms evaluate different risks 
and determine a price impact based on a combination of their likelihood 
of occurrence and the price impact in the event of occurrence.\431\
---------------------------------------------------------------------------

    \429\ See, e.g., CL-CMC-60950 at 4-5, and CL-Olam-59946 at 2-4.
    \430\ CL-ICE-60929 at 10.
    \431\ See, e.g., CL-ADM-60934 at 2-6, and CL-API-60939 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal does not broaden the 
interpretation of the phrase ``economically appropriate.'' The 
Commission notes that it has provided interpretations and guidance over 
the years as to the meaning of ``economically appropriate.'' \432\ The 
Commission reiterates its view that, to satisfy the economically 
appropriate test and the change in value requirement of CEA section 
4a(c)(2)(A)(iii), the purpose of a bona fide hedging position must be 
to offset price risks incidental to a commercial enterprise's cash 
operations.\433\
---------------------------------------------------------------------------

    \432\ See December 2013 Position Limits Proposal, 78 FR at 
75709-10.
    \433\ Id. at 75710.
---------------------------------------------------------------------------

    The Commission notes that an exchange is permitted to recognize 
non-enumerated bona fide hedging positions under the process of Sec.  
150.9, discussed below, subject to assessment of the particular facts 
and circumstances, where price risk arises from other types of risk. 
The Reproposal does not, however, allow the exchanges to utilize 
unbounded discretion in interpreting ``economically appropriate'' in 
such recognitions. The Commission believes that such a broad delegation 
is not authorized by the CEA and, in the Commission's view, would be 
contrary to the reasonably certain statutory standard of the 
economically appropriate test. Further, as explained in the discussion 
of Sec.  150.9, exchange determinations will be subject to the 
Commission's de novo review.
    Comments on gross vs. net hedging: A number of commenters requested 
that the Commission recognize as bona fide both ``gross hedging'' and 
``net hedging,'' without regard to overall risk.\434\ Commenters 
generally requested, as ``gross hedging,'' that an enterprise should be 
permitted the flexibility to use either a long or short derivative to 
offset the risk of any cash position, identified at the discretion of

[[Page 96747]]

the commercial enterprise, irrespective of the commercial enterprise's 
net cash market position.\435\ For example, a commenter contended that 
a commercial enterprise should be able to hedge fixed-price purchase 
contracts (e.g., with a short futures position), without regard to the 
enterprise's fixed-price sales contracts, even if such a short 
derivative position may increase the enterprise's risk.\436\ One 
commenter stated that the ``new proposed interpretation'' of the 
``economically appropriate'' test requires a commercial enterprise to 
include, and consider for purposes of bona fide hedging, portions of 
its portfolio it would not otherwise consider in managing risk.\437\ 
Another commenter did not agree that market participants should be 
required to calculate risk on a consolidated basis, because this 
approach would require commercial entities to build out new systems. As 
an alternative, that commenter requests the Commission recognize 
current risk management tools.\438\
---------------------------------------------------------------------------

    \434\ See, e.g., CL-MGEX-60936 at 11, CL-CMC-60950 at 6, CL-
Associations-60972 at 2.
    \435\ See, e.g., CL-Olam-59658 at 4-6.
    \436\ CL-FIA-59595 at 20-21.
    \437\ CL-Working Group-60947 at 15.
    \438\ CL-CMC-60950 at 5.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal retains the Commission's 
interpretation, as proposed, of economically appropriate gross hedging: 
that in circumstances where net hedging does not measure all risk 
exposures, an enterprise may appropriately enter into, for example, a 
calendar month spread position as a gross hedge. A number of comments 
misconstrued the Commission's historical interpretation of gross and 
net hedging. The Commission has not recognized selective identification 
of cash positions to justify a position as bona fide; rather, the 
Commission has permitted a regular practice of excluding certain 
commodities, products, or by-products, in determining an enterprise's 
risk position.\439\ As proposed, the Reproposal requires such excluded 
commodities to be de minimis or difficult to measure, because a market 
participant should not be permitted to ignore material cash market 
positions and enter into derivative positions that increase risk while 
avoiding a position limit restriction; rather, such a market 
participant's speculative activity must remain below the level of the 
speculative position limit.
---------------------------------------------------------------------------

    \439\ See, e.g., instructions to Form 204.
---------------------------------------------------------------------------

    Note, however, under a partial reading of a preamble to a 1977 
proposal, the Commission has appeared to recognize gross hedging, 
without regard to net risk, as bona fide; the Commission noted in 1977 
that: ``The previous statutory definition of bona fide hedging 
transactions or positions contained in section 4a of the Act before 
amendment by the CFTC Act and the present definition permit persons to 
classify as hedging any purchase or sale for future delivery which is 
offset by their gross cash position irrespective of their net cash 
position.'' \440\ However, under a full reading of that 1977 proposal, 
the Commission made clear that gross hedging was appropriate in 
circumstances where ``net cash positions do not necessarily 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.'' \441\ Thus, the 1977 proposal noted the 
Commission ``does not intend at this time to alter the provisions of 
the present definition with respect to the hedging of gross cash 
position.'' \442\ At the time of the 1977 proposal, the ``present 
definition'' had been promulgated in 1975 by the Administrator of the 
Commodity Exchange Authority based on the statutory definition; and the 
Administrator had interpreted the statutory definition to recognize 
gross hedging as bona fide in the context of a merchant who ``may hedge 
his fixed-price purchase commitments by selling futures and at the same 
time hedge his fixed-price sale commitments by buying futures,'' rather 
than hedging only his net position.\443\
---------------------------------------------------------------------------

    \440\ 42FR 14832 at 14834 (Mar. 16, 1977).
    \441\ Id.
    \442\ Id.
    \443\ See, Letter from Roger R. Kauffman, Adm'r, Commodity 
Exchange Authority, to Reid Bondurant, Cotton Exchange (Feb. 13, 
1959) (emphasis added), cited in CL-Olam-59658 at 5.
---------------------------------------------------------------------------

    Comments on specific, identifiable risk: Commenters requested the 
Commission consider as economically appropriate any derivative position 
that a business can reasonably demonstrate reduces or mitigates one or 
more specific, identifiable risks related to individual or aggregated 
positions or transactions, based on its own business judgment and risk 
management policies, whether risk is managed enterprise-wide or by 
legal entity, line of business, or profit center.\444\ One commenter 
disagreed with what it called a ``one-size-fits-all'' risk management 
paradigm that requires market participants to calculate risk on a 
consolidated basis because this approach would require commercial 
entities to build out new systems in order to manage risk this way. The 
commenter requests that the Commission instead recognize that current 
risk management tools are used effectively for positions that are below 
current limits and those tools remain effective above position limit 
levels as well.\445\
---------------------------------------------------------------------------

    \444\ See, e.g., CL-API-59694 at 4, CL-IECAssn-59679 at 10-11, 
CL-APGA-59722 at 9-10, CL-NCFC-59942 at 5, CL-EEI-EPSA-59602 at 15, 
and CL-EEI-Sup-60386 at 7.
    \445\ CL-CMC-60950 at 5.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal declines to assess the bona 
fides of a position based solely on whether a commercial enterprise can 
identify any particular cash position within an aggregated person, the 
risks of which such derivative position offsets. The Commission 
believes that such an approach would run counter to the aggregation 
rules in Sec.  150.4 and would permit an enterprise to cherry pick cash 
market exposures to justify exceeding position limits, with either a 
long or short derivative position, even though such derivative position 
increases the enterprise's risk.
    The Commission views a derivative position that increases an 
enterprise's risk as contrary to the plain language of CEA section 
4a(c) and the Commission's bona fide hedging definition, which requires 
that a bona fide hedging position ``is economically appropriate to the 
reduction of risks in the conduct and management of a commercial 
enterprise.'' \446\
---------------------------------------------------------------------------

    \446\ CEA section 4a(c)(2)(A)(ii).
---------------------------------------------------------------------------

    If a transaction that increases a commercial enterprise's overall 
risk should be considered a bona fide hedging position, this would 
result in position limits not applying to certain positions that should 
be considered speculative. For example, assume an enterprise has 
entered into only two cash forward transactions and has no inventory. 
The first cash forward transaction is a purchase contract (for a 
particular commodity for delivery at a particular later date). The 
second cash forward transaction is a sales contract (for the same 
commodity for delivery on the same date as the purchase contract). 
Under the terms of the cash forward contracts, the enterprise may take 
delivery on the purchase contract and re-deliver the commodity on the 
sales contract. Such an enterprise does not have a net cash market 
position that exposes it to price risk, because it has both purchased 
and sold the same commodity for delivery on the same date (such as cash 
forward contracts for the same cargo of Brent crude oil). The 
enterprise could establish a short derivative position that would 
offset the risk of the purchase contract; however, that would increase 
the enterprise's price risk. Alternatively, the enterprise

[[Page 96748]]

could establish a long derivative position that would offset the risk 
of the sales contract; however, that would increase the enterprise's 
price risk. If price risk reduction at the level of the aggregate 
person is not a requirement of a bona fide hedging position, such an 
enterprise could establish either a long or short derivative position, 
at its election, and claim an exemption from position limits for either 
derivative position, ostensibly as a bona fide hedging position. If 
either such position could be recognized as bona fide, position limits 
would simply not apply to such an enterprise's derivative position, 
even though the enterprise had no price risk exposure to the commodity 
prior to establishing such derivative position and created price risk 
exposure to the commodity by establishing the derivative position. 
Based on the Commission's experience and expertise, it believes that 
such a result (entering either a long or short derivative position, 
whichever the market participant elects) simply cannot be recognized as 
a legitimate risk reduction that should be exempt from position limits; 
rather, such a position should be considered speculative for purposes 
of position limits.
    The Commission notes that a commercial enterprise that wishes to 
separately manage its operations, in separate legal entities, may, 
under the aggregation requirements of Sec.  150.4, establish 
appropriate firewalls and file a notice for an aggregation exemption, 
because separate legal entities with appropriate firewalls are treated 
as separate persons for purposes of position limits. The Commission 
explained that an aggregation exemption was appropriate in 
circumstances where the risk of coordinated activity is mitigated by 
firewalls.\447\
---------------------------------------------------------------------------

    \447\ See discussion under section II.B.3 (Criteria for 
Aggregation Relief in Rule 150.4(b)(2)(i)) of the 2016 Final 
Aggregation Rule.
---------------------------------------------------------------------------

    Comments on processing hedge: A commenter requested the Commission 
recognize, as bona fide, a long or short derivative position that 
offsets either inputs or outputs in a processing operation, based on 
the business judgment of the commercial enterprise that it might not be 
an appropriate time to hedge both inputs and outputs, and requested the 
Commission withdraw the processing hedge example on pages 75836-7 of 
the 2013 Position Limits Proposal (proposed example 5 in Appendix C to 
part 150).\448\
---------------------------------------------------------------------------

    \448\ CL-Cargill-59638 at 2-4.
---------------------------------------------------------------------------

    Commission Reproposal: For the reasons discussed above regarding 
gross hedging and specific, identifiable risks, the Reproposal does not 
recognize as a bona fide hedging position a derivative position that 
offsets either inputs or outputs in a processing operation, absent 
additional facts and circumstances. The Commission reiterates its view 
that, as explained in the Commission's 2013 Position Limits Proposal, 
by way of 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 or blender 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.\449\ However, 
under such circumstances, merely entering an outright derivative 
position (i.e., either a long position or a short position, at the 
processor's election) appears to be risk increasing, since the price 
risk of such outright position appears greater than, and not offsetting 
of, the price risk of anticipated processing and, thus, such outright 
position would not be economically appropriate to the reduction of 
risks.
---------------------------------------------------------------------------

    \449\ December 2013 Position Limits Proposal, 78 FR at 75709.
---------------------------------------------------------------------------

    Comments on economically appropriate anticipatory hedges: 
Commenters requested the Commission recognize derivative positions as 
economically appropriate to the reduction of certain anticipatory 
risks, such as irrevocable bids or offers.\450\
---------------------------------------------------------------------------

    \450\ See, e.g., CL-Cargill-59638 at 2-4.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has a long history of 
providing for the recognition, in Sec.  1.3(z)(2), as enumerated bona 
fide hedging positions, of anticipatory hedges for unfilled anticipated 
requirements and unsold anticipated production, under the process of 
Sec.  1.48.\451\ The Reproposal continues to enumerate those two 
anticipatory hedges, along with two new anticipatory hedges for 
anticipated royalties and contracts for services, as discussed below.
---------------------------------------------------------------------------

    \451\ 17 CFR 1.3(z)(2) and 1.48 (2010).
---------------------------------------------------------------------------

    The Commission did not propose an enumerated exemption for binding, 
irrevocable bids or offers as the Commission believes that an analysis 
of the facts and circumstances would be necessary prior to recognizing 
such an exemption. Consequently, the Reproposal does not provide for 
such an enumerated exemption. However, the Commission withdraws the 
view that a binding, irrevocable bid or offer fails to meet the 
economically appropriate test.\452\ Rather, the Commission will permit 
exchanges, under Sec.  150.9, to make a facts-and-circumstances 
determination as to whether to recognize such and other anticipatory 
hedges as non-enumerated bona fide hedges, consistent with the 
Commission's recognition ``that there can be a gradation of 
probabilities that an anticipated transaction will occur.'' \453\
---------------------------------------------------------------------------

    \452\ December 2013 Position Limits Proposal, 78 FR at 75720.
    \453\ Id. at 75719.
---------------------------------------------------------------------------

iii. Change in Value Requirement
    Commission proposal: To satisfy the change in value requirement, 
the hedging position must arise from the potential change in the value 
of: (I) Assets that a person owns, produces, manufactures, processes, 
or merchandises or anticipates owning, producing, manufacturing, 
processing, or merchandising; (II) liabilities that a person owes or 
anticipates incurring; or (III) services that a person provides, 
purchases, or anticipates providing or purchasing.\454\ The proposed 
definition incorporated the potential change in value requirement in 
current Sec.  1.3(z)(1).\455\ This provision largely mirrors the 
provision of CEA section 4a(c)(2)(A)(iii).\456\
---------------------------------------------------------------------------

    \454\ Id. at 75710.
    \455\ 17 CFR 1.3(z) (2010).
    \456\ As noted in the December 2013 Position Limits Proposal, 78 
FR at 75710, CEA section 4a(c)(2)(A)(iii)(II) uses the phrase 
``liabilities that a person owns or anticipates incurring.'' The 
Commission interprets the word ``owns'' to be a typographical error, 
and interprets the word ``owns'' to be ``owes.'' A person may owe on 
a liability, and may anticipate incurring a liability. If a person 
``owns'' a liability, such as a debt instrument issued by another, 
then such person owns an asset. Because assets are included in CEA 
section 4a(c)(2)(A)(iii)(I), the Commission interprets ``owns'' to 
be ``owes.''
---------------------------------------------------------------------------

    Comments on change in value: One commenter urged a more narrow 
definition of bona fide hedging that restricts exemptions to 
``commercial entities that deal exclusively in the production, 
processing, refining, storage, transportation, wholesale or retail 
distribution, or consumption of physical commodities.'' \457\ However, 
numerous commenters urged the Commission to enumerate new exemptions 
consistent with the change in value requirement, such as for 
merchandising, as discussed below.
---------------------------------------------------------------------------

    \457\ CL-PMAA-NEFI-60952 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal retains the change in value 
requirement as proposed, which mirrors CEA section 4a(c)(2)(A)(iii). 
Rather than further restrict the types of commercial entities who may 
avail themselves of a

[[Page 96749]]

bona fide hedging exemption under the change in value requirement, the 
Commission notes that the reproposed definition also reflects the 
statutory requirement under the temporary substitute test, that the 
hedging position be a substitute for a position taken or to be taken in 
a physical marketing channel, either by the market participant or the 
market participant's pass-through swap counterparty.
    Comments on anticipatory merchandising or storage: Numerous 
commenters asserted the Commission should recognize anticipatory 
merchandising as a bona fide hedge, as included in CEA section 
4a(c)(A)(iii), such as (1) a merchant desiring to lock in the price 
differential between an unfixed price forward commitment and an 
anticipated offsetting unfixed price forward commitment, where there is 
a reasonable basis to infer that an offsetting transaction was likely 
to occur (such as in anticipation of shipping), (2) a bid or offer, 
where there is a reasonably anticipated risk that such bid or offer 
will be accepted, or (3) an anticipated purchase and/or anticipated 
storage of a commodity, prior to anticipated merchandising (or 
usage).\458\
---------------------------------------------------------------------------

    \458\ See, e.g., CL-FIA-59595 at 30-31, CL-FIA-60303 at 6, CL-
EEI-EPSA-59602 at 17-18, CL-EEI-59945 at 6, CL-CMC-60950 at 6, CL-
CMC-60391 at 4-5, CL-CMC-60318 at 5, CL-CMC-59634 at 3, 20-22, CL-
Cargill-59638 at 2-4, CL-ADM-59640 at 2-3, CL-Olam-59946 at 4, CL-BG 
Group-59656 at 10-11, CL-ASCA-59667 at 2, CL-NGSA-60379 at 5, CL-
NGSA-59674 at 2, 18-24, CL-Working Group-60383 at 15, CL-Working 
Group-59937 at 5-6, 10-12, CL-Working Group-59656 at 16-18, 21-23, 
26, CL-API-59694 at 5-6, CL-MSCGI-59708 at 2-3, 18-20, CL-CME-59718 
at 56-57, 59, CL-Armajaro-59729 at 1, CL-AFBF-59730 at 2, CL-NCFC-
59942 at 2-4, CL-ICE-60310 at 4, CL-ICE-60387 at 9, CL-ISDA/SIFMA-
59611 at 37-38, CL-COPE-59662 at 15-16, and CL-GSC-59703 at 3-4.
---------------------------------------------------------------------------

    Commenters recommended the Commission recognize unfilled storage 
capacity as the basis of a bona fide hedge of, either (1) anticipated 
rents (e.g., a type of anticipated asset or liability), (2) anticipated 
merchandising, or (3) anticipated purchase and storage prior to 
usage.\459\ By way of example, one commenter contended anticipated rent 
on a storage asset is like an option and the appropriate hedge position 
should be dynamically adjusted.\460\ Also by way of example, another 
commenter suggested enumerated hedges should include (1) offsetting 
long and short positions in commodity derivative contracts as hedges of 
storage or transportation of the commodity underlying such contracts; 
and (2) positions that hedge the value of assets owned, or anticipated 
to be owned, used to produce, process, store or transport the commodity 
underlying the derivative.\461\
---------------------------------------------------------------------------

    \459\ See, e.g., CL-Cargill-59638 at 2-4, CL-CME-59718 at 57-58, 
CL-NEM-59586 at 4, CL-FIA-59595 32-33, CL-ISDA/SIFMA-59611 at 4, CL-
CMC-59634 at 5, CL-LDC-59643 at 2, CL-BG Group-59656 at 10, CL-COPE-
59950 at 5, CL-COPE-59662 at 14-15, CL--Working Group-59693 at 23-
26, CL-GSC-59703 at 2-3, CL-AFBF-59730 at 2, CL-SEMP-59926 at 6-7, 
CL-EDF-60398 at 8-9, CL-EDF-59961 at 2-3, CL-Andersons-60256 at 1-3, 
and CL-SEMP-60384 at 4-5.
    \460\ CL-ISDA/SIFMA-59611, Annex B at 7.
    \461\ CL-EEI-EPSA-60925 at 13.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission notes that an exchange, under 
reproposed Sec.  150.9, as discussed below, is permitted to recognize 
anticipated merchandising or anticipated purchase and storage, as 
potential non-enumerated bona fide hedging positions, subject to 
assessment of the particular facts and circumstances, including such 
information as the market participant's activities (taken or to be 
taken) in the physical marketing channel and arrangements for storage 
facilities. While the Commission previously discussed its doubt that 
storage hedges generally will meet the economically appropriate test, 
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,\462\ the Commission now withdraws that 
discussion of doubt and, as reproposed, would review exchange-granted 
non-enumerated bona fide hedging exemptions for storage with an open 
mind.
---------------------------------------------------------------------------

    \462\ December 2013 Position Limits Proposal, 78 FR at 75718.
---------------------------------------------------------------------------

    The Commission does not express a view as this time on one 
commenter's assertion that the anticipated rent on a storage asset is 
like an option; the commenter did not provide data regarding the 
relationship between calendar spreads and the ``profitability of 
filling storage.'' The Commission notes that, under the Reproposal, an 
exchange could evaluate the particulars of such a situation in an 
application for a non-enumerated hedging position.
    Similarly, as reproposed, an exchange could evaluate the 
particulars of other situations, such as a commenter's example of 
storage or transportation hedges. The Commission notes that it is not 
clear from the comments how the value fluctuations of calendar month or 
location differentials are related to the fluctuations in value of 
storage or transportation. Regarding a commenter's examples of assets 
owned or anticipated to be owned, it is not clear how the value 
fluctuations of whatever would be the relevant hedging position (e.g., 
long, short, or calendar month spread) are related to the fluctuations 
in value of whatever would be the particular assets (e.g., tractors, 
combines, silos, semi-trucks, rail cars, pipelines) to be used to 
produce, process, store or transport the commodity underlying the 
derivative.
    Comments on unfixed price commitments: Commenters recommended the 
Commission recognize, as a bona fide hedge, the fixing of the price of 
an unfixed price commitment, for example, to reduce the merchant's 
operational risk and potentially to acquire a commodity through the 
delivery process on a physical-delivery futures contract.\463\ Another 
commenter provided an example of a preference to shift unfixed-price 
exposure on cash commitments from daily index prices to the first-of-
month price under the NYMEX Henry Hub Natural Gas core referenced 
futures contract.\464\ A commenter suggested that the interpretation of 
a fixed price contract should include ``basis priced contracts which 
are purchases or sales with the basis value fixed between the buyer and 
the seller against a prevailing futures'' contract; the commenter noted 
such basis risk could be hedged with a calendar month spread to lock in 
their purchase and sale margins.\465\ Another commenter requested the 
Commission explicitly recognize index price transactions as appropriate 
for a bona fide hedging exemption, citing concerns that the price of an 
unfixed price forward sales contract may fall below the cost of 
production.\466\
---------------------------------------------------------------------------

    \463\ See, e.g., CL-Olam-59946 at 4, and CL-NCFC -59942 at 2-4.
    \464\ CL-NCGA-NGSA-60919 at 4-5.
    \465\ CL-NGFA-60941 at 4.
    \466\ CL-NCGA-NGSA-60919 at 5.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission affirms its belief that a 
reduction in a price risk is required under the economically 
appropriate test of CEA section 4a(c)(2)(A)(ii); consistent with the 
economically appropriate test, a potential change in value (i.e., a 
price risk) is required under CEA section 4a(c)(2)(A)(iii). In both the 
reproposed and proposed definitions of bona fide hedging position, the 
incidental test would require a reduction in price risk. Although the 
Reproposal deletes the incidental test from the first paragraph of the 
bona fide hedging position definition (as discussed above), the 
Commission notes that it interprets risk in the economically 
appropriate test as price risk, and does not interpret risk to include 
operational risk. Interpreting risk to include operational risk would 
broaden the scope of a bona fide hedging position beyond the 
Commission's historical interpretation

[[Page 96750]]

and may have adverse impacts that are inconsistent with the policy 
objectives of limits in CEA section 4a(a)(3)(B).
    The Commission has consistently required a bona fide hedging 
position to be a position that is shown to reduce price risk in the 
conduct and management of a commercial enterprise.\467\ By way of 
background, the Commission notes, in promulgating the definition of 
bona fide hedging position in Sec.  1.3(z), it explained that a bona 
fide hedging position ``must be economically appropriate to risk 
reduction, such risks must arise from operation of a commercial 
enterprise, and the price fluctuations of the futures contracts used in 
the transaction must be substantially related to fluctuations of the 
cash market value of the assets, liabilities or services being 
hedged.'' \468\ As noted above, the Dodd-Frank Act added CEA section 
4a(c)(2), which copied the economically appropriate test from the 
Commission's definition in Sec.  1.3(z)(1). Thus, the Commission 
believes it is reasonable to interpret that statutory standard in the 
context of the Commission's historical interpretation of Sec.  1.3(z).
---------------------------------------------------------------------------

    \467\ The Commission distinguishes operational risk, which may 
arise from a potential failure of a counterparty to a cash market 
forward transaction, from price risks in the conduct and management 
of a commercial enterprise.
    \468\ 42 FR 14832 at 14833 (March 16, 1977) (proposed 
definition). The Commission also adopted the incidental test 
(requiring that the ``purpose is to offset price risks incidental to 
commercial cash or spot operations''). 42 FR 42748 at 42751 (Aug. 
24, 1977) (final definition). Previously, the Secretary of 
Agriculture promulgated a definition of bona fide hedging position 
that required a purpose ``to offset price risks incidental to 
commercial cash or spot operations.'' 40 FR 11560 at 11561 (Mar. 12, 
1975).
---------------------------------------------------------------------------

    While the Commission has enumerated a calendar month spread as a 
bona fide hedge of offsetting unfixed-price cash commodity sales and 
purchases, the Reproposal will permit an exchange, under reproposed 
Sec.  150.9, to conduct a facts-and-circumstances, case-by-case review 
to determine whether a calendar month spread is appropriately 
recognized as a bona fide hedging position for only a cash commodity 
purchase or sales contract. For example, assume a merchant enters into 
an unfixed-price sales contract (e.g., priced at a fixed differential 
to a deferred month futures contract), and immediately enters into a 
calendar month spread to reduce the risk of the fixed basis moving 
adversely. It may not be economically appropriate to recognize as bona 
fide a long futures position in the spot (or nearby) month and a short 
futures position in a deferred calendar month matching the merchant's 
cash delivery obligation, in the event the spot (or nearby) month price 
is higher than the deferred contract month price (referred to as 
backwardation, and characteristic of a spot cash market with supply 
shortages), because such a calendar month futures spread would lock in 
a loss and may be indicative of an attempt to manipulate the spot (or 
nearby) futures price.
    Regarding the risk of an unfixed price forward sales contract 
falling below the cost of production, the Reproposal enumerates a bona 
fide hedging exemption for unsold anticipated production; the 
Commission clarifies, as discussed below, that such an enumerated hedge 
is available regardless of whether production has been sold forward at 
an unfixed (that is, index) price.
    Comments on cash and carry: Commenters requested the Commission 
enumerate, as a bona fide hedging position, a ``cash and carry'' trade, 
where a market participant enters a nearby long futures position and a 
deferred short futures position, with the intention to take delivery 
and carry the commodity for re-delivery.\469\
---------------------------------------------------------------------------

    \469\ See, e.g., CL-Armajaro-59729 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal does not propose to enumerate 
a cash and carry trade as a bona fide hedging position. A cash and 
carry trade appears to fail the temporary substitute test, since such 
market participant is not using the derivative contract as a substitute 
for a position taken or to be taken in the physical marketing channel. 
The long futures position in the cash and carry trade is in lieu of a 
purchase in the cash market. In the 2016 Supplemental Proposal, the 
Commission asked whether, and subject to what conditions (e.g., 
potential facilitation of liquidity for a bona fide hedger of 
inventory), a cash and carry position might be recognized by an 
exchange as a spread exemption under Sec.  150.10, subject to the 
Commission's de novo review.\470\ This issue is discussed under Sec.  
150.10, regarding exchange recognition of spread exemptions.
---------------------------------------------------------------------------

    \470\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38479.
---------------------------------------------------------------------------

iv. Pass-Through Swap Offsets and Offsets of Hedging Swaps
    Commission proposal: The Commission proposed to 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.\471\ This proposal mirrors the requirements 
in CEA section 4a(c)(B)(i). The proposal also clarified that the swap 
itself is a bona fide hedging position to the extent it is offset. 
However, the Commission proposed that it would not recognize as bona 
fide hedges an offset in physical-delivery contracts during the shorter 
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, discussed further below).
---------------------------------------------------------------------------

    \471\ December 2013 Position Limits Proposal, 78 FR at 75710.
---------------------------------------------------------------------------

    Comments received: As noted above, commenters recommended that the 
Commission's bona fide hedging definition should reflect the standards 
in CEA section 4a(c). One commenter suggested that the Commission 
broaden the pass-through swap offset provisions to accommodate 
secondary pass-through transactions among affiliates within a corporate 
organization to make ``the most efficient and effective use of their 
existing corporate structures.'' \472\
---------------------------------------------------------------------------

    \472\ CL-NCGA-NGSA-60919 at 8-9.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission agrees that the bona fide 
hedging definition, in general, and the pass-through swap provision, in 
particular, should more closely reflect the statutory standards in CEA 
section 4a(c). Under the proposed definition, a market participant who 
reduced the risk of a swap, where such swap was a bona fide hedging 
position for that market participant, would not have received 
recognition for the swap offset as a bona fide hedging position, as 
this provision in CEA section 4a(c)(2)(B)(ii) was not mirrored in the 
proposed definition.\473\ To adhere more closely to the statutory 
standards, the Reproposal recognizes such offset as a bona fide hedging 
position. Consistent with the proposal for offset of a pass-through 
swap, the Reproposal imposes a five-day rule restriction on the offset 
in a physical-delivery contract of a swap used as a bona fide hedge; 
however, as reproposed, an exchange listing a physical-delivery 
contract may recognize, on a case-by-case basis, such offset as a non-
enumerated bona fide hedging position pursuant to the process in 
reproposed Sec.  150.9.
---------------------------------------------------------------------------

    \473\ For example, assume a market participant entered a swap as 
a bona fide hedging position and, subsequently, offset (that is, 
lifted) that hedge using a futures contract. The Commission's 
original proposal would not have recognized the lifting of the hedge 
as a bona fide hedging transaction, although the statute does.
---------------------------------------------------------------------------

    The Reproposal retains and clarifies in subparagraph (ii)(A) that 
the bona fides of a pass-through swap may be

[[Page 96751]]

determined at the time of the transaction by the intermediary. The 
clarification is intended to reduce the burden on such intermediary of 
otherwise needing to confirm the continued bona fides of its 
counterparty over the life of the pass-through swap.
    In addition, the Reproposal retains, as proposed, application of 
the five-day rule to pass-through swap offsets in a physical-delivery 
contract. However, the Commission notes that under the Reproposal, an 
exchange listing a physical-delivery contract may recognize, on a case-
by-case basis, a pass-through swap offset (in addition to the offset of 
a swap used as a bona fide hedge), during the last five days of trading 
in a spot month, as a non-enumerated bona fide hedge pursuant to the 
process in reproposed Sec.  150.9.
    Further, the Reproposal retains the recognition of a pass-through 
swap itself that is offset, not just the offsetting position (and, 
thus, permitting the intermediary to exclude such pass-through swap 
from position limits, in addition to excluding the offsetting 
position).
    Regarding the request to broaden the pass-through swap offset 
provisions to accommodate secondary pass-through transactions among 
affiliates, the Commission declines in this Reproposal to broaden the 
pass-through swap offset exemption beyond the provisions in CEA section 
4a(c)(2)(B)(i). However, the Commission notes that a group of 
affiliates under common ownership is required to aggregate positions 
under the Commission's requirements in Sec.  150.4, absent an 
applicable aggregation exemption. In the circumstance of aggregation of 
positions, recognition of a secondary pass-through swap transaction 
would not be necessary among such an aggregated group, because the 
group is treated as one person for purposes of position limits.
v. Additional Requirements for Enumeration or Other Recognition
    Commission proposal: In 2013, the Commission proposed in 
subparagraph (2)(i)(D) of the definition of a bona fide hedging 
position, that, in addition to satisfying the general definition of a 
bona fide hedging position, a position would not be recognized as bona 
fide unless it was enumerated in paragraph (3), (4), or (5)(discussed 
below), or recognized as a pass-through swap offset or pass-through 
swap.\474\ In 2016, in response to comments on the 2013 proposed 
definition, the Commission proposed, in subparagraph (2)(i)(D)(2) of 
the definition, to also recognize as bona fide any position that has 
been otherwise recognized as a non-enumerated bona fide hedging 
position by either a designated contract market or a swap execution 
facility, each in accordance with Sec.  150.9(a), or by the 
Commission.\475\
---------------------------------------------------------------------------

    \474\ December 2013 Position Limits Proposal, 78 FR at 75711.
    \475\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38505.
---------------------------------------------------------------------------

    Comments received: Commenters objected to the requirement for a 
position to be specifically enumerated in order to be recognized as 
bona fide, noting that the enumerated requirement is not supported by 
the legislative history of the Dodd-Frank Act, conflicts with 
longstanding Commission practice and precedent, and may be overly 
restrictive due to the limited set of specific enumerated hedges.\476\ 
Other commenters recommended that the Commission expand the list of 
enumerated bona fide hedge positions, to encompass all transactions 
that reduce risks in the conduct and management of a commercial 
enterprise, such as anticipatory merchandising hedges and other general 
examples.\477\
---------------------------------------------------------------------------

    \476\ See, e.g., CL-CME-59718 at 47-53, and CL-BG Group-59656 at 
9.
    \477\ See, e.g., CL-FIA-59595 at 32, CL-FIA-60303 at 6, CL-API-
60939 at 3, CL-AGA-60943 at 4, CL-CMC-60950 at 6-9, CL-EEI-EPSA-
60925 at 13, and CL-FIA-60937 at 5 and 21.
---------------------------------------------------------------------------

    Commission Reproposal: In response to comments, the Reproposal 
retains, as proposed in 2016, a proposed definition that recognizes as 
bona fide, in addition to enumerated positions, any position that has 
been otherwise recognized as a non-enumerated bona fide hedging 
position by either a designated contract market or a swap execution 
facility, each in accordance with reproposed Sec.  150.9(a), or by the 
Commission. These provisions for recognition of non-enumerated 
positions are included in re-designated subparagraph (2)(iii)(C) of the 
reproposed definition of a bona fide hedging position.
    The Commission notes that it is not possible to list all positions 
that would meet the general definition of a bona fide hedging position. 
However, the Commission observes that the commenters' many general 
examples, which they recommended be included in the list of enumerated 
bona fide hedging positions, generally did not provide sufficient 
context or facts and circumstances to permit the Commission to evaluate 
whether recognition as a non-enumerated bona fide hedging position 
would be warranted. Context would be supplied, for instance, by the 
provision of the particular market participant's historical activities 
in the physical marketing channel and such participant's estimate, in 
good faith, of its reasonably expected activities to be taken in the 
physical marketing channel.
    In a clarifying change, the Commission notes that the Reproposal 
has re-designated the provisions proposed in subparagraph (2)(i)(D), in 
new subparagraph 2(iii), regarding the additional requirements for 
recognition of a position in a physical commodity contract as a bona 
fide hedging position. Concurrent with this re-designation, the 
Commission notes the Reproposal re-organizes, also for clarity, the 
application of the five-day rule to pass-through swaps and hedging 
swaps in subparagraph (2)(iii)(B), as discussed above.\478\
---------------------------------------------------------------------------

    \478\ However, as noted above, as reproposed, an exchange 
listing a physical-delivery contract may recognize, on a case-by-
case basis, a pass-through swap offset, or the offset of a swap used 
as a bona fide hedge, during the last five days of trading in a spot 
month, as a non-enumerated bona fide hedge pursuant to the process 
in reproposed Sec.  150.9.
---------------------------------------------------------------------------

3. Enumerated Hedging Positions
a. Proposed Enumerated Hedges
    In paragraph (3) of the proposed definition of a bona fide hedging 
position, the Commission proposed four enumerated hedging positions: 
(i) Hedges of inventory and cash commodity purchase contracts; (ii) 
hedges of cash commodity sales contracts; (iii) hedges of unfilled 
anticipated requirements; and (iv) hedges by agents.\479\
---------------------------------------------------------------------------

    \479\ December 2013 Position Limits Proposal, 78 FR at 75713.
---------------------------------------------------------------------------

    Comments received: Numerous commenters objected to the provision in 
proposed subparagraph (3)(iii)(A) that would have limited recognition 
of a hedge for unfilled anticipated requirements to one year for 
agricultural commodities. For example, commenters noted a need to hedge 
unfilled anticipated requirements for sugar for a time period longer 
than twelve months.\480\ Similarly, other commenters noted there may be 
a need to offset risks arising from investments in processing capacity 
in agricultural commodities for a period in excess of twelve 
months.\481\
---------------------------------------------------------------------------

    \480\ See, e.g., Ex Parte No-869, notes of Feb. 25, 2015 ex 
parte meeting with The Hershey Company, The J.M. Smucker Co., Louis 
Dreyfus Commodities, Noble Americans Corp., et al.
    \481\ See, e.g., CL-NGFA-60941 at 8.
---------------------------------------------------------------------------

    Other commenters recommended the Commission (1) remove the 
restriction that unfilled anticipated requirement hedges by a utility 
be ``required or encouraged to hedge by its public utility commission'' 
because most public utility commissions do not require or encourage 
such hedging, (2) expand the reach beyond utilities, by including

[[Page 96752]]

entities designated as providers of last resort who serve the same role 
as utilities, and (3) clarify the meaning of unfilled anticipated 
requirements, consistent with CFTC Staff Letter No. 12-07.\482\
---------------------------------------------------------------------------

    \482\ See, e.g., CL-Working Group-59693 at 27-28, CL-EEI-EPSA-
55953 at 19. CFTC Staff Letter No. 12-07 notes that unfilled 
anticipated requirements may be recognized as the basis of a bona 
fide hedging position or transaction under Commission Regulation 
151.5(a)(2)(ii)(C) when a commercial enterprise has entered into 
long-term, unfixed-price supply or requirements contracts as the 
price risk of such ``unfilled'' anticipated requirements is not 
offset by an unfixed price forward contract as the price risk 
remains with the commercial, even though the commercial enterprise 
has contractually assured a supply of the commodity. Instead, the 
price risk continues until the forward contract's price is fixed; 
once the price is fixed on the supply contract, the commercial 
enterprise no longer has price risk and the derivative position, to 
the extent the position is above an applicable speculative position 
limit, must be liquidated in an orderly manner in accordance with 
sound commercial practices.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal retains the enumerated 
exemptions as proposed, with two amendments. First, the Commission 
agrees with the commenters' request to remove the twelve month 
constraint on hedging unfilled anticipated requirements for 
agricultural commodities, as that provision appears no longer to be a 
necessary prudential constraint. Second, the Commission agrees with the 
commenters' request to remove the condition that a utility be 
``required or encouraged to hedge by its public utility commission.'' 
Accordingly, the condition that a utility be ``required or encouraged 
to hedge by its public utility commission'' is omitted from the 
reproposed definition. The Commission notes that under the Reproposal, 
a market participant, who is not a utility, may request that an 
exchange consider recognizing a non-enumerated exemption, as it is not 
clear who would be appropriately identified as a ``provider of last 
resort'' and under what circumstance such person would reasonably 
estimate its unfilled requirements.
    Consistent with CFTC Staff Letter No. 12-07, the Commission affirms 
its belief that unfilled anticipated requirements are those anticipated 
inputs that are estimated in good faith and that have not been filled. 
Under the Reproposal, an anticipated requirement may be filled, for 
example, by fixed-price purchase commitments, holdings of commodity 
inventory by the market participant, or unsold anticipated production 
of the market participant. However, an unfixed-price purchase 
commitment does not fill an anticipated requirement, in that the market 
participant's price risk to the input has not been fixed.
b. Proposed Other Enumerated Hedges Subject to the Five-Day Rule
    In paragraph (4) of the proposed definition of a bona fide hedging 
position, the Commission proposed four other enumerated hedging 
positions: (i) Hedges of unsold anticipated production; (ii) hedges of 
offsetting unfixed-price cash commodity sales and purchases; (iii) 
hedges of anticipated royalties; and (iv) hedges of services.\483\ The 
Commission proposed to apply the five-day rule to all such positions.
---------------------------------------------------------------------------

    \483\ December 2013 Position Limits Proposal, 78 FR at 75714.
---------------------------------------------------------------------------

    Comments received on the five-day rule: Numerous commenters 
requested that the five-day rule be removed from the Commission's other 
enumerated bona fide hedging positions, as that condition is not 
included in CEA section 4a(c).
    Commission Reproposal on the five-day rule: The Commission is 
retaining the prudential condition of the five-day rule in the other 
enumerated hedging positions. The Commission has a long history of 
applying the five-day rule, in its legacy agricultural federal position 
limits, to hedges of unsold anticipated production and hedges of 
offsetting unfixed-price cash commodity sales and purchases. However, 
as discussed in relation to reproposed Sec.  150.9, the Commission will 
permit an exchange, in effect, to remove the five-day rule on a case-
by-case basis in physical-delivery contracts, as a non-enumerated bona 
fide hedging position, by applying the exchange's experience and 
expertise in protecting its own physical-delivery market.
    Comments on other enumerated exemptions: As noted above, commenters 
recommended removing the twelve-month limitation on agricultural 
production, as unnecessarily short in comparison to the expected life 
of investment in production facilities.\484\
---------------------------------------------------------------------------

    \484\ See, e.g., CL-NGFA-60941 at 8.
---------------------------------------------------------------------------

    Commission Reproposal on other enumerated exemptions: The 
Reproposal removes the twelve-month limitations on unsold anticipated 
agricultural production and hedges of services for agricultural 
commodities. As noted above, that provision appears no longer to be a 
necessary prudential constraint. Otherwise, the Reproposal retains the 
other enumerated exemptions, as proposed.
c. Proposed Cross-Commodity Hedges
    In paragraph (5) of the proposed definition of a bona fide hedging 
position, the Commission proposed to recognize as bona fide cross-
commodity hedges.\485\ Cross-commodity hedging would be conditioned on: 
(i) The fluctuations in value of the position in the commodity derivate 
contract (or the commodity underlying the commodity derivative 
contract) being 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. 
The Commission proposed a non-exclusive safe harbor for cross-commodity 
hedges that would have two factors: A qualitative factor; and a 
quantitative factor.
---------------------------------------------------------------------------

    \485\ December 2013 Position Limits Proposal, 78 FR at 75716.
---------------------------------------------------------------------------

    Comments on cross-commodity hedges: Numerous commenters requested 
the Commission withdraw the safe harbor quantitative ``test,'' and 
noted such test is impracticable where there is no relevant cash market 
price series for the commodity being hedged.\486\ Some commenters 
requested the Commission retain a qualitative approach to assessing 
whether the fluctuations in value of the position in the commodity 
derivate contract are substantially related to the fluctuations in 
value of the actual or anticipated cash position.
---------------------------------------------------------------------------

    \486\ See, e.g., CL-ICE-60929 at 16, CL-NCGA-NGSA-60919 at 6-7, 
CL-NCFC-60930 at 2-3, CL-API-60939 at 2, CL-NGFA-60941 at 8, CL-EEI-
EPSA-60925 at 10, and CL-IECAssn-60949 at 5-7.
---------------------------------------------------------------------------

    One commenter urged the Commission to clarify that market 
participants need not treat as enumerated cross-commodity hedges 
strategies where the cash position being hedged is the same cash 
commodity as the commodity underlying the futures contract even if the 
cash commodity is not deliverable against the contract. The commenter 
believes that this clarification would verify that non-deliverable 
grades of certain commodities could be deemed as the same cash 
commodity and thus not be deemed a cross-commodity hedge subject to the 
five-day rule.\487\
---------------------------------------------------------------------------

    \487\ CL-CME-60926 at 6.
---------------------------------------------------------------------------

    Commenters requested the Commission not apply a five-day rule to 
cross-commodity hedges or, alternatively, permit exchanges to determine 
the appropriate facts and circumstances where a market participant may 
be permitted to hold such positions into the spot month,

[[Page 96753]]

noting that a cross-commodity hedge in a physical-delivery contract may 
be the best hedge of its commercial exposure.\488\
---------------------------------------------------------------------------

    \488\ See, e.g., CL-FIA-60937 at 22, CL-CCI-60935 at 8-9.
---------------------------------------------------------------------------

    Commission Reproposal: The Reproposal retains the cross-commodity 
hedge provision in paragraph (5) of the definition of a bona fide 
hedging position as proposed. However, for the reasons requested by 
commenters and because of confusion regarding application of a safe 
harbor, the Reproposal does not include the safe harbor quantitative 
test. If questions arise regarding the bona fides of a particular 
cross-commodity hedge, it would, as reproposed, be reviewed based on 
facts and circumstances, including a market participant's qualitative 
review of a particular cross-commodity hedge.
    The Reproposal retains the five-day rule, because a market 
participant who is hedging the price risk of a non-deliverable cash 
commodity has no need to make or take delivery on a physical-delivery 
contract. However, the Commission notes that an exchange may consider, 
on a case-by-case basis in physical-delivery contracts, whether to 
recognize such cross-commodity positions as non-enumerated bona fide 
hedges during the shorter of the last five days of trading or the time 
period for the spot month, by applying the exchange's experience and 
expertise in protecting its own physical-delivery market, under the 
process of Sec.  150.9.
4. Commodity Trade Options Deemed Cash Equivalents
    Commission proposal: The Commission requested comment as to whether 
the Commission should use its exemptive authority under CEA section 
4a(a)(7) to provide that the offeree of a commodity option 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 
exemption.\489\ Alternatively, the Commission, noting that forward 
contracts may serve as the basis of a bona fide hedging position 
exemption, proposed that it may similarly include trade options as one 
of the enumerated bona fide hedging exemptions. The Commission noted, 
for example, such an exemption could be similar to the enumerated 
exemption for the offset of the risk of a fixed-price forward contract 
with a short futures position.
---------------------------------------------------------------------------

    \489\ December 2013 Position Limits Proposal, 78 FR at 75711. 
The Commission also requested comment on whether it would be 
appropriate to exclude commodity trade options from the definition 
of referenced contract. As discussed above, the Commission has 
determined to exclude trade options from the definition of 
referenced contract. Previous to this reproposed rule, the 
Commission observed that federal position limits should not apply to 
trade options. 81 FR 14966 at 14971 (Mar. 21, 2016).
---------------------------------------------------------------------------

    Comments on trade option exemptions: Commenters requested that the 
Commission clarify that hedges of commodity trade options be recognized 
as bona fide hedges, as would be available for other cash 
positions.\490\
---------------------------------------------------------------------------

    \490\ See, e.g., CL-EEI-EPSA-60925 at 15.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission agrees with the commenters 
and has determined to address the request that commodity trade options 
should be recognized as the basis for a bona fide hedging position, as 
would be available for other cash positions. The reproposed definition 
of a bona fide hedging position adds new paragraph (6), specifying that 
a commodity trade option meeting the requirements of Sec.  32.3 may be 
deemed a cash commodity purchase or sales contract, as the case may be, 
provided that such option is adjusted on a futures-equivalent basis. 
The reproposed definition also provides non-exclusive guidance on 
making futures-equivalent adjustments to a commodity trade option. For 
example, the guidance provides that the holder of a trade option, who 
has the right, but not the obligation, to call the commodity at a fixed 
price, may deem that trade option, converted on a futures-equivalent 
basis, to be a position in a cash commodity purchase contract, for 
purposes of showing that the offset of such cash commodity purchase 
contract is a bona fide hedging position.
    Because the price risk of an option, including a trade option with 
a fixed strike price, should be measured on a futures-equivalent 
basis,\491\ the Commission has determined that under the reproposed 
definition, a trade option should be deemed equivalent to a cash 
commodity purchase or sales contract only if adjusted on a futures-
equivalent basis. The Commission notes that it may not be possible to 
compute a futures-equivalent basis for a trade option that does not 
have a fixed strike price. Thus, under the reproposed definition, a 
market participant may not use a trade option as a basis for a bona 
fide hedging position until a fixed strike price reasonably may be 
determined.
---------------------------------------------------------------------------

    \491\ See the discussion of the definition of futures-equivalent 
in reproposed Sec.  150.1, above.
---------------------------------------------------------------------------

5. App. C to Part 150--Examples of Bona Fide Hedging Positions for 
Physical Commodities
    Commission proposal: The Commission proposed a non-exhaustive list 
of examples meeting the requirements of the proposed definition of a 
bona fide hedging position, noting that market participants could see 
whether their practices fall within the list.\492\
---------------------------------------------------------------------------

    \492\ December 2013 Position Limits Proposal, 78 FR at 75739, 
75828.
---------------------------------------------------------------------------

    Comments on examples: Comments regarding the processing hedge 
example number 5 of proposed Appendix C to part 150 are discussed 
above. Another commenter requested the Commission affirm that 
aggregation is required pursuant to an express or implied agreement 
when that agreement is to trade referenced contracts, and that 
aggregation is not triggered by the condition in example number 7 of 
proposed Appendix C to part 150, where a Sovereign grants an option to 
a farmer at no cost, conditioned on the farmer entering into a fixed-
price forward sale.\493\
---------------------------------------------------------------------------

    \493\ CL-FIA-59595 at 35, CL-FIA-59566 at 3-7, citing December 
2013 Position Limits Proposal, 78 FR at 75837.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission agrees with the commenter 
that aggregation is required pursuant to an express or implied 
agreement when that agreement is to trade referenced contracts. 
Proposed example number 7 was focused on recognizing the legitimate 
public policy objectives of a sovereign furthering the development of a 
cash spot and forward market in agricultural commodities. To avoid 
confusion regarding the aggregation policy under rule 150.4, in the 
Reproposal, the Commission has revised example number 7, and has 
provided an interpretation that a farmer's synthetic position of a long 
put option may be deemed a pass-through swap, for purposes of a 
sovereign who has granted a cash-settled call option at no cost to such 
farmer in furtherance of a public policy objective to induce such 
farmer to sell production in the cash market. The Commission notes the 
combination of a farmer's forward sale agreement and a granted call 
option is approximately equivalent to a purchased put option. A farmer 
anticipating production or holding inventory may use such a long 
position in a put option as a bona fide hedging position.
    The Reproposal also includes a number of conforming amendments and 
corrections of typographical errors. Specifically, it conforms example 
number 4 regarding a utility to the

[[Page 96754]]

changes to paragraph (3)(iii)(B) of the bona fide hedging position 
definition, as discussed above. The references in the examples to a 12-
month restriction on hedges of agricultural commodities have also been 
removed because the Reproposal eliminates those proposed restrictions 
from the reproposed enumerated bona fide hedging positions, as 
discussed above. In addition, based on discussions with cotton 
merchants, example number 6, regarding agent hedging, has been amended 
from a generic example to a specific illustration of the hedge of 
cotton equities purchased by a cotton merchant from a producer, under 
the USDA loan program. Finally, the Reproposal corrects typographical 
errors in example number 12, regarding the hedge of copper inventory 
and the cross-hedge of copper wire inventory, to correctly reflect the 
25,000 pound unit of trading in the Copper core referenced futures 
contract, and deletes the unnecessary reference to the price 
relationship between the nearby and deferred Copper futures contracts.

B. Sec.  150.2--Position Limits

1. Setting Levels of Spot Month Limits
    In the December 2013 Position Limits Proposal, the Commission 
proposed to establish speculative position limits on 28 core referenced 
futures contracts in physical commodities.\494\
---------------------------------------------------------------------------

    \494\ See generally December 2013 Position Limits Proposal, 78 
FR at 75725. The 28 core referenced futures contracts for which 
initial limit levels were proposed are: Chicago Board of Trade 
(``CBOT'') 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 
(``NYMEX'') Palladium, Platinum, Light Sweet Crude Oil, NY Harbor 
ULSD, RBOB Gasoline and Henry Hub Natural Gas.
---------------------------------------------------------------------------

    As stated in the December 2013 Position Limits Proposal, the 
Commission proposed 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 believed this 
approach to be consistent with the regulatory objectives of the Dodd-
Frank Act amendments to the CEA and many market participants are 
already used to those levels.\495\ The Commission also stated that it 
was considering setting initial spot month limits based on estimated 
deliverable supplies submitted by CME Group Inc. (``CME'') in 
2013.\496\ The Commission suggested that it might use the exchange's 
estimated deliverable supplies if it could verify that they are 
reasonable.\497\ The Commission further stated that it was considering 
another alternative of using, in the Commission's discretion, the 
recommended level, if any, of the spot month limit as submitted by each 
DCM listing a core referenced futures contract (if lower than 25 
percent of estimated deliverable supply).\498\
---------------------------------------------------------------------------

    \495\ December 2013 Position Limits Proposal, 78 FR at 75727. 
Several commenters supported establishing the initial levels of spot 
month speculative position limit levels at the levels then 
established by DCMs and listed in Appendix D to part 150, December 
2013 Position Limits Proposal, 78 FR at 75739-40 (generally stating 
that the then current levels are high enough and raising them could 
cause problems with contract performance. E.g., CL-WGC-59558 at 1-2; 
CL-Sen. Levin-59637 at 7; CL-AFBF-59730 at 3; CL-NGFA-59956 at 2; 
CL-NGFA-60312 at 3; CL-NCBA-59624 at 3; CL-Bakers-59691 at 1. 
Several commenters expressed the view that DCMs are best able to 
determine appropriate spot month limits and the Commission should 
defer to their expertise. E.g., CL-NCBA-59624 at 3; CL-Cactus-59660 
at 3; CL-TCFA-59680 at 3; CL-NGFA-59610 at 2; CL-MGEX-59635 at 2; 
CL-MGEX-59932 at 2; CL-MGEX-60380 at 1; CL-ICE-60311 at 1; CL-
Thornton-59729 at 1.
    \496\ December 2013 Position Limits Proposal, 78 FR at 75727. 
The CME July 1, 2013 deliverable supply estimates are available on 
the Commission's Web site at http://www.cftc.gov/idc/groups/public/@swaps/documents/file/cmegroupdeliverable070113.pdf; see also 
December 2013 Position Limits Proposal, 78 FR at 75727, n. 406. 
Several commenters supported using the alternative level of spot-
month position limits based on CME's deliverable supply estimates as 
listed in Table 9 of the December 2013 Position Limits Proposal, 
generally stating that the alternative estimates are more up to date 
than the deliverable supply estimates underlying the spot month 
speculative position limits currently established by the DCMs, and 
therefore more appropriate for use in setting federal limits. E.g., 
CL-FIA-59595 at 3, 8; CL-EEI-EPSA-59602 at 9; CL-CMC-59634 at 14; 
CL-Olam-59658 at 1, 3; CL-BG Group-59656 at 6; CL-COPE-59662 at 21; 
CL-Calpine-59663 at 3; CL-NGSA-59673 at 37; CL-NGSA-59900 at 11; CL-
Working Group-59693 at 58-59; CL-CME-60406 at 2-3 and App. A; CL-
CME-60307 at 4; CL-CME-59718 at 3, 20-23; CL-Sempra-59926 at 3-4; 
CL-BG Group-59937 at 2-3; CL-EPSA-59953 at 2-3; CL-ICE-59966 at 5-6; 
CL-ICE-59962 at 5; CL-US Dairy-59597 at 4; CL-Rice Dairy-59601 at 1; 
CL-NMPF-59652 at 4; CL-FCS-59675 at 5.
    \497\ December 2013 Position Limits Proposal, 78 FR at 75727. 
The U.S. Chamber of Commerce's Center for Capital Markets 
Competitiveness commented that the CFTC must update estimates of 
deliverable supply, rather than relying on existing exchange-set 
spot month limit levels. CL-Chamber-59684 at 6-7.
    \498\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------

2. Verification of Estimated Deliverable Supply
    The Commission received comment letters from CME, Intercontinental 
Exchange (``ICE'') and Minneapolis Grain Exchange, Inc. (``MGEX'') 
containing estimates of deliverable supply. CME submitted updated 
estimates of deliverable supply for CBOT Corn (C), Oats (O), Rough Rice 
(RR), Soybeans (S), Soybean Meal (SM), Soybean Oil (SO), Wheat (W), and 
KC HRW Wheat (KW); COMEX Gold (GC), Silver (SI), Platinum (PL), 
Palladium (PA), and Copper (HG); NYMEX Natural Gas (NG), Light Sweet 
Crude Oil (CL), NY Harbor ULSD (HO), and RBOB Gasoline (RB).\499\ ICE 
submitted estimates of deliverable supply for Cocoa (CC), Coffee C 
(KC), Cotton No. 2 (CT), FCOJ-A (OJ), Sugar No. 11 (SB), and Sugar No. 
16 (SF).\500\ MGEX submitted an estimate of deliverable supply for Hard 
Red Spring Wheat (MWE).\501\
---------------------------------------------------------------------------

    \499\ CL-CME-61007 at 5. See also CL-CME-61011; CL-CME-61012; 
CL-CME-60785 (earlier submission of deliverable supply estimates); 
CL-CME-60435 (earlier submission of deliverable supply estimates); 
CL-CME-60406 (earlier submission of deliverable supply estimates). 
The Commission did not receive an estimate for Live Cattle (LC).
    \500\ CL-ICE-60786. ICE also submitted an estimate for Henry Hub 
natural gas. CL-ICE-60684.
    \501\ CL-MGEX-61038 at Exhibit A; see also CL-MGEX-60938 at 2 
(earlier submission of deliverable supply estimate).
---------------------------------------------------------------------------

    The Commission is verifying that the estimates for C, O, RR, S, SM, 
SO, W, and KW submitted by CME are reasonable. The Commission is 
verifying that the estimate for MWE submitted by MGEX is reasonable. 
The Commission is verifying that the estimates for CC, KC, CT, OJ, SB, 
and SF submitted by ICE are reasonable. The Commission is verifying 
that the estimates for GC, SI, PL, PA, and HG submitted by CME are 
reasonable. Finally, the Commission is verifying that the estimates for 
NG, CL, HO, and RB submitted by CME are reasonable. In verifying that 
all of these estimates of deliverable supply are reasonable, Commission 
staff reviewed the exchange submissions and conducted its own research. 
Commission staff reviewed the data submitted, confirmed that the data 
submitted accurately reflected the source data, and considered whether 
the data sources were authoritative. Commission staff considered 
whether the assumptions made by the exchanges in the submissions were 
acceptable, or whether alternative assumptions would lead to similar 
results. In response to Commission staff questions about the exchange 
submissions, the Commission received revised estimates from exchanges. 
In some cases, Commission staff conducted trade source interviews. 
Commission staff replicated the calculations included in the 
submissions.

[[Page 96755]]

    In verifying the exchange estimates of deliverable supply, the 
Commission is not endorsing any particular methodology for estimating 
deliverable supply beyond what is already set forth in Appendix C to 
part 38 of the Commission's regulations.\502\ As circumstances change 
over time, exchanges may need to adjust the methodology, assumptions 
and allowances that they use to estimate deliverable supply to reflect 
then current market conditions and other relevant factors. The 
Commission anticipates that it will base initial spot-month position 
limits on the current verified exchange estimates as and to the extent 
described below, unless an exchange provides additional updates during 
the Reproposal comment period that the Commission can verify as 
reasonable.
---------------------------------------------------------------------------

    \502\ 17 CFR part 38, Appendix C.
---------------------------------------------------------------------------

3. Single-Month and All-Months-Combined Limits
    Commission Proposal: In the December 2013 Position Limits Proposal, 
the Commission proposed to set the level of single-month and all-
months-combined limits (collectively, non-spot month limits) based on 
total open interest for all referenced contracts in a commodity.\503\ 
The Commission also proposed to estimate average open interest 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.\504\ For setting the levels of 
initial non-spot month limits, the Commission proposed 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.\505\ The Commission 
explained that it had reviewed preliminary data submitted to it under 
part 20, but preliminarily decided not to use it for purposes of 
setting the initial levels of single-month and all-months-combined 
position limits because the data prior to January 2013 was less 
reliable than data submitted later.\506\ The Commission noted that it 
was considering using part 20 data, should it determine such data to be 
reliable, in order to establish higher initial levels in a final 
rule.\507\
---------------------------------------------------------------------------

    \503\ December 2013 Position Limits Proposal, 78 FR at 75729. 
The Commission currently sets the single-month and all-months-
combined limits based on total open interest for a particular 
commodity futures contract and options on that futures contract, on 
a futures-equivalent basis.
    \504\ December 2013 Position Limits Proposal, 78 FR at 75730.
    \505\ Id.
    \506\ December 2013 Position Limits Proposal, 78 FR at 75733. 
Thus, the initial levels as proposed in the December 2013 Position 
Limits Proposal represented the lower bounds for the initial levels 
that the Commission would establish in final rules.
    \507\ December 2013 Position Limits Proposal, 78 FR at 75734. 
The Commission also stated that it was considering using data from 
swap data repositories, as practicable. Id. The Commission has 
determined that it is not yet practicable to use data from swap data 
repositories.
---------------------------------------------------------------------------

    In the June 2016 Supplemental Proposal, the Commission noted that, 
since the December 2013 Position Limits Proposal, the Commission worked 
with industry to improve the quality of swap position data reported to 
the Commission under part 20.\508\ The Commission also noted that, in 
light of the improved quality of such swap position data reporting, the 
Commission intended to rely on part 20 swap position data, given 
adjustments for obvious errors (e.g., data reported based on a unit of 
measure, such as an ounce, rather than a futures-equivalent number of 
contracts), to establish initial levels of federal non-spot month 
limits on futures and swaps in a final rule.
---------------------------------------------------------------------------

    \508\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38459.
---------------------------------------------------------------------------

    Comments Received: Commenters requested that the Commission delay 
the imposition of hard non-spot month limits until it has collected and 
evaluated complete open interest data.\509\
---------------------------------------------------------------------------

    \509\ E.g., CL-FIA-59595 at 3, 14; CL-EEI-EPSA-59602 at 10-11; 
CL-MFA-60385 at 4-7; CL-MFA-59606 at 22-23; CL-ISDA/SIFMA-59611 at 
28-29; CL-CMC-59634 at 13; CL-Olam-59658 at 3; CL-COPE-59662 at 22; 
CL-Calpine-59663 at 4; CL-CCMC-59684 at 4-5; CL-NFP-59690 at 20; CL-
Just Energy-59692 at 4; CL-Working Group-59693 at 62.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined that certain 
part 20 large trader position data, after processing and editing by 
Commission staff as described below,\510\ is reliable. The Commission 
has determined to repropose the initial non-spot month position limit 
levels based on the combination of such adjusted part 20 swaps data and 
data on open interest in physical commodity futures and options from 
the relevant exchanges, as described below. The Commission is using two 
12-month periods of data, covering a total of 24 months, rather than 
two calendar years of data, as is practicable, in reproposing the 
initial non-spot month position limit levels.
---------------------------------------------------------------------------

    \510\ Where relevant and practicable, Commission staff consulted 
and followed the Office of Management and Budget Standards and 
Guidelines for Statistical Surveys, September 2006, available at 
https://www.whitehouse.gov/sites/default/files/omb/inforeg/statpolicy/standards_stat_surveys.pdf.
---------------------------------------------------------------------------

Data Editing
    Commission staff analyzed and evaluated the quality of part 20 data 
for the period from July 1, 2014 through June 30, 2015 (``Year 1''), 
and the period from July 1, 2015 through June 30, 2016 (``Year 
2'').\511\ The Commission used open contracts as reported for each 
business day in the time periods, rather than month-end open contracts, 
primarily because it lessens the impact of missing data. Averaging 
generally also smooths over errors in reporting when there is both 
under- and over-reporting, both of which the Commission observed in the 
part 20 data. By calculating a daily average for each month for each 
reporting entity,\512\ one calculates a reporting entity's open 
contracts on a ``representative day'' for each month. The Commission 
then summed the open contracts for each reporting entity on this 
representative day, to determine the average open interest for a 
particular month.\513\
---------------------------------------------------------------------------

    \511\ There is no part 20 swaps data for Sugar No. 16 (SF).
    \512\ A reporting entity is a clearing member or a swap dealer 
required to report large trader position data for physical commodity 
swaps, as defined in 17 CFR 20.1.
    \513\ Because there may be missing data, using open contracts 
for each business day in the time period that a reporting entity 
submits a report may overestimate open interest, compared to taking 
a straight average of the open contracts over all business days in 
the time period. However, the Commission believes it is reasonable 
to assume that the open position in swaps for a reporting entity 
failing to report for a particular business day is more accurately 
reflected by that reporting entity's average reported open swaps for 
the month, rather than zero. Hence, in choosing this approach, the 
Commission chooses to repropose higher non-spot month limit levels.
---------------------------------------------------------------------------

    First, for each of Year 1 and Year 2, Commission staff identified 
all reported positions in swaps that do not satisfy the definition of 
referenced contract as proposed in the December 2013 Position Limits 
Proposal \514\ and removed those positions from the data set. For 
example, swaps settled using the price of the LME Gold PM Fix contract 
do not meet the definition of referenced contract for the gold core 
referenced futures contract (GC) but positions reported based on these 
types of swaps represented 14% of records submitted

[[Page 96756]]

under part 20 by reporting entities for gold swaps. The percentage of 
average daily open interest excluded from the adjusted part 20 swaps 
data resulting from this deletion are set forth in Table 1 below. Other 
adjustments to the data are described below. Because not all 
commodities required exclusion of non-referenced contracts, the 
Commission reports only the 11 commodities that required this type of 
exclusion.
---------------------------------------------------------------------------

    \514\ This adjustment may have removed fewer than all of the 
reported positions in swaps that do not satisfy the definition of 
referenced contract as adopted, and therefore may have resulted in a 
higher level of open interest (which would result in a higher limit 
level). For instance, swaps reported under part 20 include trade 
options, and the Commission is reproposing an amended definition of 
``referenced contract'' to expressly exclude trade options. See the 
discussion of the defined term ``referenced contract'' under Sec.  
150.1, above. Because part 20 does not require trade options to be 
identified, the Commission could not exclude records of trade 
options from open interest or position size.

 Table III-B-1--Percent of Adjusted Average Daily Open Interest Excluded
          as Not Meeting the Definition of Referenced Contract
------------------------------------------------------------------------
                                          Year 1 percent  Year 2 percent
                                            of excluded     of excluded
    Core referenced futures contract       adjusted open   adjusted open
                                           interest (%)    interest (%)
------------------------------------------------------------------------
Cotton No. 2 (CT).......................            0.22            0.00
Sugar No. 11 (SB).......................            0.05            0.00
Gold (GC)...............................           42.59            0.00
Silver (SI).............................           48.10            0.00
Platinum (PL)...........................            9.12            5.36
Palladium (PA)..........................           56.87            6.87
Copper (HG).............................           37.58            0.25
Natural Gas (NG)........................           12.49           12.52
Light Sweet Crude (CL)..................            3.60            0.83
New York Harbor ULSD (HO)...............            0.96            1.74
RBOB Gasoline (RB)......................            1.34            1.30
------------------------------------------------------------------------

    Second, Commission staff checked and edited the remaining data to 
mitigate certain types of errors. Commission staff identified three 
general types of reporting errors and made edits to adjust the data 
for:
    (i) Positions that were clearly reported in units of a commodity 
when they should have been reported in the number of gross futures-
equivalent contracts. For example, a position in gold (GC) with a 
futures contract unit of trading of 100 ounces might be reported as 
480,000 contracts, when other available information, reasonable 
assumptions, consultation with reporting entities and/or Commission 
expertise indicate that the position should have been reported as 4,800 
contracts (that is, 480,000 ounces divided by 100 ounces per contract). 
Commission staff corrected such reported swaps position data and 
included the corrected data in the data set.
    (ii) Positions that are not obviously reported in units of a 
commodity but appear to be off by one or more decimal places (e.g., a 
position is overstated, but not by a multiple of the contract's unit of 
trading). For example, a position in COMEX gold is reported as 100,000 
and the notional value might be reported as $13,000,000, when the price 
of gold is $1300 and the COMEX gold contract is for 100 ounces, 
indicating that the position should have been reported as 100 futures-
equivalent contracts. Staff corrected such reported swaps position data 
and included the corrected data in the data set.
    (iii) Positions reported multiple times per day or otherwise 
extremely different from surrounding days' reported open interest. In 
some cases, reporting entities submitted the same report using 
different reporting identifiers, for the same day. In other cases, a 
position would inexplicably spike for one day, to a multiple of other 
days' reported open interest. When Commission staff checked with the 
reporting entity, the reporting entity confirmed that the reports were, 
indeed, erroneous. Commission staff did not include such incorrectly 
reported duplicative swaps position data in its analysis. In other 
cases, positions that were clearly reported incorrectly, but for which 
Commission staff could discern neither a reason nor a reasonable 
adjustment, were not included. For example, Commission staff deleted 
all swap position data reports submitted by one swap dealer from its 
analysis because the reports were inexplicably anomalous in light of 
other available information, reasonable assumptions and Commission 
expertise. As another example, one reporting entity reported extremely 
large values for only certain types of positions. After speaking with 
the reporting entity, Commission staff determined that there was no 
systematic adjustment to be made, but that the actual positions were, 
in fact, small. Hence, Commission staff did not include such reported 
swaps position data in its analysis.
    The number of principal records edited, resulting from the edits 
relating to the three types of edits to erroneous position reports 
noted above, is set forth in Table 2 below. A principal record is a 
report of a swaps open position where the reporting entity is a 
principal to the swap, as opposed to a counterparty record.

    Table III-B-2--Percentage of Principal Records Adjusted by Edit Type and Underlying Commodity, Referenced
                                                 Contracts Only
----------------------------------------------------------------------------------------------------------------
                                                                                     Number of       Number of
                                                                                      records         records
                                                           Edit type               adjusted year   adjusted year
                                                                                       1 (%)           2 (%)
----------------------------------------------------------------------------------------------------------------
Corn (C)....................................  (i)...............................            0.00          0.0001
                                              (iii).............................            0.00            0.66
Oats (O)....................................  (iii).............................            0.00            0.20
Rough Rice (RR).............................  (iii).............................            0.38            0.00

[[Page 96757]]

 
Soybeans (S)................................  (i)...............................            0.00            0.03
                                              (iii).............................            2.38            1.46
Soybean Meal (SM)...........................  (iii).............................            0.00            0.41
Soybean Oil (SO)............................  (iii).............................            9.15            4.93
Wheat (W)...................................  (i)...............................            0.00            0.01
                                              (iii).............................            1.77            0.71
Wheat (MWE).................................  (iii).............................           0.043           0.002
Wheat (KW)..................................  (iii).............................            1.34            0.68
Cocoa (CC)..................................  (i)...............................           0.001          0.0005
                                              (iii).............................            1.79            0.25
Coffee C (KC)...............................  (i)...............................            0.00            0.01
                                              (iii).............................            5.33            0.60
Cotton No. 2 (CT)...........................  (iii).............................           16.76            5.59
FCOJ-A (OJ).................................  (iii).............................           13.30           17.43
Sugar No. 11 (SB)...........................  (i)...............................            0.00          0.0009
                                              (iii).............................            1.21            0.54
Live Cattle (LC)............................  (i)...............................           0.002            0.00
                                              (iii).............................           45.65           15.50
Gold (GC)...................................  (i)...............................            1.99            0.02
                                              (ii)..............................            0.32            0.00
                                              (iii).............................           91.45           89.04
Silver (SI).................................  (i)...............................            3.01            0.19
                                              (iii).............................           93.08           89.52
Platinum (PL)...............................  (i)...............................            2.75            0.01
                                              (ii)..............................            0.33            0.01
                                              (iii).............................           23.51           21.11
Palladium (PA)..............................  (i)...............................            0.62            0.00
                                              (ii)..............................            0.30            0.00
                                              (iii).............................           32.97           22.29
Copper (HG).................................  (i)...............................            4.94            0.48
                                              (iii).............................           20.80           16.82
Natural Gas (NG)............................  (i)...............................            0.01            1.03
                                              (iii).............................            7.68            3.80
Light Sweet Crude (CL)......................  (i)...............................           0.001           0.003
                                              (iii).............................            9.53            8.43
New York Harbor ULSD (HO)...................  (i)...............................            0.01          0.0006
                                              (iii).............................           29.58            4.33
RBOB Gasoline (RB)..........................  (i)...............................            0.22            0.60
                                              (iii).............................           30.46           24.62
----------------------------------------------------------------------------------------------------------------

    Some records also appeared to contain errors attributable to other 
factors that Commission staff could detect and for which Commission 
staff can correct. For example, there were instances where the 
reporting entity misreported the ownership of the position, i.e., 
principal vs. counterparty. Commission staff corrected the misreported 
ownership data and included the corrected data in the data set. Such 
corrections are important to ensure that data is not double counted. In 
Year 1, eight reporting entities required an adjustment to the reported 
position ownership information. In Year 2, five reporting entities 
required an adjustment to the reported position ownership information.
    Third, in the part 20 large trader swap data, staff checked and 
adjusted the average daily open interest for positions resulting from 
inter-affiliate transactions and duplicative reporting of positions due 
to transactions between reporting entities. For an example of 
duplicative reporting by reporting entities (which is reporting in 
terms of futures-equivalent contracts), assume Swap Dealer A and Swap 
Dealer B have an open swap equivalent to 50 futures contracts, Swap 
Dealer A also has a swap equivalent to 25 futures contracts with End 
User X, and Swap Dealer B has a swap equivalent to 200 futures 
contracts with End User Y. The total open swaps in this scenario is 
equivalent to 275 futures contracts. However, Swap Dealer A will report 
a gross position of 75 contracts and Swap Dealer B will report a gross 
position of 250 contracts. Simply summing these two gross positions 
would overestimate the open swaps as 325 contracts--50 contracts more 
than there actually should be. For this reason, Commission staff used 
the counterparty accounts of each reporting entity to flag counterparty 
accounts of other reporting entities. Commission staff then used the 
daily average of the gross positions for these accounts to reduce the 
amount of average daily open swaps. Similarly, Commission staff flagged 
the counterparty accounts for entities that are affiliates of each 
reporting entity in order to adjust the amount of average daily open 
swaps. These adjustments to the Year 1 data are reflected in Table 3 
below, and the corresponding adjustments to the Year 2 data are 
reflected in Table 4 below.

[[Page 96758]]



     Table III-B-3--Average Daily Open Interest in Year 1 Adjusted for Duplicate and Affiliate Reporting by
                                              Underlying Commodity
----------------------------------------------------------------------------------------------------------------
                                                                                               Average adjusted
                                                                           Average adjusted       daily open
                                                       Average  adjusted      daily open      interest reporting
                  Paired swaps for                        daily  open     interest reporting         entity
                                                           interest              entity         duplication  &
                                                                              duplication         affiliates
                                                                                removed             removed
----------------------------------------------------------------------------------------------------------------
Corn (C)............................................             655,492             522,566             359,715
Oats (O)............................................                 684                 667                 646
Rough Rice (RR).....................................                 916                 640                 362
Soybeans (S)........................................             157,017             139,608             109,858
Soybean Meal (SM)...................................             125,444              99,795              71,887
Soybean Oil (SO)....................................              74,831              64,854              55,265
Wheat (W)...........................................             272,839             229,453             162,999
Wheat (MGE).........................................               3,430               3,021               1,944
Wheat (KW)..........................................              14,918              14,213               9,436
Cocoa (CC)..........................................              15,207              13,792              11,257
Coffee C (KC).......................................              31,540              28,539              24,164
Cotton No. 2 (CT)...................................              51,442              42,806              35,102
FCOG-A (OJ).........................................                 160                 142                 121
Sugar No. 11 (SB)...................................             279,355             256,887             211,994
Live Cattle (LC)....................................              46,361              36,999              23,626
Gold (GC)...........................................              79,778              64,363              47,727
Silver (SI).........................................              19,373              14,678               9,867
Platinum (PL).......................................              25,145              24,530              21,566
Palladium (PA)......................................               2,044               1,939               1,929
Copper (HG).........................................              31,143              28,718              22,859
Natural Gas (NG)....................................           4,100,419           3,603,368           2,866,128
Light Sweet Crude (CL)..............................           2,039,963           1,875,660           1,587,450
NY Harbor ULSD (HO).................................             178,978             161,617             138,360
RBOB Gasoline (RB)..................................             103,586             100,021              81,822
----------------------------------------------------------------------------------------------------------------


     Table III-B-4--Average Daily Open Interest in Year 2 Adjusted for Duplicate and Affiliate Reporting by
                                              Underlying Commodity
----------------------------------------------------------------------------------------------------------------
                                                                                               Average adjusted
                                                                           Average adjusted       daily open
                                                       Average  adjusted      daily open      interest reporting
                  Paired swaps for                        daily  open     interest reporting         entity
                                                           interest              entity         duplication  &
                                                                              duplication         affiliates
                                                                                removed             removed
----------------------------------------------------------------------------------------------------------------
Corn (C)............................................           1,265,639             960,088             641,014
Oats (O)............................................               1,029                 858                 480
Rough Rice (RR).....................................                 396                 250                   4
Soybeans (S)........................................             453,419             351,279             235,679
Soybean Meal (SM)...................................             282,123             209,023             134,399
Soybean Oil (SO)....................................             282,207             198,744             125,106
Wheat (W)...........................................             437,711             334,136             222,420
Wheat (MWE).........................................              15,167               9,511               3,079
Wheat (KW)..........................................              65,533              47,722              29,563
Cocoa (CC)..........................................             141,526             100,564              56,853
Coffee C (KC).......................................              97,128              74,739              51,846
Cotton No. 2 (CT)...................................             137,295              99,496              60,477
FCOJ-A (OJ).........................................               1,137                 640                   5
Sugar No. 11 (SB)...................................             717,967             558,423             382,816
Live Cattle (LC)....................................             102,131              77,783              52,330
Gold (GC)...........................................              62,804              50,054              36,029
Silver (SI).........................................               9,306               6,207               3,510
Platinum (PL).......................................               2,575               2,507               2,285
Palladium (PA)......................................                 889                 857                 823
Copper (HG).........................................              82,479              65,187              47,365
Natural Gas (NG)....................................           4,239,581           3,828,739           3,331,141
Light Sweet Crude (CL)..............................           2,318,074           2,050,270           1,744,137
NY Harbor ULSD (HO).................................             170,316             117,004              65,721
RBOB Gasoline (RB)..................................             102,094              66,560              30,477
----------------------------------------------------------------------------------------------------------------

    Staff made numerous significant adjustments to the part 20 data for 
natural gas, due to numerous reports in units rather than the number of 
gross futures-equivalent contracts and the large number of reports of 
swaps that did not meet the definition of referenced contract.

[[Page 96759]]

    The Commission continues to be concerned about the quality of data 
submitted in large trader reports pursuant to part 20 of the 
Commission's regulations. Commissioners and staff have expressed 
concerns about data reporting publicly on a variety of occasions.\515\ 
Nevertheless, the Commission anticipates that over time part 20 
submissions will become more reliable and intensive efforts by 
Commission staff to process and edit raw data will become less 
necessary. As stated in the December 2013 Position Limits Proposal, for 
setting subsequent levels of non-spot month limits, the Commission 
proposes to estimate average open interest in referenced contracts 
using data reported pursuant to parts 16, 20, and/or 45.\516\ It is 
crucial, therefore, that market participants make sure they submit 
accurate data to the Commission, and resubmit data discovered to be 
erroneous, because subsequent limit levels will be based on that data. 
Reporting is at the heart of the Commission's market and financial 
surveillance programs, which are critical to the Commission's mission 
to protect market participants and promote market integrity. Failure to 
meet reporting obligations to the Commission by submitting reports and 
data that contain errors and omissions in violation of the part 20 
regulations may subject reporting entities to enforcement actions and 
remedial sanctions.\517\
---------------------------------------------------------------------------

    \515\ See, e.g., CFTC Staff Advisory No. 15-66, available at 
http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/15-66.pdf (reminding swap dealers and major swap participants 
of their swap data reporting obligations); Remarks of Chairman 
Timothy Massad before the ABA Derivatives and Futures Law Committee, 
2016 Winter Meeting, Jan. 22, 2016, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-37 (improving 
data reporting).
    \516\ December 2013 Position Limits Proposal, 78 FR at 75734.
    \517\ The CFTC announced its first case enforcing the Reporting 
Rules in September 2015. See Order: Australia and New Zealand 
Banking Group Ltd. (``ANZ''), available at http://www.cftc.gov/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfaustraliaorder091715.pdf (the Order finds that during the period 
from at least March 1, 2013 through November 30, 2014, ANZ filed 
large trader reports that routinely contained errors).
---------------------------------------------------------------------------

4. Setting Levels of Spot-Month Limits
    In the December 2013 Position Limits Proposal, the Commission 
proposed to set the initial spot month speculative position limit 
levels for referenced contracts at the existing DCM-set levels for the 
core referenced futures contracts.\518\ As an alternative, the 
Commission stated that it was considering using 25 percent of an 
exchange's estimate of deliverable supply if the Commission verified 
the estimate as reasonable.\519\ As a further alternative, the 
Commission stated that it was considering setting initial spot month 
position limit levels at a recommended level, if any, submitted by a 
DCM (if lower than 25 percent of estimated deliverable supply).\520\
---------------------------------------------------------------------------

    \518\ December 2013 Position Limits Proposal, 78 FR at 75727. 
One commenter urged the Commission to retain the legacy speculative 
limits for enumerated agricultural products. 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. This commenter stated, ``There is no appreciable support 
within our industry or, as far as we know, from the relevant 
exchanges to move beyond current levels . . . . Changing current 
limits, as proposed in the rule, will have a negative impact on 
futures-cash market convergence and will compromise contract 
performance.'' CL-AFBF-59730 at 3. Contra CL-ISDA/SIFMA-59611 at 32 
(setting initial spot-month limits at the existing exchange-set 
levels would be arbitrary because the exchange-set levels have not 
been calibrated to apply as ``a ceiling on the spot-month positions 
that a trader can hold across all exchanges for futures, options and 
swaps''); CL-ICE-59966 at 6 (``the Proposed Rule . . . effectively 
halves the present position limit in the spot month by aggregating 
across trading venues and uncleared OTC swaps''). See also CL-ISDA/
SIFMA-59611 at 3 (the spot month limit methodology is ``both 
arbitrary and unjustified'').
    \519\ December 2013 Position Limits Proposal, 78 FR at 75727. 
The Commission also stated that if the Commission could not verify 
an exchange's estimate of deliverable supply for any commodity as 
reasonable, the Commission might adopt the existing DCM-set level or 
a higher level based on the Commission's own estimate, but not 
greater than would result from the exchange's estimated deliverable 
supply for a commodity.
    One commenter was unconvinced that estimated deliverable supply 
is ``the appropriate metric for determining spot month position 
limits'' and opined that the ``real test'' should be whether limits 
``allow convergence of cash and futures so that futures markets can 
still perform their price discovery and risk management functions.'' 
CL-NGFA-60941 at 2. Another commenter stated, ``While 25% may be a 
reasonable threshold, it is based on historical practice rather than 
contemporary analysis, and it should only be used as a guideline, 
rather than formally adopted as a hard rule. Deliverable supply is 
subject to numerous environmental and economic factors, and is 
inherently not susceptible to formulaic calculation on a yearly 
basis.'' CL-MGEX-60301 at 1. Another commenter expressed the view 
that the 25 percent formula is not ``appropriately calibrated to 
achieve the statutory objective'' set forth in section 
4a(a)(3)(B)(i) of the CEA, 7 U.S.C. 6a(a)(3)(B)(i). CL-CME-60926 at 
3. Another commenter opined that because the Commission ``has not 
established a relationship between `estimated deliverable supply' 
and spot-month potential for manipulation or excessive 
speculation,'' the 25 percent formula is arbitrary. CL-ISDA/SIFMA-
59611 at 31.
    Several commenters opined that 25 percent of deliverable supply 
is too high. E.g., CL-AFR-59685 at 2; CL-Tri-State Coalition for 
Responsible Investment-59682 at 1; CL-CMOC-59720 at 3; CL-WEED-59628 
(``Only a lower limit would ensure market stability and prevent 
market manipulation.''); CL-Public Citizen-60313 at 1 (``There is no 
good reason for a single firm to take 25% of a market.''); CL-IECA-
59964 at 3 (25 percent of deliverable supply ``is a lot of market 
power in the hands of speculators''). One commenter stated that 
``position limits should be set low enough to restore a commercial 
hedger majority in open interest in each core referenced contract,'' 
CL-IATP-60323 at 5 (suggesting in a later submission that position 
limits at 5-10 percent of estimated deliverable supply in each 
covered contract applied on an aggregated basis might ``enable 
commercial hedgers to regain for all covered contracts their pre-
2000 average share of 70 percent of agricultural contracts''). CL-
IATP-60394 at 2. One commenter supported expanding position limits 
``to ensure rough or approximate convergence of futures and 
underlying cash at expiration.'' CL-Thornton-59702 at 1.
    Several commenters supported setting limits based on updated 
estimates of deliverable supply which reflect current market 
conditions. E.g., CL-ICE-59966 at 5; CL-FIA-59595 at 8; CL-EEI-EPSA-
59602 at 9; CL-MFA-59606 at 5; CL-CMC-59634 at 14; CL-Olam-59658 at 
3; CL-CCMC-59684 at 6-7.
    \520\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------

    In determining the levels at which to repropose the initial 
speculative position limits, the Commission considered, without 
limitation, the recommendations of the exchanges as well as data to 
which the exchanges do not have access. In considering these and other 
factors, the Commission became very concerned about the effect of 
alternative limit levels on traders in the cash-settled referenced 
contracts. A DCM has reasonable discretion in establishing the manner 
in which it complies with core principle 5 regarding position 
limits.\521\ As the Commission observed in the December 2013 Position 
Limits Proposal, ``there may be a range of spot month limits, including 
limits set below 25 percent of deliverable supply, which may serve as 
practicable to maximize . . . [the] policy objectives [set forth in 
section 4a(a)(3)(B) of the CEA].'' \522\ The Commission must also 
consider the competitiveness of futures markets.\523\ Thus, the 
Commission accepts the recommendations of the exchanges and has 
determined to repropose federal limits below 25 percent of deliverable 
supply, where setting a limit level at less than 25 percent of 
deliverable supply does not appear to restrict unduly positions in the 
cash-settled referenced contracts. The exchanges retain the ability to 
adopt lower exchange-set limit levels than the initial

[[Page 96760]]

speculative position limit levels that the Commission reproposes today.
---------------------------------------------------------------------------

    \521\ CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B).
    \522\ December 2013 Position Limits Proposal, 78 FR at 75729.
    \523\ CEA section 15(a)(2)(B), 7 U.S.C. 19(a)(2)(B).
---------------------------------------------------------------------------

a. CME and MGEX Agricultural Contracts
    As explained above, the Commission has verified that the estimates 
of deliverable supply for each of the CBOT Corn (C), Oats (O), Rough 
Rice (RR), Soybeans (S), Soybean Meal (SM), Soybean Oil (SO), Wheat (W) 
core referenced futures contract, the Hard Red Winter Wheat (KW) core 
referenced futures contract submitted by CME, and the Hard Red Spring 
Wheat (MWE) core referenced futures contract submitted by MGEX are 
reasonable.
    Nevertheless, the Commission has determined to repropose the 
initial speculative spot month position limit levels for C, O, RR, S, 
SM, SO, W and KW at the recommended levels submitted by CME,\524\ all 
of which are lower than 25 percent of estimated deliverable 
supply.\525\ As is evident from the table set forth below, this also 
means that the Commission is reproposing the initial speculative 
position limit levels for these eight contracts as proposed in the 
December 2013 Position Limits Proposal. These initial levels track the 
existing DCM-set levels for the core referenced futures contracts; 
\526\ therefore, as noted in the December 2013 Position Limits 
Proposal, many market participants are already used to these 
levels.\527\ The Commission continues to believe this approach is 
consistent with the regulatory objectives of the Dodd-Frank Act 
amendments to the CEA.
---------------------------------------------------------------------------

    \524\ CL-CME-61007 at 5.
    \525\ The Commission noted in the December 2013 Position Limits 
Proposal ``that DCMs historically have set or maintained exchange 
spot month limits at levels below 25 percent of deliverable 
supply.'' December 2013 Position Limits Proposal, 78 FR at 75729.
    \526\ See CL-CME-61007 (specifying lower exchange-set limit 
levels for W and RR in certain circumstances).
    \527\ December 2013 Position Limits Proposal, 78 FR at 75727.

                       Table III-B-5--CME Agricultural Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                          Previously       25% of estimated       Reproposed
                      Contract                          proposed  limit       deliverable     speculative  limit
                                                          level \528\        supply \529\            level
----------------------------------------------------------------------------------------------------------------
C...................................................                 600                 900                 600
O...................................................                 600                 900                 600
RR..................................................                 600               2,300                 600
S...................................................                 600               1,200                 600
SM..................................................                 720               2,000                 720
SO..................................................                 540               3,400                 540
W \530\.............................................                 600               1,000                 600
KW..................................................                 600               3,000                 600
----------------------------------------------------------------------------------------------------------------

    The Commission has also determined to repropose the initial 
speculative spot month position limit level for MWE at 1,000 contracts, 
which is the level requested by MGEX \531\ and just slightly lower than 
25 percent of estimated deliverable supply.\532\ This is an increase 
from the previously proposed level of 600 contracts and is greater than 
the reproposed speculative spot month position limit levels for W and 
KW.\533\ Upon deliberation, the Commission accepts the recommendation 
of MGEX.\534\
---------------------------------------------------------------------------

    \528\ December 2013 Position Limits Proposal, 78 FR at 75839 
(Appendix D to Part 150--Initial Position Limit Levels).
    \529\ Rounded up to the next 100 contracts.
    \530\ The W core referenced futures contract refers to soft red 
winter wheat, the KW core reference futures contract refers to hard 
red winter wheat, and the MWE core reference futures contract refers 
to hard red spring wheat; i.e., the contracts are for different 
products.
    \531\ CL-MGEX-61038 at 2; see also CL-MGEX-60938 at 2 (earlier 
submission of deliverable supply estimate).
    \532\ The difference is due to rounding. The MGEX estimate of 
4,005 contract equivalents for MWE deliverable would have supported 
a spot-month limit level of 1,100 contracts (rounded up to the next 
100 contracts). The Commission noted in the December 2013 Position 
Limits Proposal ``that DCMs historically have set or maintained 
exchange spot month limits at levels below 25 percent of deliverable 
supply.'' December 2013 Position Limits Proposal, 78 FR at 75729.
    \533\ Most commenters who supported establishing the same level 
of speculative limits for each of the three wheat core referenced 
futures contracts focused on parity in the non-spot months. However, 
some commenters did support wheat party in the spot month. See, 
e.g., CL-CMC-59634 at 15; CL-NCFC-59942 at 6.
    \534\ The difference between an estimate of 4,000 contracts, 
which would result in a limit level of 1,000, and 4,005 contracts, 
which results in a limit level of 1,100 contracts, is small enough 
that the Commission's prior statements regarding the 25% formula are 
instructive. As stated in the December 2013 Position Limits 
Proposal, the 25 percent formula ``is consistent with the 
longstanding acceptable practices for DCM core principle 5 which 
provides that, for physical-delivery contracts, the spot-month limit 
should not exceed 25 percent of the estimated deliverable supply.'' 
December 2013 Position Limits Proposal, 78 FR at 75729. The 
Commission continues to believe, based on its experience and 
expertise, that the 25 percent formula is an ``effective 
prophylactic tool to reduce the threat of corners and squeezes, and 
promote convergence without compromising market liquidity.'' 
December 2013 Position Limits Proposal, 78 FR at 75729.

                         Table III-B-6--CME and MGEX Agricultural Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
                                                                  Unique persons over spot month
                                                                               limit
    Core referenced futures      Basis of spot-                  --------------------------------   Reportable
           contract                month level      Limit level                      Physical      persons spot
                                                                   Cash settled      delivery       month only
                                                                     contracts       contracts
----------------------------------------------------------------------------------------------------------------
Corn (C)......................  CME                 [dagger] 600               0              36           1,050
                                 recommendation.
                                25% DS..........             900               0              20
Oats (O)......................  CME                 [dagger] 600               0               0              33
                                 recommendation.
                                25% DS..........             900               0               0
Soybeans (S)..................  CME                 [dagger] 600               0              22             929
                                 recommendation.
                                25% DS..........           1,200               0              14
Soybean Meal (SM).............  CME                 [dagger] 720               0              14             381
                                 recommendation.
                                25% DS..........           2,000               0               *

[[Page 96761]]

 
Soybean Oil (SO)..............  CME                 [dagger] 540               0              21             397
                                 recommendation.
                                25% DS..........           3,400               0               0
Wheat (W).....................  CME                 [dagger] 600               0              11             444
                                 recommendation.
                                25% DS..........           1,000               0               6
Wheat (MWE)...................  Parity w/CME        [dagger] 600               0               *             102
                                 recommendation.
                                25% DS..........  [dagger][dagge               0               *
                                                        r] 1,000
Wheat (KW)....................  CME                 [dagger] 600               0               4             250
                                 recommendation.
                                25% DS (MW).....           1,000               0               *
                                25% DS (KW).....           3,000               0               *
Rough Rice (RR)...............  CME                 [dagger] 600               0               0              91
                                 recommendation.
                                25% DS..........           2,300               0               0
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract.
[dagger] Denotes existing limit level.
[dagger][dagger] Limit level requested by MGEX.
* Denotes fewer than 4 persons.

    The Commission's impact analysis reveals no traders in cash settled 
contracts in any of C, O, S, SM, SO, W, MWE, KW, or RR, and no traders 
in physical delivery contracts for O and RR, above the initial 
speculative limit levels for those contracts. The Commission found 
varying numbers of traders in the C, S, SM, SO, W, MWE, KW physical 
delivery contracts over the initial levels, but the numbers were very 
small for MWE and KW.\535\ Because the levels that the Commission 
reproposes today for C, O, S, SM, SO, W, KW, and RR maintain the status 
quo for those contracts, the Commission assumes that some or possibly 
all of such traders over the initial levels are hedgers. Hedgers may 
have to file for an applicable exemption, but hedgers with bona fide 
hedging positions should not have to reduce their positions as a result 
of speculative position limits per se. Thus, the number of traders in 
the C, S, SM, SO, W and KW physical delivery contracts who would need 
to reduce speculative positions below the initial limit levels should 
be lower than the numbers indicated by the impact analysis. The 
Commission believes that setting initial speculative levels at 25 
percent of deliverable supply would, based upon logic and the 
Commission's impact analysis, affect fewer traders in the C, S, SM, SO, 
W and KW physical delivery contracts. Consistent with its statement in 
the December 2013 Position Limits Proposal, the Commission believes 
that accepting the recommendation of the DCM to set these lower levels 
of initial spot month limits will serve the objectives of preventing 
excessive speculation, manipulation, squeezes and corners,\536\ while 
ensuring sufficient market liquidity for bona fide hedgers in the view 
of the listing DCM and ensuring that the price discovery function of 
the market is not disrupted.\537\
---------------------------------------------------------------------------

    \535\ Four or fewer traders.
    \536\ Contra CL-ISDA/SIFMA-59611 at 55 (proposed spot month 
limits ``are almost certainly far smaller than necessary to prevent 
corners or squeezes'').
    \537\ December 2013 Position Limits Proposal, 78 FR at 75729.
---------------------------------------------------------------------------

b. Softs
    As explained above, the Commission has verified that the estimates 
of deliverable supply for each of the IFUS Cocoa (CC), Coffee ``C'' 
(KC), Cotton No. 2 (CT), FCOJ-A (OJ), Sugar No. 11 (SB), and Sugar No. 
16 (SF) core referenced futures contracts submitted by ICE are 
reasonable.
    The Commission has determined to repropose the initial speculative 
spot month position limit levels for the CC, KC, CT, OJ, SB, and SF 
\538\ core referenced futures contracts at 25 percent of estimated 
deliverable supply, based on the estimates of deliverable supply 
submitted by ICE.\539\ As is evident from the table set forth below, 
this also means that the Commission is reproposing initial speculative 
position limit levels that are significantly higher than the levels for 
these six contracts as previously proposed. As stated in the December 
2013 Position Limits Proposal, the 25 percent formula ``is consistent 
with the longstanding acceptable practices for DCM core principle 5 
which provides that, for physical-delivery contracts, the spot-month 
limit should not exceed 25 percent of the estimated deliverable 
supply.'' \540\ The Commission continues to believe, based on its 
experience and expertise, that the 25 percent formula is an ``effective 
prophylactic tool to reduce the threat of corners and squeezes, and 
promote convergence without compromising market liquidity.'' \541\
---------------------------------------------------------------------------

    \538\ One commenter supported considering ``tropicals (sugar/
coffee/cocoa) . . . separately from those agricultural crops 
produced in the US domestic market.'' CL-Thornton-59702 at 1; see 
also CL-Armajaro-59729 at 1.
    \539\ CL-IFUS-60807.
    \540\ December 2013 Position Limits Proposal, 78 FR at 75729. 
The Commission also noted ``that DCMs historically have set or 
maintained exchange spot month limits at levels below 25 percent of 
deliverable supply.'' December 2013 Position Limits Proposal, 78 FR 
at 75729.
    \541\ December 2013 Position Limits Proposal, 78 FR at 75729.

                    Table III-B-7--IFUS Soft Agricultural Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                          Previously       25% of estimated       Reproposed
                      Contract                          proposed  limit       deliverable     speculative  limit
                                                          level \542\        supply \543\            level
----------------------------------------------------------------------------------------------------------------
CC..................................................               1,000               5,500               5,500

[[Page 96762]]

 
KC..................................................                 500               2,400               2,400
CT..................................................                 300               1,600               1,600
OJ..................................................                 300               2,800               2,800
SB..................................................               5,000              23,300              23,300
SF..................................................               1,000               7,000               7,000
----------------------------------------------------------------------------------------------------------------

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

    \542\ December 2013 Position Limits Proposal, 78 FR at 75839-40 
(Appendix D to Part 150--Initial Position Limit Levels).
    \543\ Rounded up to the next 100 contracts.
---------------------------------------------------------------------------

    The Commission did not receive any estimate of deliverable supply 
for the CME Live Cattle (LC) core referenced futures contract from CME, 
nor did CME recommend any change in the limit level for LC. In the 
absence of any such update, the Commission is reproposing the initial 
speculative position limit level of 450 contracts. Of 616 reportable 
persons, the Commission's impact analysis did not reveal any unique 
person trading cash settled or physical delivery spot month contracts 
who would have held positions above this level for LC.
    With respect to the IFUS CC, KC, CT, OJ, SB, and SF core referenced 
futures contracts, the Commission's impact analysis did not reveal any 
unique person trading cash settled spot month contracts who would have 
held positions above the initial levels that the Commission adopts 
today; as illustrated below, lower levels would mostly have affected 
small numbers of traders in physical delivery contracts.

                           Table III-B-8--IFUS Soft Agricultural Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
                                                                  Unique persons over spot month
                                                                               limit
    Core referenced futures      Basis of spot-                  --------------------------------   Reportable
           contract                month level      Limit level                      Physical      persons spot
                                                                   Cash settled      delivery       month only
                                                                     contracts       contracts
----------------------------------------------------------------------------------------------------------------
Cocoa (CC)....................  15% DS..........           3,300               0               0             164
                                25% DS..........  [dagger][dagge               0               0
                                                        r] 5,500
Coffee ``C'' (KC).............  15% DS..........           1,440               0               *             336
                                25% DS..........  [dagger][dagge               0               *
                                                        r] 2,400
Cotton No. 2 (CT).............  15% DS..........             960               0               *             122
                                25% DS..........  [dagger][dagge               0               0
                                                        r] 1,600
FCOJ-A (OJ)...................  15% DS..........           1,680               0               0              38
                                25% DS..........  [dagger][dagge               0               0
                                                        r] 2,800
Sugar No. 11 (SB).............  15% DS..........          13,980               *              10             443
                                25% DS..........  [dagger][dagge               0               *
                                                       r] 23,300
Sugar No. 16 (SF).............  15% DS..........           4,200               0               0              12
                                [dagger][dagger]  [dagger][dagge               0               0
                                 25% DS.                r] 7,000
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``15% DS'' means 15 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract and is included to provide information regarding the distribution of reportable traders.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract.
[dagger][dagger] Limit level requested by ICE.
* Denotes fewer than 4 persons.

c. Metals
    As explained above, the Commission has verified that the estimates 
of deliverable supply for each of the COMEX Gold (GC), COMEX Silver 
(SI), NYMEX Platinum (PL), NYMEX Palladium (PA), and COMEX Copper (HG) 
core referenced futures contracts submitted by CME are reasonable.
    Nevertheless, the Commission has determined to repropose the 
initial speculative spot month position limit levels for GC, SI, and HG 
at the recommended levels submitted by CME,\544\ all of which are lower 
than 25 percent of estimated deliverable supply.\545\ In the case of GC 
and SI, this is a doubling of the current exchange-set limit 
levels.\546\ In the case of HG, the initial level is the same as the 
existing DCM-set level for the core referenced futures contract and 
lower than the level previously proposed.
---------------------------------------------------------------------------

    \544\ CL-CME-61007 at 5.
    \545\ The Commission noted in the December 2013 Position Limits 
Proposal ``that DCMs historically have set or maintained exchange 
spot month limits at levels below 25 percent of deliverable 
supply.'' December 2013 Position Limits Proposal, 78 FR at 75729.
    \546\ One commenter cautioned against raising limit levels for 
GC to 25 percent of deliverable supply, and expressed concern that 
higher federal limits would incentivize exchanges to raise their own 
limits. CL-WGC-59558 at 2-4.

                          Table III-B-9--CME Metals Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                          Previously       25% of estimated       Reproposed
                      Contract                          proposed  limit       deliverable     speculative  limit
                                                          level \547\        supply \548\            level
----------------------------------------------------------------------------------------------------------------
GC..................................................               3,000              11,200               6,000

[[Page 96763]]

 
SI..................................................               1,500               5,600               3,000
PL..................................................                 500                 900                 100
PA..................................................                 650                 900                -500
HG..................................................               1,200               1,100               1,000
----------------------------------------------------------------------------------------------------------------

    The Commission has also determined to repropose the initial 
speculative spot month position limit level for PL at 100 contracts and 
PA at 500 contracts, which are the levels recommended by CME. In the 
case of PL and PA, the reproposed level is the same as the existing 
DCM-set level for the core referenced futures contract, and a decrease 
from the previously proposed levels of 500 and 650 contracts, 
respectively.
---------------------------------------------------------------------------

    \547\ December 2013 Position Limits Proposal, 78 FR at 75840 
(Appendix D to Part 150--Initial Position Limit Levels).
    \548\ Rounded up to the next 100 contracts.
---------------------------------------------------------------------------

    The Commission found varying numbers of traders in the GC, SI, PL, 
PA, and HG physical delivery contracts over the initial levels, but the 
numbers were very small except for PA.\549\ Because the levels that the 
Commission reproposes today for PL, PA, and HG maintain the status quo 
for those contracts, the Commission assumes that some or possibly all 
of such traders over the reproposed levels are hedgers. The Commission 
reiterates the discussion above regarding agricultural contracts: 
hedgers may have to file for an applicable exemption, but hedgers with 
bona fide hedging positions should not have to reduce their positions 
as a result of speculative position limits per se. Thus, the number of 
traders in the metals physical delivery contracts who would need to 
reduce speculative positions below the reproposed limit levels should 
be lower than the numbers indicated by the impact analysis. And, while 
setting initial speculative levels at 25 percent of deliverable supply 
would, based upon logic and the Commission's impact analysis, affect 
fewer traders in the metals physical delivery contracts, consistent 
with its statement in the December 2013 Position Limits Proposal, the 
Commission believes that setting these lower levels of initial spot 
month limits will serve the objectives of preventing excessive 
speculation, manipulation, squeezes and corners,\550\ while ensuring 
sufficient market liquidity for bona fide hedgers in the view of the 
listing DCM and ensuring that the price discovery function of the 
market is not disrupted.
---------------------------------------------------------------------------

    \549\ Fewer than four unique persons.
    \550\ Contra CL-ISDA/SIFMA-59611 at 55 (proposed spot month 
limits ``are almost certainly far smaller than necessary to prevent 
corners or squeezes'').

                                 Table III-B-10--CME Metal Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
                                                                  Unique persons over spot month
                                                                               limit
    Core referenced futures      Basis of spot-                  --------------------------------   Reportable
           contract                month level      Limit level                      Physical      persons spot
                                                                   Cash settled      delivery       month only
                                                                     contracts       contracts
----------------------------------------------------------------------------------------------------------------
Gold (GC).....................  CME                        6,000               *               *             518
                                 recommendation.
                                25% DS..........          11,200               0               0
Silver (SI)...................  CME                        3,000               0               0             311
                                 recommendation.
                                25% DS..........           5,600               0               0
Platinum (PL).................  CME                 [dagger] 500              13               *             235
                                 recommendation.
                                25% DS..........             900              10               *
                                50% DS..........           1,800               *               0
Palladium (PA)................  CME                 [dagger] 100               6              14             164
                                 recommendation.
                                25% DS..........             900               0               0
Copper (HG)...................  CME               [dagger] 1,000               0               *             493
                                 recommendation.
                                25% DS..........           1,100               0               *
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract.
``50% DS'' means 50 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract and is included to provide information regarding the distribution of reportable traders.
[dagger] Denotes existing exchange-set limit level.
* Denotes fewer than 4 persons.

    The Commission's impact analysis reveals no unique persons in the 
SI and HG cash settled referenced contracts, and very few unique 
persons in the cash settled GC referenced contract, whose positions 
would have exceeded the initial limit levels for those contracts. Based 
on the Commission's impact analysis, setting the initial federal spot 
month limit levels for PL and PA at the lower levels recommended by CME 
would impact a few traders in PL and PA cash settled contracts.
    The Commission has carefully considered the numbers of unique 
persons that would be impacted by each of the cash-settled and 
physical-delivery spot month limits in the PL and PA referenced 
contracts. The Commission notes those limits would appear to impact 
more traders in the physical-delivery PA contract than in the cash-
settled PA contract, while fewer traders would be impacted in the 
physical-delivery PL contract than in the cash-settled PL contract (in 
any event, few traders would appear to be affected).\551\
---------------------------------------------------------------------------

    \551\ In this regard, the Commission notes that CME did not have 
access to the Commission's impact analysis when CME recommended 
levels for its physical-delivery core referenced futures contracts.

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

[[Page 96764]]

The Commission also observed the distribution of those cash-settled 
traders over time; as reflected in the open interest table discussed 
below regarding setting non-spot month limits, it can be readily 
observed that open interest in each of the cash-settled PL and PA 
referenced contracts was markedly lower in the second 12-month period 
(year 2) than in the prior 12-month period (year 1). Accordingly, the 
Commission accepts the CME recommended levels in PL and PA referenced 
contracts.
d. Energy
    As explained above, the Commission has verified that the estimates 
of deliverable supply for each of the NYMEX Natural Gas (NG), Light 
Sweet Crude (CL), NY Harbor ULSD (HO), and RBOB Gasoline (RB) core 
referenced futures contracts submitted by CME are reasonable.
    The Commission has determined to repropose the initial speculative 
spot month position limit levels for the NG, CL, HO, and RB core 
referenced futures contracts at 25 percent of estimated deliverable 
supply which, in the case of CL, HO, and RB is higher than the levels 
recommended by CME.\552\ As is evident from the table set forth below, 
this also means that the Commission is reproposing speculative position 
limit levels that are significantly higher than the levels for these 
four contracts as previously proposed. As stated in the December 2013 
Position Limits Proposal, the 25 percent formula ``is consistent with 
the longstanding acceptable practices for DCM core principle 5 which 
provides that, for physical-delivery contracts, the spot-month limit 
should not exceed 25 percent of the estimated deliverable supply.'' 
\553\ The Commission continues to believe, based on its experience and 
expertise, that the 25 percent formula is an ``effective prophylactic 
tool to reduce the threat of corners and squeezes, and promote 
convergence without compromising market liquidity.'' \554\
---------------------------------------------------------------------------

    \552\ CL-CME-61007 at 5. One commenter opined that 25 percent of 
deliverable supply would result in a limit level that is too high 
for natural gas, and suggest 5 percent as an alternative that 
``would provide ample liquidity and significantly reduce the 
potential for excessive speculation.'' CL-Industrial Energy 
Consumers of America-59964 at 3. Another commenter supported 
increasing ``the spot-month position limit levels for Henry Hub 
Natural Gas referenced contracts to be consistent with CME Group's 
or ICE's estimates of deliverable supply and more generally the 
significant new sources of natural gas.'' CL-NGSA-59674 at 3.
    \553\ December 2013 Position Limits Proposal, 78 FR at 75729.
    \554\ December 2013 Position Limits Proposal, 78 FR at 75729.
    \555\ December 2013 Position Limits Proposal, 78 FR at 75840 
(App. D to part 150--Initial Position Limit Levels).
    \556\ Rounded up to the next 100 contracts.

                          Table III-B-11--CME Energy Contracts--Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                          Previously       25% of estimated       Reproposed
                      Contract                          proposed  limit       deliverable     speculative  limit
                                                          level \555\        supply \556\            level
----------------------------------------------------------------------------------------------------------------
NG..................................................               1,000               2,000               2,000
CL..................................................               3,000              10,400              10,400
HO..................................................               1,000               2,900               2,900
RB..................................................               1,000               6,800               6,800
----------------------------------------------------------------------------------------------------------------

    The levels that CME recommended for NG, CL, HO, and RB are twice 
the existing exchange-set spot month limit levels. Nevertheless, the 
Commission is reproposing speculative spot month limit levels at 25 
percent of deliverable supply for CL, HO, and RB because the Commission 
believes that higher levels will lessen the impact on a number of 
traders in both cash settled and physical delivery contracts. For NG, 
the Commission is reproposing the physical delivery limit at 25% of 
deliverable supply, as recommended by CME; \557\ the Commission is also 
reproposing a conditional spot month limit exemption of 10,000 for 
cash-settled contracts in natural gas only.\558\ This exemption would 
to some degree maintain the status quo in natural gas because each of 
the NYMEX and ICE cash-settled natural gas contracts, which settle to 
the final settlement price of the physical delivery contract, include a 
conditional spot month limit exemption of 5,000 contracts (for a total 
of 10,000 contracts).\559\ However, neither the

[[Page 96765]]

NYMEX and ICE penultimate contracts, which settle to the daily 
settlement price on the next to last trading day of the physical 
delivery contract, nor OTC swaps, are currently subject to any spot 
month position limit. In addition, the Commission's impact analysis 
suggests that a conditional spot month limit exemption greater than 25% 
of deliverable supply for cash settled contracts in natural gas would 
potentially benefit many traders.
---------------------------------------------------------------------------

    \557\ One commenter expressed concern about setting the spot 
month limit for natural gas swaps at the same level as for the 
physically settled futures contract, because some referenced 
contracts cease to be economically equivalent ``during the limited 
window at expiry.'' CL-BG Group-59937 at 3.
    \558\ This exemption for up to 10,000 contracts would be five 
times the spot month limit of 2,000 contracts, consistent with the 
December 2013 Position Limits Proposal. See December 2013 Position 
Limits Proposal, 78 FR at 75736-8. 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. See Position Limits for Futures and Swaps, 76 FR 71626, 
71687 (Nov. 18, 2011).
    \559\ Some commenters supported retaining a conditional spot 
month limit in natural gas. E.g., CL-ICE-60929 at 12 (``Any changes 
to the current terms of the Conditional Limit would disrupt present 
market practice for no apparent reason. Furthermore, changing the 
limits for cash-settled contracts would be a significant departure 
from current rules, which have wide support from the broader market 
as evidenced by multiple public comments supporting no or higher 
cash-settled limits.''). Contra CL-Sen. Levin-59637 at 7 (``The 
proposed higher limit for cash settled contracts is ill-advised. It 
would not only raise the affected position limits to levels where 
they would be effectively meaningless, it would also introduce 
market distortions favoring certain contracts and certain exchanges 
over others, and potentially disrupt important markets, including 
the U.S. natural gas market that is key to U.S. manufacturing.''); 
CL-Public Citizen-59648 at 5 (``Congress, in allowing an exemption 
for bona fide hedgers but not pure speculators, could not possibly 
have intended for the Commission to implement position limits that 
allow market speculators to hold 125 percent of the estimated 
deliverable supply. Once again, while this exception for cash-
settled contracts would avoid market manipulations such as corners 
and squeezes (since cash-settled contracts give no direct control 
over a commodity), it does not address the problem of undue 
speculative influence on futures prices.''); CL-Better Markets-60401 
at 17 (``There is no justification for treating cash and physically-
settled contracts differently in any month, and settlement 
characteristics should not be a determinant of the ability to exceed 
the limits in any month.''). One commenter urged the Commission ``to 
eliminate the requirement that traders hold no physical-delivery 
position in order to qualify for the conditional spot-month limit 
exemption'' in order to maintain liquidity in the NYMEX natural gas 
futures contract. CL-BG Group-59656 at 6-7. See also CL-NGSA-59674 
at 38-39 (supporting the higher conditional spot month limit in 
natural gas without restricting positions in the underlying physical 
delivery contract); CL-EEI-EPSA-59602 at 10 (the Commission should 
permit ``market participants to rely on higher speculative limits 
for cash-settled contracts while still holding a position in the 
physical-delivery contract''); CL-APGA-59722 at 8 (the Commission 
should condition the spot month limit exemption for cash settled 
natural gas contracts by precluding a trader from holding more than 
one quarter of the deliverable supply in physical inventory). Cf. 
CL-CME-59971 at 3 (eliminate the five times natural gas limit 
because it ``encourages participants to depart from, or refrain from 
establishing positions in, the primary physical delivery contract 
market and instead opt for the cash-settled derivative contract 
market, especially during the last three trading days when the five 
times limit applies. By encouraging departure from the primary 
contract market, the five times limit encourages a process of de-
liquefying the benchmark physically delivered futures market and 
directly affects the determination of the final settlement price for 
the NYMEX NG contract- the very same price that a position 
representing five times the physical limit will settle against.'').

                                  Table III-B-12--Energy Contracts--Spot Month
----------------------------------------------------------------------------------------------------------------
                                                                  Unique persons over spot month
                                                                               limit
    Core referenced futures      Basis of spot-                  --------------------------------   Reportable
           contract                month level      Limit level                      Physical      persons spot
                                                                   Cash settled      delivery       month only
                                                                     contracts       contracts
----------------------------------------------------------------------------------------------------------------
Natural Gas (NG)..............  CME                        2,000             131              16           1,400
                                 recommendation.
                                50% DS..........           4,000              77               *
                                Conditional               10,000              20               0
                                 Exemption.
Light Sweet Crude (CL)........  CME               [dagger][dagge              19               8           1,733
                                 recommendation.        r] 6,000
                                25% DS..........          10,400              16               *
                                50% DS..........          20,800               *               0
NY Harbor ULSD (HO)...........  CME                        2,000              24              11             470
                                 recommendation.
                                25% DS..........           2,900              15               5
                                50% DS..........           5,800               5               0
RBOB Gasoline (RB)............  CME                        2,000              23              14             463
                                 recommendation.
                                25% DS..........           6,800               *               0
                                50% DS..........          13,600               0               0
----------------------------------------------------------------------------------------------------------------
Reproposed speculative position limit levels are shown in bold.
``25% DS'' means 25 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract.
``50% DS'' means 50 percent of the deliverable supply as estimated by the exchange listing the core referenced
  futures contract and is included to provide information regarding the distribution of reportable traders.
[dagger][dagger] CME recommended a step-down spot month limit of 6,000/5,000/4,000 contracts in the last three
  days of trading.
* Denotes fewer than 4 persons.

5. Setting Levels of Single-Month and All-Months-Combined Limits
    The Commission has determined to use the futures position limits 
formula, 10 percent of the open interest for the first 25,000 contracts 
and 2.5 percent of the open interest thereafter, to repropose the non-
spot month speculative position limits for referenced contracts, 
subject to the details and qualifications set forth in this 
Notice.\560\ The Commission continues to believe that ``the non-spot 
month position limits would restrict the market power of a speculator 
that could otherwise be used to cause unwarranted price movements.'' 
\561\
---------------------------------------------------------------------------

    \560\ As noted in the December 2013 Position Limits Proposal, 
the Commission has used the 10, 2.5 percent formula in administering 
the level of the legacy all-months position limits since 1999. 
December 2013 Position Limits Proposal, 78 FR at 75729-30.
    Several commenters did not support establishing non-spot month 
limits. See, e.g., CL-ISDA/SIFMA-59611 at 27 (``There is no 
justification whatsoever for non-spot-month limits.''); CL-EEI-EPSA-
59602 at 10 (``limits outside the spot month are not necessary''); 
CL-AMG-59709 at 10 (the Commission should ``decline to adopt non-
spot-month position limits''); CL-CME-59718 at 39 (the Proposal's 
non-spot-month position limit formula should be withdrawn''); CL-
CAM-60097 at 2 (``Non-spot month limits are neither necessary nor 
appropriate.''); CL-BG Group-60383 at 2 (``Any final rule should be 
limited to a federally mandated spot-month limit (not any/all month 
limits).''). Some of these same commenters supported position 
accountability in the non-spot months rather than limits. See, e.g., 
CL-EEI-EPSA-59602 at 10, CL-FIA-59595 at 3, CL-MFA-60385 at 5, CL-
ISDA/SIFMA-59611 at 29, CL-Calpine-59663 at 3-4, CL-Working Group-
60396 at 10, CL-EDF-60398 at 4, CL-ICE-59966 at 8, CL-BG Group-60383 
at 2, CL-CMC-59634 at 11. Some commenters also urged the Commission 
to wait until it has reliable data before establishing non-spot 
month limits. See, e.g., CL-EEI-EPSA-59602 at 11; CL-FIA-59595 at 3, 
14; CL-MFA-60385 at 5; CL-ISDA/SIFMA-59611 at 29; CL-Olam-59658 at 
1, 3. See also discussion of part 20 data adjustments under Sec.  
150.2, below. Contra CL-O SEC-59972 (``corners and other supply 
fluctuations can occur during non-spot months'').
    A commenter who did not support adopting non-spot month limits 
suggested a fall-back position of adopting ``any months limits'' but 
not ``all months limits,'' and suggested an alternative 10, 5 
percent formula in specified circumstances. CL-Working Group-59693 
at 62. See also CL-CME-59718 at 44 (supporting a 10, 5 percent 
formula). One commenter supported abolishing single month limits 
``in favor of an ``all months'' or gross position that would 
effectively allow the player to adapt their position to the 
realities of an agricultural crop that doesn't flow in equal monthly 
chunks.'' CL-Thornton-59702 at 1. Another commenter stated that 
``[p]osition limits should be a function of the liquidity of the 
market,'' CL-MFA-59606 at 21, and asserted that applying the 10, 2.5 
percent formula will result in ``a self-reinforcing cycle of lower 
open interest and lower position limits in successive years.'' CL-
MFA-59696 at 22. Another commenter supported ``tying the overall 
non-spot month position limits to an acceptable aggregate (market-
wide) level of speculation, and tying individual trader limits to 
that aggregate level.'' CL-Public Citizen-59648 at 4. Another 
commenter expressed the belief that the 10, 2.5 percent formula 
would result in non-spot month limits that ``are much too high to 
adequately regulate excessive speculation that might lead to price 
fluctuations.'' CL-Tri-State-59682 at 1. To ``address the 
cumulative, disruptive effect of traders who hold large, but not 
dominant positions,'' one commenter suggested basing non-spot month 
position limits on ``an acceptable total level of speculation that 
approximates the historic ratio of hedging to investor/speculative 
trading.'' CL-A4A-59714 at 4. See CL-Better Markets-60401 at 4 
(``Historically, speculators in commodity futures have constituted 
between 15%-30% of market activity, and within this range 
speculators productively facilitated effective hedging without 
meaningfully disrupting or independently shaping the market's 
behavior.'').
    \561\ December 2013 Position Limits Proposal, 78 FR at 75730.
---------------------------------------------------------------------------

a. CME and MGEX Agricultural Contracts
    The Commission is reproposing the non-spot month speculative 
position limit levels for the Corn (C), Oats (O), Rough Rice (RR), 
Soybeans (S), Soybean Meal (SM), Soybean Oil (SO), and Wheat (W) core 
referenced futures contracts based on the 10, 2.5 percent open interest 
formula.\562\ Based on the Commission's experience since 2011 with non-
spot month speculative position limit levels for the Hard Red Winter 
Wheat (KW) and Hard Red Spring Wheat (MWE) core referenced futures 
contracts, the Commission is reproposing the limit levels for those two 
commodities at the current level of 12,000 contracts rather than 
reducing them to the lower levels that would result from applying the 
10, 2.5 percent formula.\563\
---------------------------------------------------------------------------

    \562\ One commenter expressed concern ``that proposed all-
months-combined speculative position limits based on open interest 
levels is not necessarily the appropriate methodology and could lead 
to contract performance problems.'' This commenter urged ``that all-
months-combined limits be structured to `telescope' smoothly down to 
legacy spot-month limits in order to ensure continued convergence.'' 
CL-NGFA-60312 at 4.
    \563\ One commenter supported a higher limit for KW than 
proposed to promote growth and to enable liquidity for Kansas City 
hedgers who often use the Chicago market. CL-Citadel-59717 at 8. 
Another commenter supported setting ``a non-spot month and combined 
position limit of no less than 12,000 for all three wheat 
contracts.'' CL-MGEX-60301 at 1. Contra CL-O SEC-59972 at 7-8 
(commending ``the somewhat more restrictive limitations . . . on 
wheat trading'').
    \564\ The W core referenced futures contract refers to soft red 
winter wheat, the KW core reference futures contract refers to hard 
red winter wheat, and the MWE core reference futures contract refers 
to hard red spring wheat; i.e., the contracts are for different 
products.

[[Page 96766]]



                Table III-B-13--CME and MGEX Agricultural Contracts--Non-Spot Month Limit Levels
----------------------------------------------------------------------------------------------------------------
                                                                                    Previously      Reproposed
                            Contract                              Current  limit     proposed       speculative
                                                                       level        limit level     limit level
----------------------------------------------------------------------------------------------------------------
C...............................................................          33,000          53,500          62,400
O...............................................................           2,000           1,600           5,000
RR..............................................................           1,800           2,200           5,000
S...............................................................          15,000          26,900          31,900
SM..............................................................           6,500           9,000          16,900
SO..............................................................           8,000          11,900          16,700
W \564\.........................................................          12,000          16,200          32,800
KW..............................................................          12,000           6,500          12,000
MWE.............................................................          12,000           3,300          12,000
----------------------------------------------------------------------------------------------------------------

    Maintaining the status quo for the non-spot month limit levels for 
the KW and MWE core referenced futures contracts means there will be 
partial wheat parity.\565\ The Commission has determined not to raise 
the reproposed limit levels for KW and MWE to the limit level for W, as 
32,800 contracts appears to be extraordinarily large in comparison to 
open interest in the KW and MWE markets, and the limit levels for KW 
and MWE are already larger than a limit level based on the 10, 2.5 
percent formula. Even when relying on a single criterion, such as 
percentage of open interest, the Commission has historically recognized 
that there can ``result . . . a range of acceptable position limit 
levels.'' \566\
---------------------------------------------------------------------------

    \565\ Several commenters supported adopting equivalent non-spot 
month position limits for the three existing wheat referenced 
contracts traders. See, e.g., CL-FIA-59595 at 4, 15; CL-CMC-60391 at 
8; CL-CMC-60950 at 11; CL-CME-59718 at 44; CL-AFBF-59730 at 4; CL-
MGEX-59932 at 2; CL-MGEX-60301 at 1; CL-MGEX-59610 at 2-3; CL-MGEX-
60936 at 2-3; CL-NCFC-59942 at 6; CL-NGFA-59956 at 3.
    \566\ Revision of Speculative Position Limits, 57 FR 12770, 
12766 (Apr. 13, 1992). See also Revision of Speculative Position 
Limits and Associated Rules, 63 FR 38525, 38527 (July 17, 1998). Cf. 
December 2013 Position Limits Proposal, 78 FR at 75729 (there may be 
range of spot month limits that maximize policy objectives).

                                                              Table III-B-14--CME and MGEX Agricultural Contracts--Non-Spot Months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Open interest                                            Unique persons above  limit     Reportable
                                                                 ---------------------------------------------------------------- Initial  limit               level                persons in
                Core-referenced futures contract                                                                                       level     --------------------------------  market-- all
                                                                       Year           Futures          Swaps           Total                        All months     Single month       months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Corn (C)........................................................               1       1,829,359         359,715       2,189,074          62,400               *               *           2,606
                                                                               2       1,779,977         641,014       2,420,991
Oats (O)........................................................               1          10,097             646          10,743           5,000               0               0             173
                                                                               2          11,223             480          11,703
Rough Rice (RR).................................................               1          10,585             362          10,948           5,000               0               0             281
                                                                               2          12,769               4          12,773
Soybeans (S)....................................................               1         973,037         109,858       1,082,895          31,900               6               4           2,503
                                                                               2         962,636         235,679       1,198,315
Soybean Meal (SM)...............................................               1         422,611          71,887         494,498          16,900               5               4             978
                                                                               2         463,549         134,399         597,948
Soybean Oil (SO)................................................               1         421,114          55,265         476,379          16,700               5               4           1,034
                                                                               2         464,373         125,106         589,478
Wheat (W).......................................................               1       1,072,107         162,999       1,235,105          32,800               *               *           1,867
                                                                               2       1,010,342         222,420       1,232,762
Wheat (MWE).....................................................               1          67,653           1,944          69,596  [dagger] 5,000              10               7             342
                                                                               2          66,608           3,079          69,687          12,000               0               0
Wheat (KW)......................................................               1         169,059           9,436         178,495  [dagger] 8,100               9               8             718
                                                                               2         216,236          29,563         245,799          12,000               *               *
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015
Year 2 = July 1, 2015 to June 30, 2016
Reproposed speculative position limit levels are shown in bold.
[dagger] Application of the 10, 2.5 percent formula would result in a level lower than the level adopted by the Commission in 2011.
* Denotes fewer than 4 persons.

b. Softs
    The Commission is reproposing non-spot month speculative position 
limit levels for the CC, KC, CT, OJ, SB, SF and LC \567\ core 
referenced futures contracts based on the 10, 2.5 percent open interest 
formula.
---------------------------------------------------------------------------

    \567\ One commenter expressed concern that too high non-spot 
month limit levels could lead to a repeat of convergence problems 
experienced by certain contracts and that ``the imposition of all 
months combined limits in continuously produced non-storable 
commodities such as livestock . . . will reduce the liquidity needed 
by hedgers in deferred months who often manage their risk using 
strips comprised of multiple contract months.'' CL-AFBF-59730 at 3-
4. One commenter requested that the Commission withdraw its proposal 
regarding non-spot month limits, citing, among other things, the 
Commission's previous approval of exchange rules lifting all-months-
combined limits for live cattle contracts ``to ensure necessary 
deferred month liquidity.'' CL-CME-59718 at 4. Another commenter 
expressed concern that non-spot month limits would have a negative 
impact on live cattle market liquidity. CL-CMC-59634 at 12-13. See 
also CL-CME-59718 at 41.

[[Page 96767]]



 Table III-B-15--Softs and Other Agricultural Contracts--Non-Spot Month
                              Limit Levels
------------------------------------------------------------------------
                                            Previously
                                             proposed       Reproposed
                Contract                    limit level     speculative
                                               \568\        limit level
------------------------------------------------------------------------
CC......................................           7,100          10,200
KC......................................           7,100           8,800
CT......................................           8,800           9,400
OJ......................................           2,900           5,000
SB......................................          23,500          38,400
SF......................................           1,200           7,000
LC......................................          12,900          12,200
------------------------------------------------------------------------

    Set forth below is a summary of the impact analysis for softs and 
live cattle.
---------------------------------------------------------------------------

    \568\ December 2013 Position Limits Proposal, 78 FR at 75839-40 
(App. D to part 150--Initial Position Limit Levels).

                                                             Table III-B-16--Softs and Other Agricultural Contracts--Non-Spot Months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                           Open interest                                            Unique persons above  limit     Reportable
                                                                 ---------------------------------------------------------------- Initial  limit               level                persons in
                Core-referenced futures contract                                                                                       level     --------------------------------  market-- all
                                                                       Year           Futures          Swaps           Total                        All months     Single month       months
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Cocoa (CC)......................................................               1         240,984          11,257         252,240          10,200              12               7             682
                                                                               2         273,134          56,853         329,987
Coffee C (KC)...................................................               1         211,051          24,164         235,215           8,800               6               *           1,175
                                                                               2         223,885          51,846         275,731
Cotton No. 2 (CT)...............................................               1         238,580          35,102         273,682           9,400              13               8           1,000
                                                                               2         239,321          60,477         299,798
FCOJ-A (OJ).....................................................               1          16,883             121          17,004           5,000
                                                                               *               *             242
                                                                               2          16,336               5          16,341
Sugar No. 11 (SB)...............................................               1       1,016,271         211,994       1,228,265          38,400              14               9             874
                                                                               2       1,077,452         382,816       1,460,268
Sugar No. 16 (SF)...............................................               1           8,385               0           8,385           7,000               *               0              22
                                                                               2           9,608               0           9,608
Live Cattle (LC)................................................               1         387,896          23,626         411,522          12,200               9               *           1,436
                                                                               2         350,147          52,330         402,478
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015. Year 2 = July 1, 2015 to June 30, 2016. Reproposed speculative position limit levels are shown in bold.
* Denotes fewer than 4 persons.

c. Metals
    The Commission is reproposing non-spot month speculative position 
limit levels for the GC, SI, PL, PA, and HG core referenced futures 
contracts based on the 10, 2.5 percent open interest formula.\569\
---------------------------------------------------------------------------

    \569\ One commenter was concerned that applying the 10, 2.5 
percent formula to open interest for gold would result in a lower 
non-spot month limit level than the spot month limit level, and 
urged the Commission to ``apply a consistent methodology to both 
spot and non-spot months.'' CL-WGC-59558 at 5.

[[Page 96768]]



    Table III-B-17--CME Metals Contracts--Non-Spot Month Limit Levels
------------------------------------------------------------------------
                                            Previously      Reproposed
                Contract                     proposed       speculative
                                            limit level     limit level
------------------------------------------------------------------------
GC......................................          21,500          19,500
SI......................................           6,400           7,600
PL......................................            5000           5,000
PA......................................            5000           5,000
HG......................................           5,600           7,800
------------------------------------------------------------------------

    Set forth below is a summary of the impact analysis for 
metals.\570\
---------------------------------------------------------------------------

    \570\ One commenter expressed concern that imposing non-spot 
position limits on copper would negatively affect liquidity as 
evidenced by the number of unique persons affected. CL-CMC-59634 at 
13, n. 26. Another commenter cited the number of unique traders with 
all-months overages as shown in the open interest data for the GC, 
SI and PL contracts in the December 2013 Position Limits Proposal as 
an indication that ``the impact of the Commission's non-spot-month 
position limits is random and arbitrarily inflexible with no 
relationship to preventing excessive speculation or manipulation.'' 
CL-CME-59718 at 41.

                                                  Table III-B-18--CME Metals Contracts--Non-Spot Months
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Open interest                                         Unique persons above limit      Reportable
    Core-referenced futures     ---------------------------------------------------------  Initial limit               level                persons in
            contract                                                                           level     --------------------------------   market--all
                                   Year       Futures          Swaps           Total                        All months     Single month       months
--------------------------------------------------------------------------------------------------------------------------------------------------------
Gold (GC)......................        1         618,738          47,727         666,465          19,500              19              17           1,557
                                       2         667,495          36,029         703,525
Silver (SI)....................        1         218,028           9,867         227,895           7,600              15              18           1,023
                                       2         203,645           3,510         207,155
Platinum (PL)..................        1          70,151          21,566          91,717           5,000              26              26             842
                                       2          70,713           2,285          72,997
Palladium (PA).................        1          37,488           1,929          39,417           5,000               *               *             580
                                       2          28,276             823          29,099
Copper (HG)....................        1         170,784          22,859         193,643           7,800              19              12           1,457
                                       2         186,525          47,365         233,890
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015
Year 2 = July 1, 2015 to June 30, 2016
Reproposed speculative position limit levels are shown in bold.
* Denotes fewer than 4 persons.

d. Energy
    The Commission is reproposing non-spot month speculative position 
limit levels for the NG, CL, HO, and RB core referenced futures 
contracts based on the 10, 2.5 percent open interest formula.\571\
---------------------------------------------------------------------------

    \571\ One commenter suggested deriving non-spot month limit 
levels for the CL, HO, and RB referenced contracts from the usage 
ratios for U.S. crude oil and oil products rather than open interest 
and expressed concern that ``unnecessarily low limits will hamper 
legitimate hedging activity.'' CL-Citadel-59717 at 7-8. Another 
commenter suggested setting limit levels based on customary position 
size. CL-APGA-59722 at 6. This commenter also supported setting the 
single month limit at two-thirds of the all months combined limit in 
order to relieve market congestion as traders exit or roll out of 
the next to expire month into the spot month. CL-APGA-59722 at 7.

[[Page 96769]]



    Table III-B-19--CME Energy Contracts--Non-Spot Month Limit Levels
------------------------------------------------------------------------
                                            Previously      Reproposed
                Contract                  proposed limit    speculative
                                               level        limit level
------------------------------------------------------------------------
NG......................................         149,600         200,900
CL......................................         109,200         148,800
HO......................................          16,100          21,300
RB......................................          11,800          15,300
------------------------------------------------------------------------

    Set forth below is a summary of the impact analysis for energy 
contracts.

                                                  Table III-B-20--CME Energy Contracts--Non-Spot Months
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                      Open interest                                         Unique persons above limit      Reportable
    Core-referenced futures     ---------------------------------------------------------  Initial limit               level                persons in
            contract                                                                           level     --------------------------------   market--all
                                   Year       Futures          Swaps           Total                        All months     Single month       months
--------------------------------------------------------------------------------------------------------------------------------------------------------
Natural Gas (NG)...............        1       4,919,841       2,866,128       7,785,969         200,900               *               0           1,846
                                       2       4,628,471       3,331,141       7,959,612
Light Sweet Crude (CL).........        1       4,071,681       1,587,450       5,659,130         148,800               0               0           2,673
                                       2       4,130,131       1,744,137       5,874,268
NY Harbor ULSD (HO)............        1         638,040         138,360         776,400          21,300               6               *             760
                                       2         587,796          65,721         653,518
RBOB Gasoline (RB).............        1         448,598          81,822         530,420          15,300               8               7             837
                                       2         505,849          30,477         536,327
--------------------------------------------------------------------------------------------------------------------------------------------------------
Year 1 = July 1, 2014 to June 30, 2015.
Year 2 = July 1, 2015 to June 30, 2016.
Reproposed speculative position limit levels are shown in bold.
* Denotes fewer than 4 persons.

6. Subsequent Levels of Limits
    The Commission notes that many of the comments referenced above, 
regarding setting initial position limits, are also discussed below, 
regarding re-setting levels of limits.
a. General Procedure for Re-Setting Levels of Limits
    Commission Proposal: The Commission proposed in Sec.  150.2(e)(2) 
that it would fix subsequent levels of speculative position limits no 
less frequently than every two calendar years, in accordance with the 
procedures in Sec.  150.2(e)(3) for spot-month limits and Sec.  
150.2(e)(3) for non-spot-month limits, discussed below.\572\ The 
Commission proposed it would publish such subsequent levels on its Web 
site.
---------------------------------------------------------------------------

    \572\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------

    Comments Received: Regarding Sec.  150.2(e)(2), commenters 
requested the Commission review the level of limits more frequently 
than every two years to address changes that may occur within the 
commodities markets.\573\
---------------------------------------------------------------------------

    \573\ CL-Public Citizen-59648 at 5; CL-AFR-59711 at 2; CL-IECA-
59713 at 3; CL-Better Markets-60325 at 2-3; CL-Better Markets-60401 
at 19-20; CL-CMOC-59720 at 3; CL-Cota-59706 at 2; CL-RF-60372 at 3.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
this provision as previously proposed in the December 2013 Position 
Limits Proposal, and reiterates that it will fix subsequent levels no 
less frequently than every two calendar years. The Commission is not 
proposing to establish a procedural requirement to reset limit levels 
more frequently than every two years, because as the frequency of reset 
increases, the burdens on market participants to update compliance 
systems and strategies, and on exchanges to submit deliverable supply 
estimates and reset exchange limit levels, also increase. The 
Commission believes that a two year timetable should reduce burdens on 
market participants while still maintaining limits based on recent 
market data. Should higher limit levels be desired, exchanges or market 
participants may petition the Commission to change limit levels within 
the two year period.
b. Re-setting Levels of Spot-Month Limits
    Commission Proposal: The Commission proposed in Sec.  150.2(e)(3) 
to reset each spot month limit at a level no greater than one-quarter 
of the estimated spot-month deliverable supply, based on the estimate 
of deliverable supply provided by the exchange listing the core 
referenced futures contract. The Commission proposed that it could, in 
its discretion, rely on its own estimate of deliverable supply. The 
Commission further proposed that, alternatively, it could set spot-
month limits based on the recommended level of the exchange listing the 
core referenced futures contract, if lower than 25 percent of estimated 
deliverable supply.\574\
---------------------------------------------------------------------------

    \574\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------

    Comments Received: Commenters generally recommended the Commission 
enhance predictability and reduce uncertainty for market participants, 
by either restricting how much adjustment would be made to the position 
limit level, or having the discretion to not alter position limit

[[Page 96770]]

levels, for example, if there have not been problems with 
convergence.\575\
---------------------------------------------------------------------------

    \575\ CL-FIA-60303 at 8, Agricultural Advisory Committee Meeting 
Transcript at 126-134 (Dec. 9, 2014).
---------------------------------------------------------------------------

    Commenters were divided regarding the proposed methodology for 
computing spot month position limit levels (which is calculated by 
determining a figure that is no more than 25 percent of estimated 
deliverable supply).\576\ Several commenters stated that the proposed 
formula for setting spot month limits based on 25 percent of 
deliverable supply results in spot month position limits that would be 
too high and may result in contract performance issues.\577\ Other 
commenters thought the formula results in spot-month position limits 
that would be too low and hinder market liquidity.\578\ Yet another 
requested that the Commission do further research to determine whether 
deliverable supply or open interest was a better means of setting spot 
month position limits, and apply the same metric (deliverable supply or 
open interest) to spot month limits and to non-spot month limits.\579\ 
Several commenters recommended that the Commission consider an 
alternative means of limiting excessive speculation, that is, by 
setting position limits at a level low enough to restore a hedger 
majority in open interest in each core referenced futures 
contract.\580\
---------------------------------------------------------------------------

    \576\ E.g., CL-WGC-59558 at 5; CL-MFA-60385 at 4-6; CL-ISDA/
SIFMA-59611 at 3, 31, 55-56, and 63-64; CL-MGEX-59610 at 2; CL-NGFA-
59681 at 4-5.
    \577\ See, e.g., CL-WGC-59558 at 5; CL-Public Citizen-60313 at 
1; CL-Tri-State-59682 at 1-2; CL-AFR-59711 at 2; CL-WEED-59628 at 1; 
CL-Industrial Energy Consumers of America-59671 at 3; CL-CMOC-59720 
at 3; CL-IATP-60394 at 2; CL-NGFA-59681 at 4-5.
    \578\ CL-ISDA/SIFMA-59611 at 55; CL-Armajaro-59729 at 1; CL-CAM-
60097 at 3-4.
    \579\ CL-WGC-59558 at 5.
    \580\ E.g., CL-IATP-60323 at 5; CL-IATP-60394 at 2; CL-RF-60372 
at 3.
---------------------------------------------------------------------------

    In estimating deliverable supply, some commenters recommended that 
the Commission include supply that is subject to long-term supply 
contracts, arguing that such supply can be readily made available for 
futures delivery.\581\ One commenter recommended that the Commission 
permit the inclusion in the deliverable supply calculation of supplies 
that can be readily transported to the futures delivery location.\582\ 
Another commenter recommended that the deliverable supply estimate 
should include related commodities that a DCM allows to be used to 
liquidate a futures position through an EFP transaction.\583\ One 
commenter recommended that the deliverable supply estimate for natural 
gas should include supplies that are available at other major locations 
in addition to the specific futures delivery location of Erath, 
Louisiana, because commercials at these locations use the futures 
contract for hedging and price basing and basing spot month limits on a 
more limited delivery area would be too restrictive.\584\ In estimating 
deliverable supply, one commenter recommended that the Commission not 
include supplies that do not meet delivery specifications.\585\ The 
same commenter said that DCMs should provide documentation if including 
long term supply agreements in deliverable supply estimates to enable 
the Commission to verify the information. The commenter expressed 
concern about financial holding companies' ability to own, warehouse 
and trade physical commodities and urged the Commission to assess how 
such firms might affect deliverable supply.\586\
---------------------------------------------------------------------------

    \581\ CL-FIA-59595 at 3, 9-10; CL-NGSA-59941 at 15.
    \582\ CL-MFA-59606 at 18; CL-MFA-60385 at 6.
    \583\ CL-MSCGI-59708 at 2, 11.
    \584\ CL-CAM-60097 at 3-4.
    \585\ CL-IATP-60323 at 6.
    \586\ CL-IATP-60323 at 7.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing to reset each 
spot-month limit, in its discretion, either: Based on 25 percent of 
deliverable supply as estimated by an exchange listing the core 
referenced futures contract; to the existing spot-month position limit 
level (that is, not changing such level); or to the recommended level 
of the exchange listing the core referenced futures contract, but not 
greater than 25 percent of estimated deliverable supply. In the 
alternative, if the Commission elects to rely on its own estimate of 
deliverable supply, it will first publish that estimate for comment in 
the Federal Register.
    Thus, the Commission accepts the commenter's recommendation that 
the Commission have discretion to retain current spot-month position 
limit levels. In this regard, the Commission provides, in reproposed 
Sec.  150.2(e)(3)(ii)(B), that an exchange need not submit an estimate 
of deliverable supply, if the exchange provides notice to the 
Commission, not less than two calendar months before the due date for 
its submission of an estimate, that it is recommending the Commission 
not change the spot-month limit, and the Commission accepts such 
recommendation.
    The Commission notes that it has long used deliverable supply as 
the basis for spot month position limits due to concerns regarding 
corners, squeezes, and other settlement-period manipulative activity. 
By restricting derivative positions to a proportion of the deliverable 
supply of the commodity, spot month position limits reduce the 
possibility that a market participant can use derivatives, including 
referenced contracts, to affect the price of the cash commodity (and 
vice versa). Limiting a speculative position based on a percentage of 
deliverable supply also restricts a speculative trader's ability to 
establish a leveraged position in cash-settled derivative contracts, 
diminishing that trader's incentive to manipulate the cash settlement 
price. Commenters did not provide evidence that would suggest that the 
open interest formula would respond more effectively to these concerns, 
and the Commission does not believe that using open interest would be 
preferable for calculating spot-month position limit levels.
    In addition, setting the limit levels at no greater than 25 percent 
of deliverable supply has historically been effective on both the 
federal and exchange level to combat corners and squeezes. In the 
preamble to the final rules for vacated Part 151, the Commission noted 
that the 25 percent of deliverable supply formula appears to ``work 
effectively as a prophylactic tool to reduce the threat of corners and 
squeezes and promote convergence without compromising market 
liquidity.'' Commenters did not provide evidence to support claims that 
this historical formula is no longer effective.
    In response to concerns that 25 percent of deliverable supply may 
result in a limit level that is too high, the Commission notes that 
exchanges can and often do--and are permitted under reproposed Sec.  
150.5(a) to--set limits at a level lower than 25 percent of estimated 
deliverable supply, which allows the exchanges to alter exchange-set 
limits easily based on changing market conditions.
    In response to commenters' suggestion to restore a hedger majority, 
the Commission notes such an alternative may fail the requirements of 
CEA section 4a(a)(3)(B)(iv) to ensure sufficient liquidity for bona 
fide hedgers. Hedgers may not be transacting on opposite sides of the 
market simultaneously and, thus, need speculators to provide liquidity. 
Simply changing the proportion of hedgers in the market does not mean 
that the markets would operate more efficiently for bona fide hedgers. 
In addition, in order to adopt the commenter's suggestion, the 
Commission would need to reintroduce the withdrawn '03 series forms 
which required traders to identify which positions were speculative and 
which were hedging, since any entity,

[[Page 96771]]

even a commercial end-user, can establish speculative positions.
    In response to commenters' suggestions regarding methods for 
estimating deliverable supply, the Commission notes that deliverable 
supply estimates are calculated and submitted by DCMs. Guidance for 
calculating deliverable supply can be found in Appendix C to part 38. 
Amendments to part 38 are beyond the scope of this rulemaking. However, 
such guidance already provides that deliverable supply calculations are 
estimates based on what ``reasonably can be expected to be readily 
available'' (including estimates of long-term supply that can be shown 
to be regularly made available for futures delivery).
c. Re-Setting Levels of Non-Spot-Month Limits
    Commission Proposal--General Procedure: For setting subsequent 
levels of non-spot month limits no less frequently than every two 
calendar years, the Commission proposed in Sec.  150.3(e)(4) to use the 
open interest formula: 10 percent of the first 25,000 contracts and 2.5 
percent of the open interest thereafter (10, 2.5 percent formula).\587\
---------------------------------------------------------------------------

    \587\ December 2013 Position Limits Proposal, 78 FR at 75729.
---------------------------------------------------------------------------

    Comments Received and Commission Response: ``In order to enhance 
the predictability and reduce uncertainty in business planning,'' one 
commenter recommended that the Commission ``adjust limits gradually and 
by no more than a minimum percentage in one biennial cycle.'' \588\ The 
Commission declines this suggestion because, as explained below, the 
Commission is reproposing a minimum non-spot month limit level of 5,000 
contracts; market participants would be certain that in no circumstance 
would the limit level fall below that figure. Also, because exchanges 
can set limits at levels below the federal limit level, a change in the 
federal limit may not have an effect on exchange limit levels.
---------------------------------------------------------------------------

    \588\ CL-FIA-60303 at 8. This commenter did not recommend any 
specific percentage limitation.
---------------------------------------------------------------------------

    Several commenters recommended that the Commission review the 
levels of position limits more frequently than once every two years to 
address changes that may occur within the commodities markets.\589\ In 
response these concerns, the Commission notes that exchanges may set 
limits at a level lower than the federal limits in order to more 
readily adapt to changing market conditions. Should higher limit levels 
be desired, exchanges may petition the Commission or the Commission may 
determine to change limit levels within the two year period. Thus, the 
flexibility to change limit levels more frequently than every two years 
is already permitted by the reproposed rules and the Commission is not 
changing the timeline.
---------------------------------------------------------------------------

    \589\ E.g., CL-Public Citizen-59648 at 5 (annually); CL-AFR-II 
at 2 (greater frequency); CL-Better Markets-60325 at 2-3 
(``[b]iennial updates . . . are completely inadequate''); CL-Better 
Markets-59716 at 34 (biennial updates values ``the input of swap 
dealers and their trade groups over that of commercial hedgers''); 
CL-CMOC-59720 at 3 (annual consultation with hedgers and end users); 
CL-RF-60372 at 3 (``review position limits every six months'').
---------------------------------------------------------------------------

    One commenter recommended that the Commission ``adopt final rules 
that give the Commission the flexibility to increase position limits 
immediately or with little delay so that the market can accurately 
respond to external forces without violating position limits'' or, in 
the alternative, ``include peak open interest levels beyond the most 
recent two years when it determines the level of open interest on which 
to base position limits.\590\ In response, the Commission notes that 
using peak open interest figures, as opposed to an average, as 
reproposed, may not necessarily represent an accurate portrait of 
current market conditions. Using the most recent two years of data is 
designed to ensure that the non-spot-month limit levels are set 
relative to the current size of the market.
---------------------------------------------------------------------------

    \590\ CL-MFA-59606 at 21.
---------------------------------------------------------------------------

    Several commenters expressed the view that the proposed limits 
based on the open interest formula would result in limit levels that 
are too high and would not accomplish the goal of reducing excessive 
speculation.\591\ In response, the Commission believes the open 
interest formula provides a level that is low enough to reduce the 
potential for excessive speculation and market manipulation without 
unduly impairing liquidity for bona fide hedgers. Under the rules 
reproposed today, both the Commission and the exchanges would have 
flexibility to impose non-spot month limit levels at the greater of the 
open interest formula, the spot month limit level, or 5,000 contracts.
---------------------------------------------------------------------------

    \591\ E.g., CL-Tri-State-59682 at 1-2; CL-A4A-59714 at 3; CL-
Better Markets-59716 at 24; CL-APGA-59722 at 3, 6; CL-AFBF-59730 at 
3; CL-NGFA-59681 at 5.
---------------------------------------------------------------------------

    Several commenters expressed the view that the proposed limits 
based on the open interest formula would result in limit levels for 
dairy contracts that are too low and would restrict hedging use by 
limiting liquidity.\592\ The Commission responds that it is deferring 
the imposition of position limits on the Class III Milk contract, as 
discussed below.\593\ The Commission also observes that reproposed 
Sec.  150.9 permits market participants to apply directly to the 
exchanges to obtain an exemption to exceed speculative position limits.
---------------------------------------------------------------------------

    \592\ E.g., CL-U.S. Dairy-59597 at 4, 6; CL-Hood-59582; CL-
McCully-59592 at 1; CL-Rice Dairy-59601 at 1; CL-Agri-Mark-59609 at 
1-2; CL-Jacoby-59622 at 1; CL-Pedestal-59630 at 2; CL-Darigold-59651 
at 1-2; CL-Traditum-59655 at 1; CL-Leprino-59707 at 2; CL-IDFA-59771 
at 1-2; CL-Fonterra-59608 at 1-2; CL-NCFC-59613 at 6; CL-NMPF-59936 
at 2; CL-DFA-59621 at 7-8; CL-Glanbia Foods-60316 at 1; CL-Leprino 
Foods-59707 at 2; CL-NMPF-59936 at 2.
    \593\ Some commenters urged the Commission to establish an 
individual month position limit in Class III Milk equal to the spot 
month limit but no less than 3,000 contracts net, and an all-months-
limit as a multiple of four times the spot month limit, to foster 
needed liquidity in the non-spot months. See, e.g., CL-NCFC-59942 at 
6. Another commenter urged an all-months-limit in Class III Milk of 
ten times the spot month limit for a similar reason. CL-U.S. Dairy-
59597 at 4. These comments are now moot.
---------------------------------------------------------------------------

    Several commenters recommended that the Commission consider an 
alternative means of limiting speculative traders, by setting position 
limits at a level low enough to restore a hedger majority in open 
interest in each core referenced futures contract.\594\ As discussed 
above, the Commission is concerned that ``restoring'' a hedger majority 
may not ensure sufficient liquidity for bona fide hedgers. Hedgers may 
not be transacting on opposite sides of the market simultaneously and, 
thus, need speculators to provide liquidity. Simply changing the 
proportion of hedgers in the market does not mean that the markets 
would operate more efficiently for bona fide hedgers. In addition, in 
order to implement this suggestion, the Commission would need to 
reintroduce the long defunct '03 series forms which required traders to 
identify which positions were speculative and which were hedging, 
because any entity, even a commercial end-user, can establish 
speculative positions.
---------------------------------------------------------------------------

    \594\ E.g., CL-IATP-60323 at 5; CL-IATP-60394 at 2; CL-RF-60372 
at 3; CL-A4A-59686 at 4; CL-Better Markets-59716 at 5; CL-Better 
Markets-60325 at 2.
---------------------------------------------------------------------------

    One commenter noted that the open interest formula permits a 
speculator to hold a larger percentage of open interest in a smaller 
commodity market and thus the formula's entire rationale seems 
``arbitrary . . . and . . . capricious.'' \595\ The Commission 
acknowledges that, because of the way the 10, 2.5 percent formula 
works, a speculator in a market with open interest of fewer than 25,000 
contracts may have a larger share of the open interest than a 
speculator in a market with an open interest of greater

[[Page 96772]]

than 25,000 contracts. The Commission responds that it is by design 
that the 10, 2.5 percent open interest formula provides that a 
speculator may hold a larger percentage of total open interest in a 
smaller market, potentially providing liquidity for bona fide hedgers 
in such a smaller market. As open interest increases, the 2.5% marginal 
increase results in limit levels that become a progressively smaller 
percentage of total open interest, essentially placing a greater 
emphasis on deterring market manipulation and protecting the price 
discovery process in a larger market.
---------------------------------------------------------------------------

    \595\ CL-USCF-59644 at 3-4.
---------------------------------------------------------------------------

    Another commenter suggested that the Commission use a 10, 5 percent 
open interest formula rather than a 10, 2.5 percent formula as 
proposed, arguing that the 10, 5 percent formula has worked well for 
certain agricultural futures markets and should be applied more 
broadly. Alternatively, this commenter said that Commission should use 
the 10, 5 percent formula for at least spread positions.\596\ The 
Commission notes the 10, 2.5 percent formula has produced limit levels 
that should sufficiently maximize the CEA section 4a(a)(3)(B) criteria, 
and the Commission does not believe increasing the marginal percentage 
is necessary. A larger limit such as would be produced from a 10, 5 
percent formula may not adequately prevent excessive speculation. In 
the preamble to the proposed rules, the Commission noted that the 10, 
2.5 percent formula was first proposed in 1992, and the commenter has 
not provided sufficient justification for moving away from this 
established standard.
---------------------------------------------------------------------------

    \596\ CL-Working Group-59693 at 62.
---------------------------------------------------------------------------

    One commenter recommended that the Commission consider commodity-
related ratios in establishing limits, such as the ratio between crude 
oil and its products, diesel (30 percent) and gasoline (50 percent), 
rather than on separate open interest formulas applied to each.\597\ In 
response, the Commission notes setting limit levels based on the open 
interest of a related commodity may result in limit levels that are too 
large to be effective in the smaller commodity markets. For example, 
based on the levels proposed in this release in Appendix D, 
implementing a limit for NYMEX RBOB Gasoline equal to 50 percent of the 
crude oil limit, as suggested by the commenter, would result in a limit 
almost 10 times the size otherwise indicated by the open interest 
formula, and would equal almost 28 percent of total average open 
interest in the RBOB referenced contract. Further, hedgers with 
positions in multiple contracts could establish positions in various 
ratios without violating a position limit, provided they comply with 
the bona fide hedging position definition and any applicable 
requirements. The Commission also notes that the process in reproposed 
Sec.  150.10 exempting certain spread positions may allow speculators 
some flexibility in inter- and intra-commodity spreads for the purpose 
of providing liquidity to bona fide hedgers.
---------------------------------------------------------------------------

    \597\ CL-Citadel-59717 at 7-8.
---------------------------------------------------------------------------

    One commenter suggested the Commission consider setting position 
limits on ``customary position size'' which had been used for setting 
non-spot month limits by the Commission in the past and which the 
commenter argues is a more effective means of curtailing large 
speculative positions.\598\ In response, the Commission believes the 
10, 2.5 percent formula has been effective in preventing excessive 
speculation without unduly limiting liquidity for bona fide hedgers. 
The Commission notes when the ``customary position size'' methodology 
was used to set non-spot-month limit levels, such levels were below the 
levels established using 10, 2.5 percent formula.
---------------------------------------------------------------------------

    \598\ CL-APGA-59722 at 6.
---------------------------------------------------------------------------

    Commission Reproposal Regarding General Procedure for Re-Setting 
Levels of Non-Spot Month Limits: The Commission has determined to 
repropose the 10, 2.5 percent formula, generally as proposed in the 
December 2013 Position Limits Proposal, for the reasons discussed 
above. However, the Commission has determined, in response to requests 
by commenters requesting wheat parity, as discussed above, to provide 
that it may determine not to change the level of a non-spot month 
limit. This would permit, for example, the Commission to continue to 
retain a level of 12,000 contracts for the non-spot month limits in the 
KW and MWE contracts, even if average open interest did not exceed 
405,000 contracts (which is the level that, when applying the 10, 2.5 
percent formula, would result in a limit of 12,000 contracts).
    Commission Proposal for Time Periods, Data Sources, Publication and 
Minimum Levels for Re-Setting Levels of Non-Spot Month Limits: Under 
proposed in Sec.  150.2(e)(4)(i) and (ii), the Commission would 
estimate average open interest in referenced contracts using data 
reported for each of the last two calendar years pursuant to parts 16, 
20, and/or 45.\599\ The Commission also proposed under Sec.  
150.2(e)(4)(iii) to publish on the Commission's Web page 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.\600\ Finally, the Commission proposed under Sec.  
150.2(e)(4)(iv) to establish minimum non-spot month levels of 1,000 
contracts for agricultural commodity contracts and 5,000 contracts for 
exempt commodity contracts.
---------------------------------------------------------------------------

    \599\ December 2013 Position Limits Proposal, 78 FR at 75734.
    \600\ Id.
---------------------------------------------------------------------------

    Comments Received and Commission Response: Regarding the time 
period for average open interest, as noted above, one commenter 
recommended that the Commission, as an alternative, ``include peak open 
interest levels beyond the most recent two years when it determines the 
level of open interest on which to base position limits.'' \601\ In 
response, the Commission notes that using peak open interest figures, 
as opposed to an average, as reproposed, may not necessarily represent 
an accurate portrait of current market conditions.
---------------------------------------------------------------------------

    \601\ CL-MFA-59606 at 21.
---------------------------------------------------------------------------

    Regarding data sources for average open interest, several 
commenters noted that the open interest data used by the Commission in 
determining the non-spot month limits was not complete since it did not 
include all OTC swaps data and that the Commission should correct this 
deficiency before it sets the limits using the open interest 
formula.\602\ In response, the Commission notes it used futures-
equivalent open interest for swaps reported under part 20, in 
determining the initial non-spot month limits, as discussed above, and 
believes this data also is acceptable for re-setting limit levels, as 
reproposed.
---------------------------------------------------------------------------

    \602\ E.g., CL-DBCS-59569 at 6; CL-FIA-59595 at 14; CL-EEI-60386 
at 11; CL-MFA-59606 at 5, 20, 22-23; CL-ISDA/SIFMA-59611 at 29, 
including footnote 108; CL-CMC-59634 at 13; CL-Olam-59658 at 3; CL-
COPE-59662 at 22; CL-Calpine-59663 at 4; CL-Chamber-59684 at 5; CL-
NFP-59690 at 20; CL-Just Energy-59692 at 4; CL-Working Group-59693 
at 62; CL-Working Group-60396 at 8-10; CL-Citadel-59717 at 4-5.
---------------------------------------------------------------------------

    The Commission received no comments regarding publication of 
average open interest.
    Regarding minimum levels for non-spot month limits, some commenters 
urged the Commission to afford itself the flexibility to set non-spot 
month limits at least as high as the spot-month position limit, rather 
than base the non-spot month limit strictly on the open interest 
formula in cases where the latter would result in a relatively small 
limit that would hinder liquidity.\603\ The Commission accepts these

[[Page 96773]]

commenters' recommendation. Upon consideration of proposing minimum 
initial non-spot month limits, as discussed above, the Commission is 
removing the distinction between agricultural and exempt commodities. 
This change would establish a minimum non-spot month limit level of 
5,000 contracts in either agricultural or exempt commodities.
---------------------------------------------------------------------------

    \603\ CL-ICE-59966 at 6; CL-U.S. Dairy-59597 at 4.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to repropose 
these provisions generally as proposed in the December 2013 Position 
Limits Proposal, but with the changes described above to provide 
flexibility for a higher minimum level of non-spot month limits.
7. Deferral of Limits on Cash-Settled Core Referenced Futures Contracts
    Commission Proposal:
    The Commission proposed, but is not reproposing, positon limits on 
three cash-settled core referenced futures contracts: CME Class III 
Milk; CME Feeder Cattle; and CME Lean Hogs.\604\
---------------------------------------------------------------------------

    \604\ Each of these contracts is cash settled to a U.S. 
Department of Agriculture price series; Feeder Cattle and Lean Hogs 
settle to a CME-calculated index of daily USDA livestock prices, 
while Class III Milk settles to the monthly USDA Class III Milk 
price.
---------------------------------------------------------------------------

    Comments Received: Commenters raised concerns with these cash-
settled contracts and how they fit within the federal position limits 
regime. While many of these concerns were raised in the context of the 
dairy industry, they apply to all three cash-settled core referenced 
futures contracts. Concerns raised include: (1) How to apply spot month 
limits in a contract that is cash-settled; \605\ (2) the ``five-day 
rule'' for bona fide hedging; \606\ and (3) the length of the spot 
month period.\607\ Commenters contended that the Commission's rationale 
in the December 2013 Position Limits Proposal focused on concerns with 
physical-delivery contracts, which the commenters believe do not apply 
to cash-settled core referenced futures contracts because there is no 
physical delivery process and because the contracts settle to 
government-regulated price series (through the USDA).\608\ Commenters 
were concerned that the Commission's ``one-size-fits-all'' approach 
discriminates against participants in dairy and livestock because the 
spot-month limit is effectively smaller compared to the separate spot-
month limits for physical-delivery and cash-settled contracts in other 
commodities.\609\ Several commenters suggested limit levels that do not 
follow the proposed formulae for determining limit levels for both spot 
and non-spot-month limits due to the unique aspects of cash-settled 
core referenced futures contracts, including the relatively large cash 
market and trading strategies not found in other core referenced 
futures markets.\610\
---------------------------------------------------------------------------

    \605\ CL-Rice Dairy-59960 at 1; CL-US Dairy-59597 at 3-4; CL-
NMPF-59652 at 4; CL-DFA-59948 at 4-5.
    \606\ CL-NMPF-59652 at 5; CL-DFA-59948 at 8.
    \607\ CL-NGSA-59674 at 44; CL-ICE-59669 at 5-6.
    \608\ See, e.g., CL-US Dairy-59597 at 3-4.
    \609\ CL-DFA-59948 at 6.
    \610\ CL-Rice Dairy-59601 at 1; CL-US Dairy-59597 at 3; CL-NMPF-
59652 at 4; CL-DFA-59948 at 4-5.
---------------------------------------------------------------------------

    Commission Determination: The Commission, as part of the phased 
approach to implementing position limits on all physical commodity 
derivative contracts, is deferring action so that it may, at a later 
date: (1) Clarify the application of limits to cash-settled core 
referenced futures contracts; and (2) consider further which method to 
use to determine a level for a spot-month limit for a cash-settled core 
referenced futures contract. The Commission notes that the December 
2013 Position Limits Proposal discussed spot-month limits primarily in 
the context of protecting the price discovery process by preventing 
corners and squeezes.\611\ There was limited discussion of cash-settled 
core referenced futures contracts.\612\ The Commission did not propose 
alternate means of calculating limit levels for cash-settled core 
referenced futures contracts in the December 2013 Position Limits 
Proposal.
---------------------------------------------------------------------------

    \611\ For example, the Commission stated that concerns regarding 
corners and squeezes are most acute in the markets for physical-
delivery contracts in the spot month. December 2013 Position Limits 
Proposal, 78 FR at 75737.
    \612\ See, e.g., December 2013 Position Limits Proposal 78 FR at 
75688, including n. 82.
---------------------------------------------------------------------------

C. Sec.  150.3--Exemptions

1. Current Sec.  150.3
    Statutory authority: CEA section 4a(c)(1) exempts positions that 
are shown to be bona fide hedging positions, as defined by the 
Commission, from any Commission rule establishing speculative position 
limits under CEA section 4a(a).\613\ In addition, CEA section 4a(a)(1) 
authorizes the Commission to exempt transactions normally know to the 
trade as ``spreads.'' \614\ Further, CEA section 4a(a)(7) authorizes 
the Commission to exempt any person, contract, or transaction from any 
position limit requirement the Commission establishes.\615\
---------------------------------------------------------------------------

    \613\ 7 U.S.C. 6a(c)(1). Section 737 of the Dodd-Frank Act did 
not substantively change CEA section 4a(c)(1) (renumbering existing 
provision by inserting ``(1)'' after ``(c)'').
    \614\ 7 U.S.C. 6a(a)(1). Section 737 of the Dodd-Frank Act did 
not change the Commission's authority to exempt spreads under CEA 
section 4a(a)(1).
    \615\ 7 U.S.C. 6a(a)(7). Section 737 of the Dodd-Frank Act added 
CEA section 4a(a)(7). The Commission interprets CEA section 4a(a)(7) 
to provide the Commission with plenary authority to grant exemptive 
relief from position limits, consistent with the purposes of the 
CEA. 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.''
---------------------------------------------------------------------------

    Current exemptions: The three existing exemptions in current Sec.  
150.3(a), promulgated prior to the enactment of the Dodd-Frank Act, are 
part of the Commission's regulatory framework for speculative position 
limits.\616\ First, current Sec.  150.3(a)(1) exempts positions shown 
to be bona fide hedging positions from federal position limits.\617\ 
Second, current Sec.  150.3(a)(3) exempts spread positions between 
single months of a futures contract (and/or, on a futures-equivalent 
basis, options) outside of the spot month, provided a trader's spread 
position in any single month does not exceed the all-months limit.\618\ 
Third, under current Sec.  150.3(a)(4), positions carried for an 
eligible entity \619\ in the separate account of an independent account 
controller (``IAC'') \620\ that manages customer positions need not be 
aggregated with the other positions owned or controlled by that 
eligible entity (the ``IAC exemption'').\621\
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    \616\ For completeness, the Commission notes it previously 
provided an exemption in Sec.  150.3(a)(2) for spreads of futures 
positions which offset option positions. However, the Commission 
removed and reserved that provision once it was rendered obsolete by 
the Commission determination to impose speculative limits on a 
trader's net position in futures and options combined, rather than 
separately. 58 FR 17973 at 17979 (April 7, 1993).
    \617\ 17 CFR 150.3(a)(1). The term bona fide hedging position is 
currently defined at 17 CFR 1.3(z) (2010). As discussed above, the 
Commission is reproposing a new definition of bona fide hedging 
position in Sec.  150.1.
    \618\ The Commission clarifies that a spread 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 
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).
    \619\ ``Eligible entity'' is defined in current 17 CFR 150.1(d).
    \620\ ``Independent account controller'' is defined in current 
17 CFR 150.1(e).
    \621\ 17 CFR 150.3(a)(4). See also discussion of the IAC 
exemption in the 2016 Final Aggregation Rule.

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[[Page 96774]]

2. Proposed Sec.  150.3
    In the December 2013 Position Limits Proposal, the Commission 
proposed a number of 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 proposed to amend 
the three exemptions from federal speculative limits contained in 
current Sec.  150.3. These previously proposed 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,\622\ and delete the calendar month spread 
provision which is unnecessary under changes to Sec.  150.2 that would 
set the level of each single month position limit to that of the all-
months position limit. Second, the Commission proposed 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 proposed to revise recordkeeping 
and reporting requirements for traders claiming any exemption from the 
federal speculative position limits.
---------------------------------------------------------------------------

    \622\ See November 2013 Aggregation Proposal. See also 2016 
Final Aggregation Rule.
---------------------------------------------------------------------------

a. Proposed Amendments to Existing Exemptions
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to update cross-references within Sec.  150.3 to 
reflect other changes in part 150. Specifically, the Commission 
proposed: To update references to the bona fide hedging definition to 
Sec.  150.1 from Sec.  1.3(z); to require that those filing for 
exemptive relief must meet the reporting requirements in part 19; and 
to add a cross-reference to aggregation provisions in proposed Sec.  
150.4.
    The Commission also proposed to move the existing IAC exemption to 
Sec.  150.4, thereby deleting the current exemption in Sec.  
150.3(a)(4). The Commission also proposed to delete the spread 
exemption in current Sec.  150.3, because it noted that the proposed 
non-spot month limits rendered such an exemption unnecessary.\623\
---------------------------------------------------------------------------

    \623\ Under the 2016 Supplemental Position Limits Proposal, DCMs 
and SEFs that are trading facilities would have authority to grant 
spread exemptions to both exchange and federal position limits. See 
infra discussion of Sec. Sec.  150.5 and 150.10.
---------------------------------------------------------------------------

    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to conform Sec.  150.3(a) to accommodate processes proposed in 
other sections of part 150. Specifically, the Commission proposed under 
Sec.  150.3(a)(1)(i) exemptions for those bona fide hedging positions 
that have been recognized by a DCM or SEF in accordance with proposed 
Sec. Sec.  150.9 and 150.11. The Commission also proposed under Sec.  
150.3(a)(1)(iv) exemptions for those spread positions that have been 
recognized by a DCM or SEF in accordance with proposed Sec.  150.10. 
Recognition of other positions exempted under proposed Sec.  150.3(e) 
was re-numbered as subsection (v) from subsection (iv) of Sec.  
150.3(a)(1) of the 2013 Position Limits Proposal.
    Comments Received: The Commission received no comments on the 
proposed conforming changes to Sec.  150.3.\624\ The Commission 
addresses comments on the IAC exemption in its final rule amending the 
aggregation policy under Sec.  150.4, published separately.
---------------------------------------------------------------------------

    \624\ The Commission received many comments on the changes to 
the bona fide hedging definition in Sec.  150.1 and the processes 
for exchange recognition of exemptions in Sec. Sec.  150.9-11. See 
discussion of the bona fide hedging definition, above, and of the 
processes in Sec. Sec.  150.9-11, below.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing these 
amendments as previously proposed in the December 2013 Position Limits 
Proposal.
b. Positions Which May Exceed Limits--Sec.  150.3(a)
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission listed positions which may exceed limits in proposed Sec.  
150.3(a). Such positions included: (i) Bona fide hedging positions as 
defined in Sec.  150.1; (ii) financial distress positions exempted 
under Sec.  150.3(b); (iii) conditional spot month limit positions 
exempted under Sec.  150.3(c); and (iv) other positions exempted under 
Sec.  150.3(e). Proposed Sec.  150.3(a) also provided that all such 
positions may exceed limits only if recordkeeping requirements in Sec.  
150.3(g) are met and any applicable reporting requirements in part 19 
are met.
    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to revise Sec.  150.3(a) to include, in addition to bona fide 
hedging positions as defined in Sec.  150.1, positions that are 
recognized by a DCM or SEF in accordance with Sec.  150.9 or Sec.  
150.11 as well as spread positions recognized by a DCM or SEF in 
accordance with Sec.  150.10.
    Comments Received: The Commission received many comments on the 
definition of bona fide hedging in Sec.  150.1, as well as on the 
processes proposed in Sec. Sec.  150.9-11.\625\ The Commission 
addresses those comments in the discussion of the definition of bona 
fide hedging position in Sec.  150.1, above, and in the discussion of 
the processes proposed in Sec. Sec.  150.9-11, below. The Commission 
did not receive comments specific to the conforming revisions to Sec.  
150.3(a).
---------------------------------------------------------------------------

    \625\ Id.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing Sec.  150.3(a) 
as previously proposed in the December 2013 Position Limits Proposal, 
with conforming changes consistent with the reproposed definition of a 
bona fide hedging position in Sec.  150.1, which includes positions 
that are recognized by a DCM or SEF in accordance with reproposed Sec.  
150.9 or Sec.  150.11, or by the Commission, and conforming changes 
consistent with the process for spread positions recognized by a DCM or 
SEF in accordance with reproposed Sec.  150.10, or by the Commission.
c. Proposed Additional Exemptions From Position Limits
i. Financial Distress Exemption--Sec.  150.3(b)
    Proposed Rule: The Commission proposed to add in Sec.  150.3(b) an 
exemption from position limits for market participants in financial 
distress circumstances, upon the Commission's approval of a specific 
request.\626\ For example, the Commission recognized that, in periods 
of financial distress, it may be beneficial for a financially sound 
market participant to take on the positions (and corresponding risk) of 
a less stable market participant. The Commission explained that it has 
historically provided an exemption from position limits in these types 
of situations in order to avoid sudden liquidations that could 
potentially reduce liquidity, disrupt price discovery, and/or increase 
systemic risk. The Commission therefore proposed to codify this 
historical practice.
---------------------------------------------------------------------------

    \626\ December 2013 Position Limits Proposal, 78 FR at 75736.
---------------------------------------------------------------------------

    Comments Received: One commenter requested the non-exclusive 
circumstances for the financial distress exemption be clarified by 
adding ``bud not limited to'' after the word ``include'' to permit 
other situations not listed.\627\
---------------------------------------------------------------------------

    \627\ CL-CME-59718 at 71.
---------------------------------------------------------------------------

    Commission Reproposal: In response to the commenter, the Commission 
clarifies that the circumstances under which a financial distress 
exemption may be claimed include, but are not limited to, the specific 
scenarios in the definition. However, the Commission believes that the 
proposed definition

[[Page 96775]]

sufficiently articulates that the list of potential circumstances for 
claiming the financial distress exemption is non-exclusive, and, 
therefore, is reproposing the definition as previously proposed.
ii. Pre-Enactment and Transition Period Swaps Exemption--Sec.  150.3(d)
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to provide an exemption from federal position 
limits for (1) pre-enactment swaps, defined as swaps entered into prior 
to July 21, 2010 (the date of the enactment of the Dodd-Frank Act of 
2010), so long as the terms of which have not expired as of that date, 
and (2) transition period swaps, defined as swaps entered into during 
the period commencing July 22, 2010 and ending 60 days after the 
publication of the final position limit rules in the Federal Register, 
the terms of which have not expired as of that date. The Commission 
also proposed to allow both pre-enactment and transition period swaps 
to be netted with commodity derivative contracts acquired more than 60 
days after publication of the final rules in the Federal Register for 
purposes of complying with non-spot-month position limits.\628\
---------------------------------------------------------------------------

    \628\ December 2013 Position Limits Proposal, 78 FR at 75738.
---------------------------------------------------------------------------

    Comments Received: One commenter suggested that ``grandfathering'' 
relief should be extended to pre-existing positions, and should also 
permit the pre-existing positions to be increased after the effective 
date of the limit. The commenter also suggested that the Commission 
should permit the risk associated with a pre-existing position to be 
offset through roll of a position from a prompt month into a deferred 
contract month.\629\
---------------------------------------------------------------------------

    \629\ CL-AMG-59709 at 2, 18-19.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission declines to accept the 
commenter's recommendation regarding increasing positions, because 
allowing pre-existing positions to be increased after the effective 
date of the limits effectively would create a loophole for exceeding 
position limits. Further, the Commission declines the commenter's 
recommendation to permit a roll of a pre-existing position, because 
that would permit a market participant to extend indefinitely the 
holding of a speculative economic exposure in commodity derivative 
contracts exempt from position limits, frustrating the intent of 
speculative position limits. The Commission notes, however, that 
reproposed Sec.  150.3(d), like the previous proposal, allows for 
netting of pre- and post-effective date positions, allowing a market 
participant to offset the risk of the position provided the offsetting 
position is not held into a spot month. The Commission is reproposing 
Sec.  150.3(d) as proposed in the December 2013 Position Limits 
Proposal.
iii. Previously Granted Exemptions--Sec.  150.3(f)
    Proposed Rule: The Commission proposed in the December 2013 
Position Limits Proposal that exemptions previously granted by the 
Commission under Sec.  1.47 for swap risk management would not apply to 
new swap positions entered into after the effective date of the final 
rule. The Commission noted that the proposed rules revoke the 
previously granted exemptions for risk management positions for such 
new swaps. Therefore, risk management positions that offset such new 
swaps would be subject to federal position limits, unless another 
exemption applied. The Commission explained that these risk management 
positions are inconsistent with the revised definition of bona fide 
hedging contained in the December 2013 Position Limits Proposal and the 
purposes of the Dodd-Frank Act amendments to the CEA.\630\
---------------------------------------------------------------------------

    \630\ December 2013 Position Limits Proposal, 78 FR at 75740.
---------------------------------------------------------------------------

    Comments Received: A number of commenters urged the Commission not 
to deny risk-management exemptions for financial intermediaries who 
utilize referenced contracts to offset the risks arising from the 
provision of diversified commodity-based returns to the intermediaries' 
clients.\631\
---------------------------------------------------------------------------

    \631\ CL-FIA-59595 at 5, 34-35; CL-AMG-59709 at 2, 12-15; CL-
CME-59718 at 67-69.
---------------------------------------------------------------------------

    In contrast, other commenters noted that the proposed rules 
``properly refrain'' from providing a general exemption to financial 
firms seeking to hedge their financial risks from the sale of 
commodity-related instruments such as index swaps, ETFs, and ETNs 
because such instruments are ``inherently speculative'' and may 
overwhelm the price discovery function of the derivative market.\632\
---------------------------------------------------------------------------

    \632\ CL-Sen. Levin-59637 at 8; CL-Better Markets-60325 at 2.
---------------------------------------------------------------------------

    Commission Reproposal: As discussed above in the clarifications to 
the bona fide hedging position definition, the Commission now proposes 
to expand the relief in Sec.  150.3(f) by: (1) Clarifying that such 
previously granted exemptions may apply to pre-existing financial 
instruments that are within the scope of existing Sec.  1.47 
exemptions, rather than only to pre-existing swaps; and (2) recognizing 
exchange-granted non-enumerated exemptions in non-legacy commodity 
derivatives outside of the spot month (consistent with the Commission's 
recognition of risk management exemptions outside of the spot month), 
and provided such exemptions are granted prior to the compliance date 
of the final rule, and apply only to pre-existing financial instruments 
as of the effective date of the final rule. These two changes are 
intended to reduce the potential for market disruption by forced 
liquidations, since a market intermediary would continue to be able to 
offset risks of pre-effective-date financial instruments, pursuant to 
previously-granted federal or exchange risk management exemptions.
iv. Non-Enumerated Hedging Positions--Sec.  150.3(e)
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission noted that it 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 proposed to delete Sec.  1.47 for several reasons described 
in the December 2013 Position Limits Proposal.\633\
---------------------------------------------------------------------------

    \633\ December 2013 Position Limits Proposal, 78 FR at 75738-9.
---------------------------------------------------------------------------

    Proposed Sec.  150.3 provided that 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 positions, may apply to the Commission for an exemption from 
position limits. As previously 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 fell 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 position in previously 
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 \634\ concerning the applicability

[[Page 96776]]

of the bona fide hedging position exemption, or the person may seek 
exemptive relief from the Commission under CEA section 4a(a)(7).\635\
---------------------------------------------------------------------------

    \634\ 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.
    \635\ See supra discussion of CEA section 4a(a)(7).
---------------------------------------------------------------------------

    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed Sec. Sec.  150.9, 150.10, and 150.11 which provided 
alternative processes that would permit eligible DCMs and SEFs to 
provide relief for non-enumerated bona fide hedging positions, certain 
spread positions, and anticipatory bona fide hedging positions, 
respectively.\636\ However, the Commission did not propose to alter or 
delete Sec.  150.3 because the Commission determined to provide 
multiple avenues for persons seeking exemptive relief.
---------------------------------------------------------------------------

    \636\ See infra discussion of these alternative processes in 
Sec.  150.9, Sec.  150.10, and Sec.  150.11.
---------------------------------------------------------------------------

    Comments Received: One commenter requested that the Commission 
provide a spread exemption from federal position limits for certain 
soft commodities, reasoning that there was a ``lack of fungibility of 
certain soft commodities . . . [because] inventories of various 
categories vary widely in terms of marketability over time.'' The 
commenter also stated that such a spread exemption would allow for 
effective competition for the ownership of certified inventories that 
in turn helps to maintain a close relationship between the cash and 
futures markets.\637\ Another commenter recommended the Commission 
recognize calendar spread netting, and not place any limits on the 
same, because speculators provide liquidity in deferred months to 
hedgers and offset, in part, that exposure with shorter dated 
contracts.\638\
---------------------------------------------------------------------------

    \637\ CL-CMC-59718 at 15.
    \638\ CL-Citadel-59717 at 8-9.
---------------------------------------------------------------------------

    Commission Reproposal: Both of these comments were submitted in 
response to the December 2013 Position Limits Proposal, well in advance 
of the 2016 Supplemental Position Limits Proposal. Spread exemptions 
such as those described by the commenters are addressed in Sec.  
150.10, discussed below. The Commission is reproposing Sec.  150.3(e) 
as previously proposed in the December 2013 Position Limits Proposal.
d. Proposed Conditional Spot Month Limit Exemption--Sec.  150.3(c)
    Conditional spot month limit exemptions to exchange-set spot-month 
position limits for natural gas contracts were adopted in 2009, after 
the ICE submitted such an exemption as part of its certification of 
compliance with core principles required of exempt commercial markets 
(``ECMs'') on which significant price discovery contracts (``SPDCs'') 
were traded.\639\
---------------------------------------------------------------------------

    \639\ CFTC Reauthorization Act of 2008 (``Farm Bill'', 
incorporated as Title XIII of the Food, Conservation and Energy Act 
of 2008, Public Law 110-246, 112 Stat. 1624 (June 18, 2008)) 
expanded the Commission's authority with respect to ECMs by creating 
a new regulatory category: ECMs on which significant price discovery 
contracts (``SPDCs'') were traded. The Farm Bill authorized the 
Commission to designate an ECM contract as a SPDC if the Commission 
determined, under criteria established in the Act, that the contract 
performed a significant price discovery function. When the 
Commission made such a determination, the ECM on which the SPDC was 
traded would be required to assume, with respect to that contract, 
all the responsibilities and obligations of a registered entity 
under the Commission's regulations and the Act. This process was 
invalidated and deleted by changes to the Act made under the Dodd-
Frank Act of 2010.
---------------------------------------------------------------------------

    As ICE developed its rules in order to comply with the ECM SPDC 
requirements,\640\ ICE expressed concerns regarding the impact of 
position limits on the open interest in its LD1 contract. ICE 
demonstrated that as the open interest declines in the physical-
delivery New York Mercantile Exchange Inc. (``NYMEX'') Henry Hub 
Natural Gas Futures (``NYMEX NG'') contract approaching expiration, 
open interest increases rapidly in the cash-settled ICE NG LD1 
contract, and suggested that the ICE NG LD1 contract served an 
important function for hedgers and speculators who wished to recreate 
or hedge the NYMEX NG contract price without being required to make or 
take delivery. ICE stated that it believed there are ``significant and 
material distinctions between the design and use of'' the NYMEX NG 
contract and the ICE NG LD1 contract, and those distinctions were most 
pronounced at expiration. Further, ICE stated that, due to the size of 
some positions in the cash-settled ICE NG LD1 contract, the impact to 
the market of an equivalent limit could impair the ability for market 
participants to adjust their positions in an orderly fashion to come 
into compliance. For these reasons, ICE requested that the Commission 
consider an alternative to the Commission's acceptable practice that 
spot month position limits for the NG LD1 contract should be equivalent 
to the spot month position limits in the NYMEX NG contract.\641\
---------------------------------------------------------------------------

    \640\ On March 16, 2009, the Commission adopted final rules 
implementing the provisions of the Farm Bill. 74 FR 12179 (March 23, 
2009). These regulations became effective on April 22, 2009. Among 
other things, the rules established procedures by which the 
Commission would make and announce its determination as to whether a 
particular contract served a significant price discovery function. 
On July 24, 2009, the Commission issued an order finding that ICE's 
Henry Financial LD1 Fixed Price contract (``NG LD1 contract'') 
performed a significant price discovery function and, thus, that ICE 
was a registered entity with respect to the NG LD1 contract, subject 
to all provisions of the Act applicable to registered entities, 
including compliance with certain core principles. 74 FR 37988 (July 
30, 2009).
    As required after the designation of the NG LD1 contract as a 
SPDC, ICE submitted a demonstration of their compliance with the 
required core principles. One of the core principles with which ICE 
was required to comply under the Farm Bill ECM SPDC rules concerned 
position limits and position accountability rules for the 
contract(s) designated as SPDC(s). See Section 13201(C)(ii)(IV) of 
the Farm Bill (implemented in Section 2(h)(7) of the Act).
    \641\ See 17 CFR part 36, App. B, Core Principle IV(c)(3) 
(2010). 74 FR 12177 (April 22, 2009).
---------------------------------------------------------------------------

    After discussion with both the Commission's Division of Market 
Oversight and NYMEX, ICE submitted and certified rule amendments 
implementing position limits and position accountability rules for the 
ICE NG LD1 contract. Specifically, ICE imposed a spot-month position 
limit and non-spot-month position accountability levels equal to those 
of the economically equivalent NYMEX NG contract. ICE also adopted a 
rule for a larger conditional position limit for traders who: (1) 
Agreed not to maintain a position in the NYMEX NG futures contract 
during the last three trading days, and (2) agreed to show ICE their 
complete book of Henry Hub related positions.\642\
---------------------------------------------------------------------------

    \642\ ICE also imposed related aggregation, bona fide hedging, 
and other exemption rules for the ICE NG LD1 contract.
---------------------------------------------------------------------------

    In June 2009, the Commission also received self-certified rule 
amendments from CME Group, Inc. (``CME'') regarding position limits and 
position accountability levels for the cash-settled NYMEX Henry Hub 
Financial Last Day Futures (HH) contract and related cash-settled 
contracts.\643\ The rules, as amended, established spot month position 
limits for the NYMEX HH contract as well as certain related cash-
settled contracts so as to be consistent with the requirements for the 
SPDC contract on ICE. In the rule certification documents, CME stated 
that it was amending its position limits rules for the HH contract in 
anticipation of ICE's new rules. In February 2010, the conditional spot 
month limit exemptions on NYMEX and ICE went into effect.
---------------------------------------------------------------------------

    \643\ New York Mercantile Exchange, Inc. Submission #09.103 
(June 2, 2009): Notification of Amendments to NYMEX Rules 9A.27 and 
9A.27A to Establish Hard Expiration Position Limits for Certain 
Natural Gas Financially Settled Contracts. Previously, NYMEX did not 
have spot-month limits on its HH contract and related cash-settled 
contracts.
---------------------------------------------------------------------------

    Proposed Rules: In the December 2013 Position Limits Proposal, the

[[Page 96777]]

Commission proposed a conditional spot month limit exemption for all 
commodities subject to federal limits under proposed Sec.  150.2. That 
proposed rule was identical to the rule proposed in the Part 151 
Proposal, with the exception that the December 2013 Position Limits 
Proposal did not include any restriction on trading in the cash 
market.\644\ In proposing the conditional spot month limit exemption in 
proposed Sec.  150.3(c), the Commission stated its preliminary belief 
that the current exemption in natural gas markets has served ``to 
further the purposes Congress articulated for position limits'' and 
that the 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.'' \645\ In addition, the Commission noted that it has 
observed repeatedly that open interest levels in physical-delivery 
contracts ``naturally decline leading up to and during the spot month, 
as the contract approaches expiration'' because ``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.'' \646\ The Commission also stated its 
preliminary belief 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 limit,'' as 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.'' \647\
---------------------------------------------------------------------------

    \644\ See December 2013 Position Limits Proposal, 78 FR at 
75736-38.
    \645\ Id. at 75737.
    \646\ Id. at 75770.
    \647\ Id. at 75770, n. 782.
---------------------------------------------------------------------------

    Comments Received: The Commission received many comments regarding 
the conditional spot month limit exemption. These comments revealed 
little to no consensus among market participants, exchanges, and 
industry groups regarding spot-month position limits in cash-settled 
contracts.
    Several commenters supported the higher spot-month limit (or no 
limit at all) for cash-settled contracts, but opposed the restriction 
on holding a position in the physical-delivery referenced contract to 
obtain the higher limit for various reasons, including: The view that 
there is no discernible reason for the restriction in the first place; 
the belief that it provides a negative impact on liquidity in the 
physical delivery contract; and the view that it prevents commercials 
from taking advantage of the higher limit given their need to have some 
exposure in a physical delivery referenced contract during the spot 
month.\648\
---------------------------------------------------------------------------

    \648\ E.g., CL-FIA-59595 at 3 and 11; CL-EEI-EPSA-59602 at 9-10; 
CL-MFA-59606 at 5 and 19-20; CL-AIMA-59618 at 2; CL-ISDA/SIFMA-59611 
at 31; CL-BG Group-59656 at 7; CL-BG Group-59937 at 5-6; CL-COPE-
59662 at 23; CL-NGSA-59673 at 38-39; CL-NGSA-59941 at 3-4; CL-
IECAssn-59957 at 9.
---------------------------------------------------------------------------

    One commenter said that the conditional spot month position limit 
exemption for gold is not supported by sufficient research, could 
decouple the cash-settled contract from the physical-delivery contract, 
and could lead to lower liquidity in the physical-delivery contract and 
higher price volatility.\649\ Several commenters opposed a spot-month 
position limit for cash-settled contracts that is higher than the limit 
for physical-delivery contracts for various reasons including: The 
higher limit does not address the problem of excessive speculation; the 
higher limit would reduce liquidity in the physical-delivery contract; 
and the conditional limit is not restrictive enough and should include 
a restriction on holdings of the physical commodity as had been 
proposed in vacated part 151.\650\
---------------------------------------------------------------------------

    \649\ CL-WGC-59558 at 4.
    \650\ E.g., CL-Sen. Levin-59637 at 7; CL-AFR-59711 at 2; CL-A4A-
59714 at 3; CL-Working Group-59693 at 59-60; CL-IECA-59713 at 3-4; 
CL-Better Markets-60401 at 17-18; CL-CME-59971 at 3; CL-CME-60307 at 
4-5; CL-CME-60406 at 2; CL-CMOC-59720 at 3-6; CL-APGA-59722 at 8; 
CL-OSEC-59972 at 7; CL-RF-60372 at 3; CL-IATP-59701 at 5; CL-IATP-
59704 at 6; CL-IATP-60394 at 2; CL-NGFA-59681 at 6.
---------------------------------------------------------------------------

    Several commenters expressed the view that a market participant 
holding a trade option position, which presumably would be considered a 
physical delivery referenced contract, should not be precluded from 
using the conditional spot-month limit exemption because trade options 
are functionally equivalent to a forward contract and the conditional 
exemption does not restrict holding forwards.\651\
---------------------------------------------------------------------------

    \651\ E.g., CL-FIA-59595 at 20; CL-COPE-59662 at 23; CL-EEI-
EPSA-60926 at 7, CL-EEI-Sup-60386 at 3-4; CL-Working Group-59693 at 
59-60.
---------------------------------------------------------------------------

    One commenter supported the conditional spot month limit exemption 
provided that the Commission modifies its proposal to allow 
independently-operated subsidiaries to hold positions in physical-
delivery contracts if the subsidiary engages in separate and 
independent trading activities, shares no employees, and is not jointly 
directed in its trading activity with other subsidiaries by the parent 
company.\652\
---------------------------------------------------------------------------

    \652\ CL-SEMP-59926 at 4-6; CL-SEMP-60384 at 5-6.
---------------------------------------------------------------------------

    Some commenters supported the continuation of the practice of DCMs 
separately establishing and maintaining their own conditional spot 
month limits and not aggregating cash-settled limits across exchanges 
and the OTC market, arguing that the resultant aggregated limit will be 
unnecessarily restrictive and result in lower liquidity and increased 
volatility.\653\
---------------------------------------------------------------------------

    \653\ E.g., CL-IECAssn-59713 at 30-31; CL-ICE-59966 at 4-5; CL-
ICE-59962 at 4-7.
---------------------------------------------------------------------------

    Some commenters expressed the view that the filing of daily Form 
504 reports to satisfy the conditional spot month limit exemption was 
burdensome, and recommended less frequent reporting such as monthly 
reports \654\ or no reporting at all.\655\
---------------------------------------------------------------------------

    \654\ CL-EEI-EPSA-59602 at 10; CL-ICE-59669 at 7.
    \655\ CL-COPE-59662 at 24.
---------------------------------------------------------------------------

    Two exchanges which currently permit a conditional spot month limit 
exemption, CME and ICE, have each submitted several comments regarding 
the exemption, some in direct response to the other exchange's 
comments. This back-and-forth nature of the disagreement surrounding 
the conditional spot month limit exemption has been significant and, on 
many aspects of the previously proposed exemption, the comments have 
been in direct opposition to each other. CME submitted a comment letter 
in response to the 2016 Supplemental Position Limits Proposal that 
reiterated its belief that the conditional limit would drain liquidity 
from the physical-delivery contract; \656\ ICE responded that nothing 
in the natural gas market has suggested that the physical-delivery 
contract has been harmed.\657\ ICE noted that CME's current conditional 
limit benefits CME's own cash-settled natural gas contracts; \658\ CME 
responded that it opposes any conditional limit framework even though 
such opposition could work ``to the detriment of CME Group's commercial 
interests in certain of its cash-settled markets.'' \659\ CME stated 
its belief that the CEA necessitates ``one-to-one limit treatment and 
similar exemptions'' for both physical-delivery and cash-settled 
contracts within a particular commodity; \660\ ICE suggested that 
removing or reducing the conditional limit would ``disrupt present 
market practice.'' \661\
---------------------------------------------------------------------------

    \656\ CL-CME-60926 at 4.
    \657\ CL-ICE-61009 at 1.
    \658\ Id.
    \659\ CL-CME-61008 at 2.
    \660\ Id. at 3.
    \661\ CL-ICE-61009 at 2.
---------------------------------------------------------------------------

    ICE also submitted a series of charts, using CFTC Commitment of 
Traders

[[Page 96778]]

Report data, illustrating the opposite: That spot-month open interest 
and volume in the physical-delivery contract (the NYMEX NG) have 
actually increased since the introduction of the conditional spot month 
limit.\662\
---------------------------------------------------------------------------

    \662\ Id. at 3-6.
---------------------------------------------------------------------------

    CME stated its opposition to the conditional limits ``as a matter 
of statutory law,'' opining that CEA section 4(b) does not allow the 
imposition of the conditional limit.\663\ CME believes that the 
conditional limit contained in the December 2013 Position Limits 
Proposal ``contravenes Congress's intent behind the statutory 
`comparability' requirement'' in multiple ways, and that neither ICE 
nor the Commission has ``addressed these aspects of [CEA section 
4(b)].'' \664\
---------------------------------------------------------------------------

    \663\ CL-CME-61008 at 2-3. CEA section 4(b)(1)(B)(ii)(1) imposes 
requirements on a foreign board of trade (``FBOT'') as a condition 
of providing U.S. persons direct access to the electronic trading 
and order-matching systems of the FBOT with respect to a contract 
that settles against any price of one or more contracts listed for 
trading on a registered entity. Such FBOT must adopt position limits 
for contract(s) that are ``comparable'' to the position limits 
adopted by the registered entity for the contract(s) against which 
the FBOT contract settles. 7 U.S.C. 6(b)(1)(B)(ii)(1), codified in 
17 CFR 48.8(c)(1)(ii)(A).
    \664\ CL-CME-61008 at 3.
---------------------------------------------------------------------------

    ICE replied that the Commission ``has no basis to modify the 
current conditional limit level'' because the markets ``have functioned 
efficiently and effectively'' and the Commission should not ``change 
the status quo.'' \665\ ICE continued that the conditional limit of 
five times the physical-delivery contract's spot-month limit ``appears 
to be arbitrary and likely insufficient'' and opined that the 
Commission has not indicated how it arrived at that figure or how such 
a level ``strikes the right balance between supporting liquidity and 
diminishing undue burdens.'' \666\ ICE concluded that the conditional 
exemption ``must be maintained at no less than the current levels.'' 
\667\
---------------------------------------------------------------------------

    \665\ CL-ICE-61022 at 2.
    \666\ Id.
    \667\ Id.
---------------------------------------------------------------------------

    Commission Reproposal: After taking into consideration all the 
comments it received regarding the conditional spot-month limit 
exemption, the Commission is reproposing the conditional spot-month 
limit exemption in natural gas markets only. The Commission believes 
the volume of comments regarding the conditional spot-month limit 
exemption indicates the importance of careful and thoughtful analysis 
prior to finalizing policy with respect to conditional spot-month limit 
exemptions in other cash-settled referenced contracts. In particular, 
the considerations may vary, and should be considered in relation to 
the particular commodity at issue. As such, the Commission believes it 
is prudent to proceed cautiously in expanding the conditional spot-
month limit exemption beyond the natural gas markets where it is 
currently employed. The Commission encourages exchanges and/or market 
participants who believe that the Commission should extend the 
conditional spot-month limit exemption to additional commodities to 
petition the Commission to issue a rule pursuant to Sec.  13.2 of the 
Commission's regulations.\668\
---------------------------------------------------------------------------

    \668\ 17 CFR 13.2.
---------------------------------------------------------------------------

    With respect to natural gas cash-settled referenced contracts, the 
reproposed rules allow market participants to exceed the position limit 
provided that such positions do not exceed 10,000 contracts and the 
person holding or controlling such positions does not hold or control 
positions in the spot-month natural gas physical-delivery referenced 
contract (NYMEX NG). Persons relying upon this exemption must file Form 
504 during the spot month.\669\
---------------------------------------------------------------------------

    \669\ See infra discussion of part 19 and Form 504, below.
---------------------------------------------------------------------------

    The Commission observes that the conditional exemption level of 
10,000 contracts is equal to five times the federal natural gas spot-
month position limit level of 2,000 contracts. The conditional 
exemption level is also equal to the sum of the current conditional 
exemption levels for each of the NYMEX HH contract and the ICE NG LD1 
contract. The Commission believes the level of 10,000 contracts 
provides relief for market participants who currently may hold or 
control 5,000 contracts in each of these two cash-settled natural gas 
futures contracts and an unlimited number of cash-settled swaps, while 
still furthering the purposes of the Dodd-Frank Act's amendments to CEA 
section 4a.
    The Commission is proposing the fixed figure of 10,000 contracts, 
rather than the variable figure of five times the spot-month position 
limit level, in order to avoid confusion in the event NYMEX were to set 
its spot-month limit in the physical-delivery NYMEX NG contract at a 
level below 2,000 contracts.
    The Commission provides, for informational purposes, summary 
statistical information that it considered in declining to extend the 
conditional spot-month limit exemption beyond the natural gas 
referenced contract. The four tables below present the number of unique 
persons that held positions in commodity derivative contracts greater 
than or equal to the specified levels, as reported to the Commission 
under the large trader reporting systems for futures and swaps, for the 
period July 1, 2014 to June 30, 2016. The table also presents counts of 
unique reportable persons, whether reportable under part 17 (futures 
and future option contracts) or under part 20 (swap contracts). The 
method the Commission used to analyze this large trader data is 
discussed above, under Sec.  150.2.
    The four tables group commodities only for convenience of 
presentation. In each table, the term ``25% DS'' means 25 percent of 
the deliverable supply as estimated by the exchange listing the core 
referenced futures contract and verified as reasonable by the 
Commission. Similarly, ``15% DS'' means 15 percent of estimated 
deliverable supply. An asterisk (``*'') means that fewer than four 
unique persons were reported. ``CME proposal'' means the level 
recommended by the CME Group for the spot-month limit. MGEX submitted a 
recommended spot-month limit level that is slightly less than 25 
percent of estimated deliverable supply but did not affect the reported 
number of unique persons; no other exchange recommended a spot-month 
level of less than 25 percent of estimated deliverable supply.
    For the first group of commodities, there was no unique person in 
the cash-settled referenced contracts whose position would have 
exceeded 25 percent of the exchange's estimated deliverable supply. 
Moreover, no unique person held a position in the cash-settled 
referenced contracts that would have exceeded the reproposed spot-month 
limits discussed under Sec.  150.2, above, that are lower than 25 
percent of the exchange's estimated deliverable supply.

[[Page 96779]]



                                                Table III-B-21--CME Group and MGEX Agricultural Contracts
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Number of unique persons >=    Number of reportable persons
                                                                                                       level                         in market
                                                                          Position limit ---------------------------------------------------------------
     Core-referenced futures contract         Basis of spot-month level        level                        Spot month
                                                                                            Spot month       physical       Spot month      All months
                                                                                           cash settled      delivery          only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Corn......................................  CME proposal................             600               0              36           1,050           2,606
(CBOT current limit 600)..................  25% DS......................             900               0              20  ..............  ..............
Oats......................................  CME proposal................             600               0               0              33             173
(CBOT current limit 600)..................  25% DS......................             900               0               0  ..............  ..............
Soybeans..................................  CME proposal................             600               0              22             929           2,503
(CBOT current limit 600)..................  25% DS......................           1,200               0              14  ..............  ..............
Soybean Meal..............................  CME proposal................             720               0              14             381             978
(CBOT current limit 720)..................  25% DS......................           2,000               0             (*)  ..............  ..............
Soybean Oil...............................  CME proposal................             540               0              21             397           1,034
(CBOT current limit 540)..................  25% DS......................           3,400               0               0  ..............  ..............
Wheat (CBOT)..............................  CME proposal................             600               0              11             444           1,867
(CBOT current limit 600)..................  25% DS......................           1,000               0               6  ..............  ..............
Wheat (MGEX)..............................  Parity w/CME proposal.......             600               0             (*)             102             342
(MGEX current limit 600)..................  Approx. 25% DS..............           1,000               0             (*)  ..............  ..............
Wheat (KCBT)..............................  CME proposal................             600               0               4             250             718
(KCBT current limit 600)..................  25% CBOT DS.................           1,000               0             (*)  ..............  ..............
                                            25% DS......................           3,000               0             (*)  ..............  ..............
Rough Rice................................  CME proposal................             600               0               0              91             281
(CBOT current limit 600)..................  25% DS......................           2,300               0               0  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For the second group of commodities, there was no unique person in 
the cash-settled referenced contracts whose position would have 
exceeded 25 percent of the exchange's estimated deliverable supply or, 
in the case of Live Cattle, the current exchange limit level of 450 
contracts. Moreover, other than in the Sugar No. 11 contract, no unique 
person held a position in the cash-settled referenced contracts that 
would have exceeded 15 percent of the exchange's estimated deliverable 
supply. For informational purposes, the table also shows for Live 
Cattle that no unique person held a position in the cash-settled 
referenced contracts that would have exceeded 60 percent of the 
exchange's current spot-month limit of 450 contracts.\670\
---------------------------------------------------------------------------

    \670\ The Commission notes that 60 percent of the 450 contract 
spot-month limit is analogous to the counts presented for 15 percent 
of estimated deliverable supply. That is, 60 percent of 25 percent 
equals 15 percent.

                                         Table III-B-22--Other Agricultural Contracts and ICE Futures U.S. Softs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Number of unique persons >=     Number of unique persons in
                                                                                                       level                          market
                                                                          Position limit ---------------------------------------------------------------
     Core-referenced futures contract         Basis of spot-month level        level                        Spot month
                                                                                            Spot month       physical       Spot month      All months
                                                                                           cash settled      delivery          only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Cotton No. 2..............................  15% DS......................             960               0             (*)             122           1,000
(ICE current limit 300)...................  25% DS......................           1,600               0               0  ..............  ..............
Cocoa.....................................  15% DS......................           3,300               0               0             164             682
(ICE current limit 1,000).................  25% DS......................           5,500               0               0  ..............  ..............
Coffee....................................  15% DS......................           1,440               0             (*)             336           1,175
(ICE current limit 500)...................  25% DS......................           2,400               0             (*)  ..............  ..............
Orange Juice..............................  15% DS......................           1,680               0               0              38             242
(ICE current limit 300)...................  25% DS......................           2,800               0               0  ..............  ..............
Live Cattle...............................  60% Current Limit...........             225               0              33             616           1,436
(CME current limit 450)...................  Current limit *.............             450               0               0  ..............  ..............
Sugar No. 11..............................  15% DS......................          13,980             (*)              10             443             874
(ICE current limit 5,000).................  25% DS......................          23,300               0             (*)  ..............  ..............
Sugar No. 16..............................  15% DS......................           4,200               0               0              12              22
(ICE current limit 1,000).................  25% DS......................           7,000               0               0  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For the third group of energy commodities, there were a number of 
unique persons in the cash-settled referenced contracts whose position 
would have exceeded 25 percent of the exchange's estimated deliverable 
supply. For energy commodities other than natural gas, there were fewer 
than 20 unique persons that had cash-settled positions in excess of the 
reproposed spot-month limit levels, each based on 25 percent of 
deliverable supply, as discussed above under Sec.  150.2. However, for 
natural gas referenced contracts, 131 unique persons had cash-settled 
positions in excess of the reproposed spot-month limit level of 2,000 
contracts. As can be observed in the table below, only 20 unique 
persons had cash-settled referenced contract positions that would have 
exceeded the

[[Page 96780]]

reproposed natural gas conditional spot-month limit level of 10,000 
contracts. Thus, a conditional spot-month limit exemption in natural 
gas referenced contracts potentially would provide relief to a 
substantial number of market participants, each of whom did not have a 
position that was extraordinarily large in relation to other traders' 
positions in cash-settled referenced contracts.

                                                            Table III-B-23--Energy Contracts
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Nunber of unique persons >=     Number of unique persons in
                                                                                                       level                          market
                                                                          Position limit ---------------------------------------------------------------
     Core-referenced futures contract         Basis of spot-month level        level                        Spot month
                                                                                            Spot month       physical       Spot month      All months
                                                                                           cash settled      delivery          only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Crude Oil, Light Sweet (WTI)..............  CME proposal *..............           6,000              19               8           1,773           2,673
(NYMEX current limit......................  25% DS......................          10,400              16             (*)  ..............  ..............
3,000 contracts)..........................  50% DS......................          20,800             (*)               0  ..............  ..............
Gasoline Blendstock (RBOB)................  CME proposal................           2,000              23              14             463             837
(NYMEX current limit......................  25% DS......................           6,800             (*)               0  ..............  ..............
1,000 contracts)..........................  50% DS......................          13,600               0               0  ..............  ..............
Natural Gas...............................  25% DS......................           2,000             131              16           1,400           1,846
(NYMEX current limit......................  50% DS......................           4,000              77             (*)  ..............  ..............
1,000 contracts)..........................  Current single exchange                5,000              65             (*)  ..............  ..............
                                             conditional spot-month
                                             limit exemption.
                                            Conditional spot-month limit          10,000              20               0  ..............  ..............
                                             exemption.
ULSD (HO).................................  CME proposal................           2,000              24              11             470             760
(NYMEX current limit......................  25% DS......................           2,900              15               5  ..............  ..............
1,000 contracts)..........................  50% DS......................           5,800               5               0  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------
* For WTI, CME Group recommended a step-down spot-month limit of 6,000/5,000/4,000 contracts in the last three days of trading.

    For the fourth group of metal commodities, there were a few unique 
persons in the cash-settled referenced contracts whose position would 
have exceeded the reproposed levels of the spot-month limits, based on 
the CME Group's recommended levels, as discussed above under Sec.  
150.2. However, there were fewer than 20 unique persons that had cash-
settled positions in excess of the reproposed spot-month limit levels 
for metal commodities; this is in marked contrast to the 131 unique 
persons who had cash-settled positions in excess of the reproposed 
spot-month limit for natural gas contracts. The Commission, in 
consideration of the distribution of unique persons holding positions 
in cash-settled metal commodity contracts across the 24 calendar months 
of its analysis, particularly in platinum,\671\ is of the view that the 
spot-month limit level, as discussed above under Sec.  150.2, and 
without a conditional spot-month limit exemption, is within the range 
of acceptable limit levels that, to the maximum extent practicable, may 
achieve the statutory policy objectives in CEA section 4a(a)(3)(B).
---------------------------------------------------------------------------

    \671\ As can be observed in the open interest table discussed 
under Sec.  150.2, above, the Commission notes that open interest in 
cash-settled platinum contracts was markedly lower in the second 12-
month review period (year 2), than in the first 12-month review 
period (year 1).

                                                Table III-B-24--Metal Contracts (COMEX Division of NYMEX)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                            Number of unique persons >=     Number of unique persons in
                                                                                                       level                          market
                                                                          Position limit ---------------------------------------------------------------
     Core-referenced futures contract         Basis of spot-month level        level                        Spot month
                                                                                            Spot month       physical       Spot month      All months
                                                                                           cash settled      delivery          only
--------------------------------------------------------------------------------------------------------------------------------------------------------
Copper....................................  CME proposal................           1,000               0             (*)             493           1,457
(current limit 1,000).....................  25% DS......................           1,100               0             (*)  ..............  ..............
Gold......................................  CME proposal................           6,000             (*)             (*)             518           1,557
(current limit 3,000).....................  25% DS......................          11,200               0               0  ..............  ..............
Palladium.................................  CME proposal................             100               6              14             164             580
(current limit 100).......................  25% DS......................             900               0               0  ..............  ..............
Platinum..................................  CME proposal................             500              13             (*)             235             842
(current limit 500).......................  25% DS......................             900              10             (*)  ..............  ..............
                                            50% DS......................           1,800             (*)               0  ..............  ..............
Silver....................................  CME proposal................           3,000               0               0             311           1,023
(current limit 1,500).....................  25% DS......................           5,600               0               0  ..............  ..............
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 96781]]

e. Proposed Recordkeeping and Special Call Requirements--Sec.  150.3(g) 
and Sec.  150.3(h)
    Proposed Rules: As proposed in the December 2013 Position Limits 
Proposal, Sec.  150.3(g) specifies recordkeeping requirements for 
persons who claim any exemption set forth in Sec.  150.3. Persons 
claiming exemptions under previously 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. 
Furthermore, such persons must make such books and records available to 
the Commission upon request under previously proposed Sec.  150.3(h), 
which would preserve the ``special call'' rule set forth in current 
Sec.  150.3(b). This ``special call'' rule would have required 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.
    The Commission noted that the previously proposed rules concerning 
detailed recordkeeping and special calls are designed to help ensure 
that any person who claims any exemption set forth in Sec.  150.3 can 
demonstrate a legitimate purpose for doing so.\672\
---------------------------------------------------------------------------

    \672\ December 2013 Position Limits Proposal, 78 FR at 75741.
---------------------------------------------------------------------------

    Comments Received: The Commission did not receive any comments on 
the recordkeeping provisions in Sec.  150.3(g) as proposed in the 
December 2013 Position Limits Proposal. With respect to previously 
proposed Sec.  150.3(h), one commenter opposed the ``special call'' 
provision because, in the commenter's opinion, it is ``too passive.'' 
The commenter advocated, instead, a revision requiring persons claiming 
an exemption to maintain books and records on an ongoing basis and 
provide information to the Commission on a periodic and automatic 
basis, because even if the Commission lacked staff and resources to 
review the submitted material in real-time, Commission staff would have 
detailed historical data for use in compliance audits. This commenter 
stated that since required records are likely to be kept in an 
electronic format, the more frequent reporting requirement would not be 
considered burdensome.\673\
---------------------------------------------------------------------------

    \673\ CL-O SEC-59972 at 5.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission believes the previously 
proposed recordkeeping and ``special call'' provisions in Sec.  
150.3(g) and Sec.  150.3(h), respectively, are sufficient to limit 
abuse of exemptions without causing undue burdens on market 
participants. The Commission is reproposing these sections generally as 
proposed in the December 2013 Position Limits Proposal. The Commission 
is clarifying, in reproposed Sec.  150.3(g)(2), that the bona fides of 
the pass-through swap counterparty may be determined at the time of the 
transaction or, alternatively, at such later time that the counterparty 
can show the swap position to be a bona fide hedging position. As 
previously proposed, such bona fides could only be determined at the 
time of the transaction, as opposed to at a later time.

D. Sec.  150.5--Exchange-Set Speculative Position Limits and Parts 37 
and 38

1. Background
    As discussed above, the Commission currently sets and enforces 
position limits pursuant to its broad authority under CEA section 
4a,\674\ and does so only with respect to certain enumerated 
agricultural products.\675\ As the Commission explained above and in 
the December 2013 Position Limits Proposal,\676\ section 735 of the 
Dodd-Frank Act amended section 5(d)(1) of the CEA to explicitly provide 
that the Commission may mandate the manner in which DCMs must comply 
with the core principles.\677\ However, Congress limited the exercise 
of reasonable discretion by DCMs only where the Commission has acted by 
regulation.\678\
---------------------------------------------------------------------------

    \674\ CEA section 4a, as amended by the Dodd-Frank Act, provides 
the Commission with broad authority to set position limits, 
including an extension of its position limits authority to swaps 
positions. 7 U.S.C. 6a. See supra discussion of CEA section 4a.
    \675\ 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 enumerated 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.
    \676\ See December 2013 Position Limits Proposal, 78 FR at 
75748.
    \677\ 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. See CEA section 
5(d)(1)(B); 7 U.S.C. 7(d)(1)(B).
    \678\ See December 2013 Position Limits Proposal, 78 FR at 
75748.
---------------------------------------------------------------------------

    The Dodd-Frank Act also amended DCM core principle 5. As amended, 
DCM core principle 5 requires 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.'' \679\ Moreover, the Dodd-Frank Act added CEA 
section 5h to provide a regulatory framework for Commission oversight 
of SEFs.\680\ Under SEF core principle 6, which parallels DCM core 
principle 5, Congress required that SEFs that are trading facilities 
adopt for each swap, as is necessary and appropriate, position limits 
or position accountability.\681\ Furthermore, 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.\682\
---------------------------------------------------------------------------

    \679\ See CEA section 5(d)(5)(B) (amended 2010), 7 U.S.C. 
7(d)(5)(B).
    \680\ See CEA section 5h, 7 U.S.C. 7b-3.
    \681\ CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6); see also 
December 2013 Position Limits Proposal, 78 FR at 75748.
    \682\ Id.
---------------------------------------------------------------------------

2. Summary
    As explained in the December 2013 Position Limits Proposal,\683\ to 
implement the authority provided by section 735 of the Dodd-Frank Act 
amendments to CEA sections 5(d)(1) and 5h(f)(1), the Commission 
evaluated 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,\684\ the 
Commission in its December 2013 Position Limit Proposal, proposed 
several updates to Sec.  150.5 to promote compliance with DCM core 
principle 5 and SEF core principle 6 governing position limitations or 
accountability.\685\
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    \683\ December 2013 Position Limits Proposal, 78 FR at 75754.
    \684\ 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).
    \685\ December 2013 Position Limits Proposal, 78 FR at 75754.
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    First, the Commission proposed amendments to the provisions of 
Sec.  150.5 to include SEFs and swaps. Second, the Commission proposed 
to codify rules and revise acceptable practices for

[[Page 96782]]

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. Third, the Commission proposed 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. Fourth, the Commission 
proposed to amend Sec.  150.5 to implement uniform requirements for 
DCMs and SEFs that are trading facilities relating to hedging 
exemptions across all types of contracts, including those that are 
subject to federal limits. Fifth, the Commission proposed to require 
DCMs and SEFs that are trading facilities to have aggregation policies 
that mirror the federal aggregation provisions.\686\
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    \686\ Id. Aggregation exemptions can be used, in effect, as a 
way for a trader to acquire a larger speculative position. As noted 
in the December 2013 Position Limits Proposal, 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. December 2013 Position Limits 
Proposal, 78 FR at 75754, n. 660.
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    In addition to the changes to the provisions of Sec.  150.5 
proposed in the December 2013 Position Limits Proposal, the Commission 
also noted that it had, in response to the Dodd-Frank Act, previously 
published several earlier rulemakings that pertained to position 
limits, including in 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.\687\ In addition, as noted above, the Commission had published a 
proposal to replace part 150 with a proposed part 151, which was later 
finalized before being vacated.\688\ In the December 2013 Position 
Limits Proposal, the Commission pointed out that as it was originally 
proposed, Sec.  38.301 would require each DCM to comply with the 
requirements of part 151 as a condition of its compliance with DCM core 
principle 5.\689\ When the Commission finalized Dodd-Frank updates to 
part 38 in 2012, it 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.\690\ At that time, the Commission explained 
that this clarification would ensure that DCMs were 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.\691\ The Commission further explained that 
its new regulation, Sec.  38.301, was based on the Dodd-Frank 
amendments to the DCM core principles regime, which collectively would 
provide that DCM discretion in setting position limits or position 
accountability levels was limited by Commission regulations setting 
position limits.\692\
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    \687\ See December 2013 Position Limits Proposal, 78 FR at 
75753; see also Core Principles and Other Requirements for 
Designated Contract Markets, 75 FR 80572 (Dec. 22, 2010) (``2010 
Part 38 Proposed Rule'').
    \688\ See supra discussion under Part I.B (discussing the 
Commission's adoption of part 151,subsequently vacated).
    \689\ 2010 Part 38 Proposed Rule at 80585.
    \690\ Core Principles and Other Requirements for Designated 
Contract Markets, 77 FR 36611, 36639 (Jun. 19, 2012) (``Final Part 
38 Rule''). 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.
    \691\ Final Part 38 Rule at 36639.
    \692\ Id. (discussing the Dodd-Frank amendments to the DCM core 
principles); see also CEA sections 5(d)(1) and 5(d)(5), as amended 
by the Dodd-Frank Act.
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    Similarly, as the Commission noted in the December 2013 Position 
Limits Proposal,\693\ when in 2010 the Commission proposed to adopt a 
regulatory scheme applicable to SEFs, it proposed to require that SEFs 
establish position limits in accordance with the requirements set forth 
in part 151 of the Commission's regulations under proposed Sec.  
37.601.\694\ The Commission pointed out that it had revised Sec.  
37.601 in the SEF final rulemaking, to state that until such time that 
compliance was 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 SEF core principle 
6.\695\
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    \693\ December 2013 Position Limits Proposal, 78 FR at 75753.
    \694\ Core Principles and Other Requirements for Swap Execution 
Facilities, 76 FR 1214 (Jan. 7, 2011) (``SEF final rulemaking''). 
Current Sec.  37.601 provides requirements for SEFs that are trading 
facilities to comply with SEF core principle 6 (Position Limits or 
Accountability), while the guidance to SEF core principle 6 
(Position Limits or Accountability) in Appendix B to part 37, cites 
to part 151.
    \695\ Core Principles and Other Requirements for Swap Execution 
Facilities, 78 FR 33476 (June 4, 2013). Current Sec.  37.601 
provides requirements for SEFs that are trading facilities to comply 
with SEF core principle 6 (Position Limits or Accountability).
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    In the December 2013 Position Limits Proposal, the Commission noted 
that in light of the District Court vacatur of part 151, the Commission 
proposed to amend Sec.  37.601 to delete the reference to vacated part 
151. The amendment would have instead required that SEFs that are 
trading facilities meet the requirements of part 150, which would be 
comparable to the DCM requirement, since, as proposed in the December 
2013 Position Limits Proposal, Sec.  150.5 would apply to commodity 
derivative contracts, whether listed on a DCM or on a SEF that is a 
trading facility. At the same time, the Commission would have amended 
Appendix B to part 37, which provides guidance on complying with core 
principles, both initially and on an ongoing basis, to maintain SEF 
registration.\696\ Since the December 2013 Position Limits Proposal 
required that SEFs that are trading facilities meet the requirements of 
part 150, the proposed amendments to the guidance regarding SEF core 
principle 6 reiterated that requirement. The Commission noted that for 
SEFs that are not trading facilities, to whom core principle 6 would 
not be applicable under the statutory language, part 150 should have 
been considered as guidance.\697\
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    \696\ Appendix B to Part 37--Guidance on, and Acceptable 
Practices in, Compliance with Core Principles.
    \697\ December 2013 Position Limits Proposal, 78 FR at 75753.
---------------------------------------------------------------------------

    More recently, the Commission issued the 2016 Supplemental Position 
Limits Proposal to revise and amend certain parts of the December 2013 
Position Limits Proposal based on comments received on the December 
2013 Position Limits Proposal,\698\ viewpoints expressed during a 
Roundtable on Position Limits,\699\ several Commission advisory 
committee meetings that each provided a focused forum for participants 
to discuss some aspects of the December 2013 Position Limits 
Proposal,\700\ and information obtained in the course of ongoing 
Commission

[[Page 96783]]

review of SEF registration applications.\701\
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    \698\ Comments on the December 2013 Position Limits Proposal are 
accessible on the Commission's Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1436.
    \699\ A transcript of the June 19, 2014 Roundtable on Position 
Limits is available on the Commission's Web site at http://www.cftc.gov/idc/groups/public/@swaps/documents/dfsubmission/dfsubmission_061914-trans.pdf.
    \700\ Information regarding the December 9, 2014 and September 
22, 2015 meetings of the Agricultural Advisory Committee, sponsored 
by Chairman Massad, is accessible on the Commission's Web site at 
http://www.cftc.gov/About/CFTCCommittees/AgriculturalAdvisory/aac_meetings. Information regarding February 26, 2015 and the July 
29, 2015 meetings of the Energy & Environmental Markets Advisory 
Committee (``EEMAC''), sponsored by Commission Giancarlo, is 
accessible on the Commission's Web site at http://www.cftc.gov/About/CFTCCommittees/EnergyEnvironmentalMarketsAdvisory/emac_meetings.
    \701\ Added by the Dodd-Frank Act, section 5h(a) of the CEA, 7 
U.S.C. 7b-3, requires SEFs to register with the Commission. See 
generally ``Core Principles and Other Requirements for Swap 
Execution Facilities,'' 78 FR 33476 (Aug. 5, 2013). Information 
regarding the SEF application process is available on the 
Commission's Web site at http://www.cftc.gov/IndustryOversight/TradingOrganizations/SEF2/sefhowto.
---------------------------------------------------------------------------

    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to delay for exchanges that lack access to sufficient swap 
position information the requirement to establish and monitor position 
limits on swaps at this time by: (i) Adding Appendix E to part 150 to 
provide guidance regarding Sec.  150.5; and (ii) revising guidance on 
DCM Core Principle 5 and SEF Core Principle 6 that corresponds to that 
proposed guidance regarding Sec.  150.5.\702\ In addition, the 
Commission in the 2016 Supplemental Position Limits Proposal proposed 
new alternative processes for DCMs and SEFs to recognize certain 
positions in commodity derivative contracts as non-enumerated bona fide 
hedges or enumerated anticipatory bona fide hedges, as well as to 
exempt from federal position limits certain spread positions, in each 
case subject to Commission review.\703\ Moreover, the Commission 
proposed that DCMs and SEFs could recognize and exempt from exchange 
position limits certain non-enumerated bona fide hedging positions, 
enumerated anticipatory bona fide hedges, and certain spread 
positions.\704\ To effectuate the latter proposals, the Commission 
proposed amendments to Sec.  150.3 and new Sec.  150.9, 150.10, and 
150.11, as well as corresponding amendments to Sec.  150.5(a)(2) and 
150.5(b)(5).\705\
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    \702\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38459-62. See also DCM Core Principle 5, Position Limitations or 
Accountability (contained in CEA section 5(d)(5), 7 U.S.C. 7(d)(5)) 
and SEF Core Principle 6, Position Limits or Accountability 
(contained in CEA section 5h(f)(6), 7 U.S.C. 7b-3(f)(6)).
    \703\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38467-76 (providing for recognition of certain positions in 
commodity derivative contracts as non-enumerated bona fide hedges), 
at 38480-81 (providing for recognition of certain positions in 
commodity derivatives contracts as enumerated anticipatory bona fide 
hedges); and at 38476-80 (providing for exemptions from federal 
position limits for certain spread positions).
    \704\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38482.
    \705\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38504-13. The 2016 Supplemental Position Limits Proposal did not 
address the changes to Sec. Sec.  37.601 or 38.301 proposed in the 
December 2013 Position Limits Proposal.
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3. Discussion
    As discussed in greater detail below, the Commission has determined 
to repropose Sec.  150.5 largely as proposed in the December 2013 
Position Limit Proposal and as revised in the 2016 Supplemental 
Position Limits Proposal. In addition, the Commission has determined to 
repropose the previously proposed amendments to Sec.  37.601 and Sec.  
38.301.\706\
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    \706\ The Commission did not receive any comments regarding the 
proposed changes to Sec.  37.601 and Sec.  38.301.
---------------------------------------------------------------------------

    Some changes were made to Sec.  150.5 in response to concerns 
raised by commenters; other changes to the reproposed regulation are to 
conform to changes made in other sections. For example, in reproposing 
Sec.  150.5(b)(1) and (2), the Commission has determined to make 
certain changes to the acceptable practices for establishing the levels 
of individual non-spot or all-months combined position limits for 
futures and future option contracts that are not subject to federal 
limits. The changes to reproposed Sec.  150.5(b)(1) and (2) correspond 
to changes to reproposed Sec.  150.2(e)(4)(iv) discussed above, for 
establishing the levels of individual non-spot or all-months combined 
positions limits for futures and future option contracts that are 
subject to federal limits. Moreover, several non-substantive changes 
were made in response to commenter requests to provide greater 
clarity.\707\
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    \707\ See the removal of the provisions regarding excluded 
commodities from Sec.  150.5(b) and their placement in a new section 
(c), which addresses only excluded commodities. In addition to the 
reorganization of the excluded commodity provisions, changes were 
made to those provisions to track changes made in other sections or 
paragraphs and to address concerns raised by commenters and 
confusion that became apparent in the comment letters.
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    The essential features of the changes to reproposed Sec.  150.5 are 
discussed below.
a. Treatment of Swaps on SEFs and DCMs
    i. December 2013 Position Limits Proposal. As explained above, CEA 
section 4a(a)(5), as amended by the Dodd-Frank Act, requires federal 
position limits for swaps that are ``economically equivalent'' to 
futures and options that are subject to mandatory position limits under 
CEA section 4a(a)(2).\708\ The CEA also requires in SEF Core Principle 
6 that a SEF that is a trading facility: (i) Set its exchange-set limit 
on swaps at a level no higher than that of the federal position limit; 
and (ii) monitor positions established on or through the SEF for 
compliance with the federal position limit and any exchange-set 
limit.\709\ Similarly, for all contracts subject to a federal position 
limit, including swaps, DCMs, under DCM Core Principle 5, must set a 
position limit no higher than the federal limit.\710\
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    \708\ See December 2013 Position Limits Proposal, 78 FR at 
75681-5 (the Commission interpret the statute to mandate that the 
Commission impose limits on futures, options, and swaps, in 
agricultural and exempt commodities).
    \709\ CEA section 5h(f)(6)(B), 7 U.S.C. 7b-3(f)(6) (SEF Core 
Principle 6B). The Commission codified SEF Core Principle 6, added 
by the Dodd-Frank Act, in Sec.  37.600 of its regulations, 17 CFR 
37.600. See generally Core Principles and Other Requirements for 
Swap Execution Facilities, 78 FR 33476, 33533-34 (June 4, 2013).
    \710\ CEA section 5(d)(5), 7 U.S.C. 7(d)(5) (DCM Core Principle 
5). The Commission codified DCM Core Principle 5, as amended by the 
Dodd-Frank Act, in Sec.  38.300 of its regulations, 17 CFR 38.300. 
See Core Principles and Other Requirements for Designated Contract 
Markets, 77 FR 36612, 36639 (June 19, 2012).
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    The December 2013 Position Limits Proposal specified that federal 
position limits would apply to referenced contracts,\711\ whether 
futures or swaps, regardless of where the futures or swaps positions 
are established.\712\ Consistent with DCM Core Principle 5 and SEF Core 
Principle 6, the Commission at Sec.  150.5(a)(1) previously proposed 
that for any commodity derivative contract that is subject to a 
speculative position limit under Sec.  150.2, a DCM or SEF that is a 
trading facility shall set a speculative position limit no higher than 
the level specified in Sec.  150.2.'' \713\
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    \711\ Under the December 2013 Position Limits Proposal, 
``referenced contracts'' are defined as futures, options, 
economically equivalent swaps, and certain foreign board of trade 
contracts, in physical commodities, and are subject to the proposed 
federal position limits. See December 2013 Position Limits Proposal, 
78 FR at 75825.
    \712\ See December 2013 Position Limits Proposal, 78 FR at 75826 
(previously proposed Sec.  150.2).
    \713\ See December 2013 Position Limits Proposal, 78 FR at 
75754-8.
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ii. Comments Received to December 2013 Position Limits Proposal
    Several comment letters on previously proposed Sec.  150.5 
recommended that the Commission not require SEFs to establish position 
limits.\714\ Two noted that because SEF participants may use more than 
one derivatives clearing organization (``DCO''), a SEF may not know 
when a position has been offset.\715\ Further, during the ongoing SEF 
registration process,\716\ a number of

[[Page 96784]]

persons applying to become registered as SEFs told the Commission that 
they lack access to information that would enable them to knowledgeably 
establish position limits or monitor positions.\717\ As the Commission 
observed in the 2016 Supplemental Position Limits Proposal, this 
information gap would also be a concern for DCMs in respect of 
swaps.\718\
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    \714\ CL-CMC-59634 at 14-15, CL-FIA-60392 at 10. One comment 
letter stated that SEFs should be exempt from the requirement to set 
positions limits because SEFs are in the early stages of development 
and could be harmed by limits that restrict liquidity. CL-ISDA/
SIFMA-59611 at 35.
    \715\ CL-CMC-59634 at 14-15, CL-FIA-60392 at 10.
    \716\ Under CEA section 5h(a)(1), no person may operate a 
facility for trading swaps unless the facility is registered as a 
SEF or DCM. 7 U.S.C. 7b-3(a)(1). A SEF must comply with core 
principles, including Core Principle 6 regarding position limits, as 
a condition of registration. CEA section 5h(f)(1), 7 U.S.C. 7b-
3(f)(1).
    \717\ For example, in a submission to the Commission under part 
40 of the Commission's regulations, BGC Derivative Markets, L.P. 
states that ``[t]he information to administer limits or 
accountability levels cannot be readily ascertained. Position limits 
or accountability levels apply market-wide to a trader's overall 
position in a given swap. To monitor this position, a SEF must have 
access to information about a trader's overall position. However, a 
SEF only has information about swap transactions that take place on 
its own Facility and has no way of knowing whether a particular 
trade on its facility adds to or reduces a trader's position. And 
because swaps may trade on a number of facilities or, in many cases, 
over-the-counter, a SEF does not know the size of the trader's 
overall swap position and thus cannot ascertain whether the trader's 
position relative to any position limit. Such information would be 
required to be supplied to a SEF from a variety of independent 
sources, including SDRs, DCOs, and market participants themselves. 
Unless coordinated by the Commission operating a centralized 
reporting system, such a data collection requirement would be 
duplicative as each separate SEF required reporting by each 
information source.'' BGC Derivative Markets, L.P., Rule Submission 
2015-09 (Oct. 6, 2015).
    \718\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38460.
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iii. 2016 Supplemental Position Limits Proposal
    As explained above, in the 2016 Supplemental Position Limits 
Proposal, the Commission proposed to temporarily delay for DCMs and 
SEFs that are trading facilities, which lack access to sufficient swap 
position information, the requirement to establish and monitor position 
limits on swaps by: (i) Adding Appendix E to part 150 to provide 
guidance regarding Sec.  150.5; and (ii) revising guidance on DCM Core 
Principle 5 and SEF Core Principle 6 that corresponds to that guidance 
regarding Sec.  150.5.\719\ At that time, the Commission acknowledged 
that, if an exchange does not have access to sufficient data regarding 
individual market participants' open swap positions, then it cannot 
effectively monitor swap position limits, and expressed its belief that 
most exchanges do not have access to sufficient swap position 
information to effectively monitor swap position limits.\720\
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    \719\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38459-62.
    \720\ Id. at 38460. The Commission acknowledged that one SEF 
that may have access to sufficient swap position information by 
virtue of systems integration with affiliates that are CFTC 
registrants and shared personnel. This SEF requires that all of its 
listed swaps be cleared on an affiliated DCO, which reports to an 
affiliated SDR. 2016 Supplemental Position Limits Proposal, 81 FR at 
38459; see also 38460, n. 32.
---------------------------------------------------------------------------

    In this regard, the Commission expressed its belief that an 
exchange would have or could have access to sufficient swap position 
information to effectively monitor swap position limits if, for 
example: (1) It had access to daily information about its market 
participants' open swap positions; or (2) it knows that its market 
participants regularly engage in large volumes of speculative trading 
activity, including through knowledge gained in surveillance of heavy 
trading activity, that would cause reasonable surveillance personnel at 
an exchange to inquire further about a market participant's intentions 
\721\ or total open swap positions.\722\
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    \721\ Id. at 38460-61. For instance, heavy trading activity 
might cause an exchange to ask whether a market participant is 
building a large speculative position or whether the heavy trading 
activity is merely the result of a market participant making a 
market across several exchanges.
    \722\ Id. at 38461. See 17 CFR 45.3, 45.4, and 45.10. See 
generally CEA sections 4r (reporting and recordkeeping for uncleared 
swaps) and 21 (swap data repositories), 7 U.S.C. 6r and 24a, 
respectively. The Commission also observed that, unlike futures 
contracts, which are proprietary to a particular DCM and typically 
clear at a single DCO affiliated with the DCM, swaps in a particular 
commodity are not proprietary to any particular trading facility or 
platform. Market participants may execute swaps involving a 
particular commodity on or subject to the rules of multiple 
exchanges or, in some circumstances, OTC. Further, under the 
Commission regulations, data with respect to a particular swap 
transaction may be reported to any swap data repository (``SDR'').
---------------------------------------------------------------------------

    The Commission noted that it is possible that an exchange could 
obtain an indication of whether a swap position established on or 
through a particular exchange is increasing a market participant's swap 
position beyond a federal or exchange-set limit, if that exchange has 
data about some or all of a market participant's open swap position 
from the prior day and combines it with the transaction data from the 
current day, to obtain an indication of the market participant's 
current open swap position.\723\ The indication would alert the 
exchange to contact the market participant to inquire about that 
participant's total open swap position.
---------------------------------------------------------------------------

    \723\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38461. The Commission observed, moreover, by way of example, that 
part 20 swaps data is a source that identifies a market 
participant's reported open swap positions from the prior trading 
day. So an exchange with access to part 20 swaps date could use it 
to add to any swap positions established on or through that exchange 
during the current trading day to get an indication of a potential 
position limit violation. Nonetheless, that market participant may 
have conducted other swap transactions in the same commodity, away 
from a particular exchange, that reduced its swap position. Id.
---------------------------------------------------------------------------

    The Commission expressed its belief that although this indication 
would not include the market participant's activity transacted away 
from that particular exchange, such monitoring would comply with CEA 
section 5h(f)(6)(B)(ii). However, the Commission observed that 
exchanges generally do not currently have access to a data source that 
identifies a market participant's reported open swap positions from the 
prior trading day. With only the transaction data from a particular 
exchange, it would be impracticable, if not impossible, for that 
exchange to monitor and enforce position limits for swaps.\724\
---------------------------------------------------------------------------

    \724\ Id. The Commission also noted that an exchange could 
theoretically obtain swap position data directly from market 
participants, for example, by requiring a market participant to 
report its swap positions, as a condition of trading on the 
exchange. The Commission observed, however, that it is unlikely that 
a single exchange would unilaterally impose a swaps reporting regime 
on market participants. Id. at 38461, n. 36. The Commission 
abandoned the approach of requiring market participants to report 
futures positions directly to the Commission many years ago. Id.; 
see also Reporting Requirements for Contract Markets, Futures 
Commission Merchants, Members of Exchanges and Large Traders, 46 FR 
59960 (Dec. 8, 1981). Instead, the Commission and DCMs rely on a 
large trader reporting system where futures positions are reported 
by futures commission merchants, clearing members and foreign 
brokers. See generally part 19 of the Commission's regulations, 17 
CFR part 19. See also, for example, the discussion of an exchange's 
large trader reporting system in the Division of Market Oversight 
Rule Enforcement Review of the Chicago Mercantile Exchange and the 
Chicago Board of Trade, July 26, 2013, at 24-7, available at http://www.cftc.gov/idc/groups/public/@iodcms/documents/file/rercmecbot072613.pdf.
    Further, as noted above, exchanges do not have authority to 
demand swap position data from derivative clearing organizations or 
swap data repositories; nor do exchanges have general authority to 
demand market participants' swap position data from clearing members 
of DCOs or swap dealers (as the Commission does under part 20). 2016 
Supplemental Position Limits Proposal, 81 FR at 38461, n. 36.
---------------------------------------------------------------------------

    The Commission also acknowledged in the 2016 Supplemental Position 
Limits Proposal that it has neither

[[Page 96785]]

required any DCO \725\ or SDR \726\ to provide such swap data to 
exchanges,\727\ nor provided any exchange with access to swaps data 
collected under part 20 of the Commission's regulations.\728\
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    \725\ Core principle M for DCOs addresses information sharing 
for risk management purposes, but does not address information 
sharing with exchanges for other purposes. CEA section 5b(c)(2)(M), 
7 U.S.C. 7a-1(c)(2)(M), and Sec.  39.22, 17 CFR 39.22. The 
Commission has access to DCO information relating to trade and 
clearing details under Sec.  39.19, 17 CFR 39.19, as is necessary to 
conduct its oversight of a DCO. However, the Commission has not used 
its general rulemaking authority under CEA section 8a(5), 7 U.S.C. 
12a(5), to require DCOs to provide registered entities access to 
swap information, although the Commission could impose such a 
requirement by rule. CEA section 5b(c)(2)(A)(i), 7 U.S.C. 7a-
1(c)(2)(A)(i).
    \726\ An SDR has a duty to provide direct electronic access to 
the Commission, or a designee of the Commission who may be a 
registered entity (such as an exchange). CEA section 21(c)(4), 7 
U.S.C. 24a(c)(4). See 76 FR 54538 at 54551, n. 141 (Sept. 1, 2011). 
However, the Commission has not designated any exchange as a 
designee of the Commission for that purpose. Further, the Commission 
has not used its general rulemaking authority under CEA section 
8a(5), 7 U.S.C. 12a(5), to require SDRs to provide registered 
entities (such as exchanges) access to swap information, although 
the Commission could impose such a requirement by rule. CEA section 
21(a)(3)(A)(ii), 7 U.S.C. 24a(a)(3)(A)(ii). For purposes of 
comparison, the Securities and Exchange Commission (``SEC'') noted 
with regard to security-based swaps when it finalized its rules 
implementing its similar provision (which it described as a 
``statutory requirement that security-based SDRs conditionally 
provide data to certain regulators and other authorities''), ``that 
one or more self-regulatory organizations potentially may seek such 
access under this provision.'' Access to Data Obtained by Security-
Based Swap Data Repositories, 81 FR 60585, 50588 (Sept. 2, 2016). 
The SEC estimated that ``up to 30 domestic entities potentially 
might enter into such MOUs or other arrangements, reflecting the 
nine entities specifically identified by statute or the final rules, 
and up to 21 additional domestic governmental entities or self-
regulatory organizations that may seek access to such data.'' Id. at 
60593.
    \727\ As the Commission noted in the 2016 Supplemental Position 
Limits Proposal, even if such information were to be made available 
to exchanges, the swaps positions would need to be converted to 
futures-equivalent positions for purposes of monitoring position 
limits on a futures-equivalent basis. 2016 Supplemental Position 
Limits Proposal, 81 FR at 38461. See also December 2013 Positions 
Limits Proposal, 78 FR at 78 FR75825 (describing the proposed 
definition of futures-equivalent); 2016 Supplemental Position Limits 
Proposal at 38461 (describing amendments to that proposed 
definition).
    \728\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38461. The part 20 swaps data is reported in futures equivalents, 
but does not include data specifying where reportable positions in 
swaps were established.
    The Commission stated in the December 2013 Position Limits 
Proposal that it preliminarily had decided not to use the swaps data 
then reported under part 20 for purposes of setting the initial 
levels of the proposed single and all-months-combined positions 
limits due to concerns about the reliability of such data. December 
2013 Position Limits Proposal, 78 FR at 75533. The Commission also 
stated that it might use part 20 swaps data should it determine such 
data to be reliable, in order to establish higher initial levels in 
a final rule. Id. at 75734.
    However, as the Commission noted in the 2016 Supplemental 
Position Limits Proposal, the quality of part 20 swaps data does 
appear to have improved somewhat since the December 2013 Position 
Limits Proposal, although some reports continue to have significant 
errors. The Commission stated that it is possible that it will be 
able to rely on swap open positions data, given adjustments for 
obvious errors (e.g., data reported based on a unit of measure, such 
as an ounce, rather than a futures equivalent number of contracts), 
to establish higher initial levels of non-spot month limits in a 
final rule. 2016 Supplemental Position Limits Proposal, 81 FR at 
38461.
    Moreover, the quality of the data regarding reportable positions 
in swaps may have improved enough for the Commission to be able to 
rely on it when monitoring market participants' compliance with the 
proposed federal position limits.
---------------------------------------------------------------------------

    The Commission stated that in light of the foregoing, it was 
proposing a delay in implementation of exchange-set limits for swaps 
only, and only for exchanges without sufficient swap position 
information.\729\ After consideration of the circumstances described 
above, and in an effort to accomplish the policy objectives of the 
Dodd-Frank Act regulatory regime, including to facilitate trade 
processing of any swap and to promote the trading of swaps on 
SEFs,\730\ the 2016 Supplemental Position Limits Proposal amended the 
guidance in the appendices to parts 37 and 38 of the Commission's 
regulations regarding SEF core principle 6 and DCM core principle 5, 
respectively. According to the 2016 Supplemental Position Limits 
Proposal, the revised guidance clarified that an exchange need not 
demonstrate compliance with SEF core principle 6 or DCM core principle 
5 as applicable to swaps until it has access to sufficient swap 
position information, after which the guidance would no longer be 
applicable.\731\ For clarity, the 2016 Supplemental Position Limits 
Proposal included the same guidance in a new Appendix E to proposed 
part 150 in the context of the Commission's proposed regulations 
regarding exchange-set position limits.
---------------------------------------------------------------------------

    \729\ Id.
    \730\ See, e.g., CEA sections 5h(b)(1)(B) and 5h(e), 7 U.S.C. 
7b-3(b)(1)(B) and 7b-3(e), respectively.
    \731\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38461. The Commission stated that once the guidance was no longer 
applicable, a DCM or a SEF would be required to file rules with the 
Commission to implement the relevant position limits and demonstrate 
compliance with Core Principle 5 or 6, as appropriate. The 
Commission also noted that, for the same reasons regarding swap 
position data discussed above in respect of CEA section 5h(f)(6)(B), 
the guidance proposed in the 2016 Supplemental Position Limits 
Proposal would temporarily relieve SEFs of their statutory 
obligation under CEA section 5h(f)(6)(A). Id.
---------------------------------------------------------------------------

    Although the Commission proposed to temporarily relieve exchanges 
that do not now have access to sufficient swap position information 
from having to set position limits on swaps, it also noted that nothing 
in the 2016 Supplemental Position Limits Proposal would prevent an 
exchange from nevertheless establishing position limits on swaps, while 
stating that it does seem unlikely that an exchange would implement 
position limits before acquiring sufficient swap position information 
because of the ensuing difficulty of enforcing such a limit. The 
Commission expressed its belief that providing delay for those 
exchanges that need it both preserved flexibility for subsequent 
Commission rulemaking and allowed for phased implementation of 
limitations on swaps by exchanges, as practicable.\732\
---------------------------------------------------------------------------

    \732\ As the Commission noted above, although the 2016 
Supplemental Position Limits Proposal proposed position limits 
relief to SEFs and to DCMs in regards to swaps, it did not propose 
any alteration to the definition of referenced contract (including 
economically equivalent swaps) that was proposed in December 2013. 
See also December 2013 Position Limits Proposal, 78 FR at 75825.
---------------------------------------------------------------------------

    Additionally, the Commission observed that courts have authorized 
relieving regulated entities of their statutory obligations where 
compliance is impossible or impracticable,\733\ and noted its view that 
it would be impracticable, if not impossible, for an exchange to 
monitor and enforce position limits for swaps with only the transaction 
data from that particular exchange.\734\ The Commission expressed its 
belief that, accordingly, it was reasonable to delay implementation of 
this discrete aspect of position limits, only with respect to swaps 
position limits, and only for exchanges that lacked access to 
sufficient swap position information. This approach, the Commission 
believed, would further the policy objectives of the Dodd-Frank Act 
regulatory regime, including the facilitation of trade processing of 
swaps

[[Page 96786]]

and the promotion of trading swaps on SEFs. Finally, the Commission 
noted that while this approach would delay the requirement for certain 
exchanges to establish and monitor exchange-set limits on swaps, under 
the December 2013 Position Limits Proposal, federal position limits 
would apply to swaps that are economically equivalent to futures 
contracts subject to federal position limits.\735\
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    \733\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38462. See also id. at n. 44 (See, e.g., Ass'n of Irritated 
Residents v. EPA, 494 F.3d 1027, 1031 (D.C. Cir. 2007) (allowing 
regulated entities to enter into consent agreements with EPA--
without notice and comment--that deferred prosecution of statutory 
violation until such time as compliance would be practicable); 
Catron v. County Bd. Of Commissioners v. New Mexico Fish & Wildlife 
Serv., 75 F.3d 1429, 1435 (10th Cir.1966) (stating that `Compliance 
with [the National Environmental Protection Act] is excused when 
there is a statutory conflict with the agency's authorizing 
legislation that prohibits or renders compliance impossible.' '')). 
The Commission noted, moreover, that ``it is axiomatic that courts 
will avoid reading statutes to reach absurd or unreasonable 
consequences'' (citing, as an example, Griffin v. Oceanic 
Contractors, Inc., 458 U.S. 564 (1982)), and pointed out that to 
require an exchange to monitor position limits on swaps, when it 
currently has extremely limited visibility into a market 
participant's swap position, was, arguably, absurd and certainly 
appeared unreasonable. 2016 Supplemental Position Limits Proposal, 
81 FR at 38462, n. 44.
    \734\ Id. at 38462.
    \735\ Id.
---------------------------------------------------------------------------

iv. Comments Received to 2016 Supplemental Position Limits Proposal
    Several commenters addressed the Commission's proposed guidance on 
exchange-set limits on swaps.\736\
---------------------------------------------------------------------------

    \736\ E.g., CL-FIA-60937 at 1,6; CL-WMBA-60945 at 1-2; CL-AFR-
60953 at 2; CL-RER2-60962 at 1; CL-Better Markets-60928 at 6.
---------------------------------------------------------------------------

    Regarding insufficient swap data, four commenters agreed that SEFs 
and DCMs lack access to sufficient swap position data to set exchange 
limits on swaps, and as such, the commenters support the Commission's 
decision to delay the position limit monitoring requirements for SEFs 
that are trading facilities and DCMs.\737\ In addition, one commenter 
recommended that the Commission provide notice for public comments 
prior to implementing any determination that a DCM or SEF has access to 
sufficient swap position data to set exchange limits on swaps.\738\ 
Further, two commenters recommended that the Commission identify a 
plan, to address the insufficient data issues, that goes beyond 
``simply exempting affected exchanges.'' \739\
---------------------------------------------------------------------------

    \737\ CL-FIA-60937 at 2, 5-6; CL-WMBA-60945 at 1-2; CL-AFR-60953 
at 2; CL-RER2-60962 at 1.
    \738\ CL-FIA-60937 at 2, 5-6.
    \739\ CL-AFR-60953 at 2; CL-RER2-60962 at 1.
---------------------------------------------------------------------------

    On the other hand, one commenter asserted that there should be no 
delay in implementing position limits for swaps because, according to 
the commenter, the Commission has access to sufficient swap data it 
needs to implement position limits.\740\
---------------------------------------------------------------------------

    \740\ CL-Better Markets-60928 at 6.
---------------------------------------------------------------------------

v. Commission Determination
    The Commission has determined to repropose the treatment of swaps 
and SEFs as previously proposed in the 2016 Supplemental Position 
Limits Proposal for the reasons given above.\741\
---------------------------------------------------------------------------

    \741\ For purposes of clarity, the Commission is reproposing the 
guidance to provide for a temporarily delay for DCMs and SEFs that 
are trading facilities that lack access to sufficient swap position 
information the requirement to establish and monitor position limits 
on swaps by reproposing as proposed in the 2016 Supplemental 
Position Limits Proposal: (i) Appendix E to Part 150 to provide 
guidance regarding reproposed Sec.  150.5; and (ii) guidance on DCM 
Core Principle 5 and SEF Core Principle 6 that corresponds to that 
reproposed guidance regarding Sec.  150.5.
---------------------------------------------------------------------------

    Regarding the comments recommending that the Commission identify a 
plan to address the insufficient data issues that goes beyond ``simply 
exempting affected exchanges,'' the Commission may consider granting 
DCMs and SEFs, as self-regulatory organizations, access to part 20 data 
or SDR data at a later time.
    In addition, regarding the comment that the Commission already has 
access to sufficient swap data in order to implement position limits, 
the Commission points out that it proposes to adopt a phased approach 
to updating its position limits regime.\742\ In conjunction with this 
phased approach, the Commission believes that at this time it should 
limit its implementation of position limits for swaps to those that are 
referenced contracts.
---------------------------------------------------------------------------

    \742\ As the Commission noted in the December 2013 Position 
Limits Proposal, ``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).'' 78 FR 75680.
---------------------------------------------------------------------------

b. Sec.  150.5(a)--Requirements and Acceptable Practices for Commodity 
Derivative Contracts That Are Subject to Federal Position Limits
i. December 2013 Position Limits Proposal
    Several requirements were added to Sec.  150.5(a) in the December 
2013 Position Limits Proposal to which a DCM or SEF that is a trading 
facility must adhere when setting position limits for contracts that 
are subject to the federal position limits listed in Sec.  150.2.\743\ 
Previously proposed Sec.  150.5(a)(1) specified 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.\744\ Exchanges with cash-
settled contracts price-linked to contracts subject to federal limits 
would also be required to adopt those limit levels.
---------------------------------------------------------------------------

    \743\ 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.
    \744\ As previously 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).
---------------------------------------------------------------------------

    Previously proposed Sec.  150.5(a)(3) would have required a DCM or 
SEF that is a trading facility to exempt from speculative position 
limits established under Sec.  150.2 a swap position acquired in good 
faith in any pre-enactment and transition period swaps, in either case 
as defined in Sec.  150.1.\745\ However, previously proposed Sec.  
150.5(a)(3) 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. Under 
previously proposed Sec.  150.5(a)(4)(i), a DCM or SEF that is a 
trading facility must require compliance with spot month speculative 
position limits for pre-existing positions in commodity derivatives 
contracts other than pre-enactment or transition period swaps, while 
previously proposed Sec.  150.5(a)(4)(ii) provides that a non-spot-
month speculative position limit established under Sec.  150.2 would 
not apply to any commodity derivative contract acquired in good faith 
prior to the effective date of such limit.\746\ As proposed in the 
December 2013 Position Limits Proposal, 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.\747\
---------------------------------------------------------------------------

    \745\ The Commission previously proposed to exercise its 
authority under CEA section 4a(a)(7) to exempt pre-Dodd-Frank and 
transition period swaps from speculative position limits (unless the 
trader elected to include such a position to net with post-effective 
date commodity derivative contracts). Such a pre-existing swap 
position would be exempt from initial spot month speculative 
position limits. December 2013 Position Limits Proposal, 78 FR at 
75756, n. 674.
    \746\ See previously proposed 150.5(a)(4)(ii). See also CEA 
section 22(a)(5)(B), added by section 739 of the Dodd-Frank Act.
    \747\ See previously proposed 150.5(a)(4)(ii). Notwithstanding 
any pre-existing exemption adopted by a DCM or SEF that applied to 
speculative position limits in non-spot months, under the December 
2013 Position Limits Proposal, a person holding pre-existing 
commodity derivative contracts (except for pre-existing swaps as 
described above) would be required to comply with spot month 
speculative position limits. However, nothing in previously proposed 
Sec.  150.5(a)(4) would override the exclusion of pre-Dodd-Frank and 
transition period swaps from speculative position limits. December 
2013 Position Limits Proposal, 78 FR at 75756, n. 675.
---------------------------------------------------------------------------

    Under the December 2013 Position Limits Proposal, the Commission 
had proposed to require DCMs and SEFs that are trading facilities to 
have aggregation polices that mirror the federal aggregation 
provisions.\748\ Therefore,

[[Page 96787]]

previously proposed Sec.  150.5(a)(5) required DCMs and SEFs that are 
trading facilities to have aggregation rules that conformed to the 
uniform standards listed in Sec.  150.4.\749\ As noted in the December 
2013 Position Limits Proposal, 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.\750\
---------------------------------------------------------------------------

    \748\ December 2013 Position Limits Proposal, 78 FR at 75754, 
75756. As noted above, aggregation exemptions can be used, in 
effect, as a way for a trader to acquire a larger speculative 
position, and 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 December 2013 Position Limits Proposal also noted that ``. . . 
position aggregation exemptions, if not uniform with the 
Commission's requirements, 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 . . . position aggregation exemptions, DCMs or SEFs may 
not serve that role. December 2013 Position Limits Proposal, 78 FR 
at 75754. See also 2016 Final Aggregation Rule (regarding amendments 
to 150.4, which were approved by the Commission in a separate 
release concurrently with this reproposed rulemaking).
    \749\ Under the December 2013 Position Limits Proposal, 17 CFR 
150.5(g) would be replaced with previously proposed Sec.  
150.5(a)(5) which referenced 17 CFR 150.4 as the regulation 
governing aggregation for contracts subject to federal position 
limits.
    \750\ December 2013 Position Limits Proposal, 78 FR at 75755.
---------------------------------------------------------------------------

    A DCM or SEF that is a trading facility would have continued to be 
free to enforce position limits that are more stringent that the 
federal limits. The Commission clarified in the December 2013 Position 
Limits Proposal that federal spot month position limits do not to apply 
to physical-delivery contracts after delivery obligations are 
established.\751\ Exchanges generally prohibit transfer or offset of 
positions once long and short position holders have been assigned 
delivery obligations. Previously proposed Sec.  150.5(a)(6) clarified 
acceptable practices for a DCM or SEF that is a trading facility 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.\752\
---------------------------------------------------------------------------

    \751\ December 2013 Position Limits Proposal, 78 FR at 75756. 
The Commission stated that, 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. Id. at 75756, n. 678.
    \752\ Id. at 75756. The December 2013 Position Limits Proposal 
noted, for example, that an exchange might 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. Previously proposed Sec.  
150.5(b)(9) set forth the same acceptable practices for contracts 
not subject to federal limits. Id. at 75756, n. 679.
---------------------------------------------------------------------------

ii. Comments Received to December 2013 Position Limits Proposal 
Regarding Proposed Sec.  150.5(a)
    One commenter recommended that exchanges be required to withdraw 
their position accountability and position limit regimes in deference 
to any federal limits and to conform their position limits to the 
federal limits so that a single regime will apply across 
exchanges.\753\
---------------------------------------------------------------------------

    \753\ CL-DBCS-59569 at 4.
---------------------------------------------------------------------------

    Two commenters recommended that the Commission clarify that basis 
contracts would be excluded from exchange-set limits in order to 
provide consistency since such contracts are excluded from the 
Commission's definition of referenced contract and thus are not subject 
to Federal limits.\754\
---------------------------------------------------------------------------

    \754\ CL-FIA-59595 at 41; CL-Nodal-59695 at 3.
---------------------------------------------------------------------------

    One commenter recommended that DCMs and SEFs that are trading 
facilities be given more discretion, particularly with respect to non-
referenced contracts, over aggregation requirements.\755\
---------------------------------------------------------------------------

    \755\ CL-AMG-59709 at 2, 10-11.
---------------------------------------------------------------------------

iii. 2016 Supplemental Position Limits Proposal
    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to amend Sec.  150.5(a)(2) as it was proposed in the December 
2013 Position Limits Proposal.\756\ The amendments would permit 
exchanges to recognize non-enumerated bona fide hedging positions under 
Sec.  150.9, to grant spread exemptions from federal limits under Sec.  
150.10, and to recognize certain enumerated anticipatory bona fide 
hedging positions under Sec.  150.11, each as contained in the 2016 
Supplemental Position Limits Proposal. In conjunction with those 
amendments, the Commission proposed corresponding changes to Sec.  
150.3 and Sec.  150.5(a)(2).
---------------------------------------------------------------------------

    \756\ As noted above, the changes to Sec.  150.3 as proposed in 
the December 2013 Position Limits Proposal would have provided for 
recognition of enumerated bona fide hedge positions, but would not 
have exempted any spread positions from federal limits. For any 
commodity derivative contracts subject to federal position limits, 
Sec.  150.5(a)(2) as proposed in the December 2013 Position Limits 
Proposal would have established requirements under which exchanges 
could recognize exemptions from exchange-set position limits, 
including hedge exemptions and spread exemptions. See also 2016 
Supplemental Position Limits Proposal, 81 FR at 38482.
---------------------------------------------------------------------------

    For example, Sec.  150.5(a)(2)(i), as proposed in the December 2013 
Position Limits Proposal, required that any exchange rules providing 
for hedge exemptions for commodity derivatives contracts subject to 
federal position limits conform to the definition of bona fide hedging 
position as defined in the amendments to Sec.  150.1 contained in the 
December 2013 Position Limits Proposal. But because the 2016 
Supplemental Position Limits Proposal incorporated the bona fide 
hedging position definition and provided for spread exemptions in 
150.3(a)(1)(i), the 2016 Supplemental Position Limits Proposal proposed 
instead to cite to Sec.  150.3 in Sec.  150.5(a)(2).\757\ Similarly, 
the application process provided for in Sec.  150.5(a)(2) was amended 
to conform to the requirement in proposed Sec.  150.10 and Sec.  150.11 
that exchange rules providing for exemptions for commodity derivatives 
contracts subject to federal position limits require that traders 
reapply on at least an annual basis. In addition, the changes to Sec.  
150.5(a)(2) clarified that exchanges may deny an application, or limit, 
condition, or revoke any exemption granted at any time.
---------------------------------------------------------------------------

    \757\ As proposed in the 2016 Supplemental Position Limits 
Proposal, Sec.  150.5(a)(2)(i) provides that a DCM or SEF that is a 
trading facility ``may grant exemptions from any speculative 
position limits it sets under paragraph (a)(1) of this section, 
provided that such exemptions conform to the requirements specified 
in Sec.  150.3.''
---------------------------------------------------------------------------

    Similarly, the 2016 Supplemental Position Limits Proposal amended 
previously proposed Sec.  150.5(b) to require that exchange rules 
provide for recognition of a non-enumerated bona fide hedge ``in a 
manner consistent with the process described in Sec.  150.9(a).'' 
Addressing the granting of spread exemptions for contracts not subject 
to federal position limits, the 2016 Supplemental Position Limits 
Proposal integrates in the standards of CEA section 4a(a)(3), providing 
that exchanges should take into account those standards when 
considering whether to grant spread exemptions. Finally, the 2016 
Supplemental Position Limits Proposal clarified that for excluded 
commodities, the exchange can grant certain exemptions provided under 
paragraphs Sec.  150.5(b)(5)(i) and (b)(5)(ii) in addition to the risk 
management exemption previously proposed in the December 2013 Position 
Limits Proposal.\758\
---------------------------------------------------------------------------

    \758\ See Sec.  150.5(b)(5)(D) (stating that for excluded 
commodities, a DCM or SEF may grant, pursuant to rules submitted to 
the Commission, ``the exemptions under paragraphs (b)(5)(i) and 
(b)(5)(ii)(A) through (C)''). While the December 2013 Position 
Limits Proposal numbered the provisions applicable to excluded 
commodities as Sec.  150.5(b)(5)(ii)(E), the 2016 Supplemental 
Position Limits Proposal renumbered the provision as Sec.  
150.5(b)(5)(ii)(D).

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[[Page 96788]]

iv. Comments Received on the 2016 Supplemental Position Limits Proposal 
Regarding Sec.  150.5(a)
    While comments were submitted on the 2016 Supplemental Position 
Limits Proposal that addressed the proposed changes to the definitions 
under Sec.  150.1, as well as to the proposed exchange processes for 
recognition of non-enumerated bona fide hedges and anticipatory hedges, 
and for granting spreads exemptions under proposed Sec. Sec.  150.9, 
150.11, and 150.10, respectively, all of which indirectly affect Sec.  
150.5(a), very few comments specifically addressed Sec.  150.5(a). 
Comments received on the 2016 Supplemental Position Limits Proposal 
regarding the other sections are addressed in the discussions of those 
sections.\759\
---------------------------------------------------------------------------

    \759\ One example of an issue raised by several commenters 
concerns the application procedures in Sec. Sec.  150.9(a)(4), 
150.10(a)(4), and 150.11(a)(3), which requires market participants 
to apply for recognition or an exemption in advance of exceeding the 
limit. See, e.g., CL-FIA-60937 at 4, 13; CL-CME-60926 at 12; CL-ICE-
60929 at 11, 20-21; CL-NCGA-NGSA-60919 at 10-11; CL-EEI-EPSA-60925 
at 4; CL-ISDA-60931 at 13; and CL-CMC-60950 at 3. For example, ICE 
requested the insertion of a provision for exchanges to recognize 
exemptions retroactively due to ``unforeseen hedging needs,'' and 
also stated that certain exchanges currently utilize a similar rule 
and it is ``critical in reflecting commercial hedging needs that 
cannot always be predicted in advance.'' CL-ICE-60929 at 11.
---------------------------------------------------------------------------

    One commenter urged the Commission to allow exchanges to maintain 
their current authority to set speculative limits for both spot month 
and all-months combined limits below federal limits to ensure that 
convergence continues to occur.\760\
---------------------------------------------------------------------------

    \760\ CL-NGFA-60941 at 2.
---------------------------------------------------------------------------

    While the Commission's retention of what is often referred to as 
the five-day rule \761\ was included only in the revised definition of 
bona fide hedging position under Sec.  150.1,\762\ several commenters 
addressed the five-day rule in the context of Sec.  150.5 as proposed 
in the 2016 Supplemental Position Limits Proposal.\763\ According to 
the commenters, the decision of whether to apply the five-day rule to a 
particular contract should be delegated to the exchanges because the 
exchanges are in the best position to evaluate facts and circumstances, 
and different markets have different dynamics and needs.\764\ In 
addition, one commenter requested that the Commission specifically 
authorize exchanges to grant bona fide hedging position and spread 
exemptions during the last five days of trading or less.\765\ Two 
commenters suggested, as an alternative approach if the five-day rule 
remains, that the Commission instead rely on tools available to 
exchanges to address concerns, such as exchanges requiring gradual 
reduction of the position (``step down'' requirements) or revoking 
exemptions to protect the price discovery process in core referenced 
futures contracts approaching expiration.\766\ Another commenter argued 
that in spite of any five-day rule that is adopted, exchanges should be 
allowed to recognize non-enumerated bona fide hedging exemptions during 
the last five trading days for enumerated strategies that are otherwise 
subject to the five-day rule and the discretion to grant exemptions for 
hedging strategies that would otherwise be subject to the five-day 
rule.\767\
---------------------------------------------------------------------------

    \761\ The Commission's current definition of ``bona fide hedging 
transactions and positions,'' under Sec.  1.3(z), applies the 
``five-day rule'' in Sec.  1.3(z)(2) subsections (i)(B), (ii)(C), 
(iii), and (iv). Under those sections of the ``five-day rule,'' no 
such positions and transactions were maintained in the five last 
days of trading. See Sec.  1.3(z).
    \762\ As noted in the December 2013 Position Limits Proposal 
(which did not change in the 2016 Supplemental Position Limits 
Proposal), the Commission previously proposed to delete Sec.  1.3(z) 
and replace it with a new definition in Sec.  150.1 of ``bona fide 
hedging position.'' And, as noted above, the December 2013 Position 
Limits Proposal retained the five-day rule. The previously proposed 
definition was built on the Commission's history and was grounded 
for physical commodities in the new requirements of CEA section 
4a(c)(2) as amended by the Dodd-Frank Act. December 2013 Position 
Limits Proposal, 78 FR at 75706.
    \763\ E.g., CL-NCGA-ASA-60917 at 1-2; CL-CME-60926 at 14-15; CL-
ICE-60929 at 7-8; CL-ISDA-60931 at 11; CL-CCI-60935 at 3; CL-MGEX-
60936 at 4; CL-Working Group-60947 at 5, 7-9; CL-IECAssn-60949 at 7-
9; CL-CMC-60950 at 9-14; CL-NCC-ACSA-60972 at 2. No comments on the 
December 2013 Position Limits Proposal specifically addressed the 
``five-day rule'' in the context of Sec.  150.5.
    \764\ See, e.g, CL-ISDA-60931 at 10; CL-CCI-60935 at 3; CL-MGEX-
60936 at 11; CL-Working Group-60947 at 7-9.
    \765\ CL-CMC-60950 at 11-12.
    \766\ CL-Working Group-60947 at 8; CL-IECAssn-60949 at 7-9.
    \767\ CL-CME-60926 at 6, 8.
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    One issue raised by several commenters \768\ that did not directly 
address Sec.  150.5 concerns the application procedures in Sec. Sec.  
150.9(a)(4), 150.10(a)(4), and 150.11(a)(3), which require market 
participants to apply for recognition or an exemption in advance of 
exceeding the limit.\769\ For example, one commenter requested the 
insertion of a provision permitting exchanges to recognize exemptions 
retroactively due to ``unforeseen hedging needs''; this commenter also 
stated that certain exchanges currently utilize a similar rule and it 
is ``critical in reflecting commercial hedging needs that cannot always 
be predicted in advance.'' \770\ Another commenter requested that the 
Commission allow exchanges to recognize a bona fide hedge exemption for 
up to a five-day retroactive period in circumstances where market 
participants need to exceed limits to address a sudden and unforeseen 
hedging need.\771\ That commenter stated that CME and ICE currently 
provide mechanisms for such recognition, which are used infrequently 
but are nonetheless important. According to that commenter, ``[t]o 
ensure that such allowances will not diminish the overall integrity of 
the process, two effective safeguards under the current exchange-
administered processes could continue to be required. First, the 
exchange rules could continue to require market participants making use 
of the retroactive application to demonstrate that the applied-for 
hedge was required to address a sudden and unforeseen hedging need. . . 
. Second, if the emergency hedge recognition is not granted, the 
exchange rules could continue to require the applicant to immediately 
unwind its position and also deem the applicant to have been in 
violation for any period in which its position exceeded the applicable 
limits.\772\ While these comments address other sections, the 
Commission will respond to these comments in explaining its reproposal 
of Sec.  150.5.
---------------------------------------------------------------------------

    \768\ CL-FIA-60937 at 4, 13; CL-CME-60926 at 12; CL-ICE-60929 at 
11, 20-21; CL-NCGA-NGSA-60919 at 10-11; CL-EEI-EPSA-60925 at 4; CL-
ISDA-60931 at 13; and CL-CMC-60950 at 3.
    \769\ See 150.9(a)(4) (requiring each person intending to exceed 
position limits to, among other things, ``receive notice of 
recognition from the designated contract market or swap execution 
facility of a position as a non-enumerated bona fide hedge in 
advance of the date that such position would be in excess of the 
limits then in effect pursuant to section 4a of the Act.'')
    \770\ CL-ICE-60929 at 11.
    \771\ CL-NCGA-NGSA-60919 at 10-11.
    \772\ Id. at 11 (footnote omitted).
---------------------------------------------------------------------------

v. Commission Determination Regarding Sec.  150.5(a)
    The Commission has determined to repropose Sec.  150.5(a) as 
proposed in the 2016 Supplemental Position Limits Proposal for the 
reasons provided above with some changes, as detailed below.\773\
---------------------------------------------------------------------------

    \773\ For example, the Commission is reproposing the following 
sections as previously proposed without change for the reasons 
provided above: Sec.  150.5(a)(1); Sec.  150.5(a)(3) (Pre-enactment 
and transition period swap positions), Sec.  150.5(a)(4) (Pre-
existing positions), and Sec.  150.5(a)(6) (Additional acceptable 
practices); no substantive comments were received regarding those 
sections.

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

[[Page 96789]]

    Although the Commission is reproposing Sec.  150.5(a)(1), in 
response to the comment that the exchanges should conform their 
position limits to the federal limits so that a single position limit 
and accountability regime apply across exchanges,\774\ the Commission 
believes that exchanges may find it prudent in the course of monitoring 
position limits to impose lower (that is, more restrictive) limit 
levels. The flexibility for exchanges to set more restrictive limits is 
granted in CEA section 4a(e), which provides that if an exchange 
establishes limits on a contract, those limits shall be set at a level 
no higher than the level of any limits set by the Commission. This 
expressly permits an exchange to set lower limit levels than federal 
limit levels. The reproposed rules track this statutory provision.
---------------------------------------------------------------------------

    \774\ But see CL-NGFA-60941 at 2 (urging the Commission to allow 
exchanges to maintain their current authority to set speculative 
limits for both spot month and all-months combined limits below 
federal limits).
---------------------------------------------------------------------------

    For purposes of clarification in response to comments on the 
treatment of basis contracts, the reproposed rules provide a singular 
definition of ``referenced contract'' which, as stated by the 
commenters, excludes ``basis contracts.'' For commodities subject to 
federal limits under reproposed Sec.  150.2, the definition of 
referenced contract remains the same for federal and exchange-set 
limits and may not be amended by exchanges. An exchange could, but is 
not required to, impose limits on any basis contract independently of 
the federal limit for the commodity in question, but a position in a 
basis contract with an independent, exchange-set limit would not count 
for the purposes of the federal limit.\775\
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    \775\ The Commission notes that its singular definition of 
``referenced contract'' that excludes ``basis contracts'' applies 
not only to Sec.  150.5(a), but also to Sec.  150.5(b). Separately, 
the Commission notes that in the future, it may determine to subject 
basis contracts to a separate class limit in order to discourage 
potential manipulation of the outright price legs of the basis 
contract.
---------------------------------------------------------------------------

    After consideration of comments regarding Sec.  150.5(a)(2)(i) 
(Grant of exemption),\776\ as proposed in the 2016 Supplemental 
Position Limits Proposal, the Commission is reproposing it with 
modifications. Reproposed Sec.  150.5(a)(2)(i) provides that any 
exchange may grant exemptions from any speculative position limits it 
sets under paragraph Sec.  150.5(a)(1), provided that such exemptions 
conform to the requirements specified in Sec.  150.3, and provided 
further that any exemptions to exchange-set limits not conforming to 
Sec.  150.3 are capped at the level of the applicable federal limit in 
Sec.  150.2.
---------------------------------------------------------------------------

    \776\ See, e.g., CL-ICE-60929 at 2-4, 7-8; CL-Working Group-
60947 at 14.
---------------------------------------------------------------------------

    The Commission notes that under the 2013 Position Limits Proposal, 
exchanges could adopt position accountability at a level lower than the 
federal limit (along with a position limit at the same level as the 
federal limit); in such cases, the exchange would not need to grant 
exemptions for positions no greater than the level of the federal 
limit. Under the Reproposal, exchanges could choose, instead, to adopt 
a limit lower than the federal limit; in such a case, the Commission 
would permit the exchange to grant an exemption to the exchange's lower 
limit, where such exemption does not conform to Sec.  150.3, provided 
that such exemption to an exchange-set limit is capped at the level of 
the federal limit. Such a capped exemption would basically have the 
same effect as if the exchange set its speculative position limit at 
the level of the federal limit, as required under DCM core principle 
5(B) and SEF core principle 6(B)(1).\777\
---------------------------------------------------------------------------

    \777\ 7 U.S.C. 7(d)(5) and 7 U.S.C. 7b-3(f)(6).
---------------------------------------------------------------------------

    In regards to the five-day rule, the Commission notes that the 
reproposed rule does not apply the prudential condition of the five-day 
rule to non-enumerated hedging positions. The Commission considered the 
recommendations that the Commission: Allow exchanges to recognize a 
bona fide hedge exemption for up to a five-day retroactive period in 
circumstances where market participants need to exceed limits to 
address a sudden and unforeseen hedging need; specifically authorize 
exchanges to grant bona fide hedge and spread exemptions during the 
last five days of trading or less, and/or delegate to the exchanges for 
their consideration the decision of whether to apply the five-day rule 
to a particular contract after their evaluation of the particular facts 
and circumstances. As reproposed, and as discussed in connection with 
the definition of bona fide hedging position,\778\ the five-day rule 
would only apply to certain positions (pass-through swap offsets, 
anticipatory and cross-commodity hedges).\779\ However, in regards to 
exchange processes under Sec.  150.9, Sec.  150.10, and Sec.  150.11, 
the Commission would allow exchanges to waive the five-day rule on a 
case-by-case basis.
---------------------------------------------------------------------------

    \778\ See the discussion regarding the five-day rule in 
connection with the definition of bona fide hedging position in the 
discussion of Sec.  150.9 (Process for recognition of positions as 
non-enumerated bona fide hedges).
    \779\ See Sec.  150.1, definition of bona fide hedging position 
sections (2)(ii)(A), (3)(iii), (4), and (5) (Other enumerated 
hedging position). To provide greater clarity as to which bona fide 
hedge positions the five-day rule applies, the reproposed rules 
reorganize the definition.
---------------------------------------------------------------------------

    In addition, the Commission proposes to amend Sec.  150.5(a)(2)(ii) 
(Application for exemption). The reproposed rule would permit exchanges 
to adopt rules that allow a trader to file an application for an 
enumerated bona fide hedging exemption within five business days after 
the trader assumed the position that exceeded a position limit.\780\ 
The Commission expects that exchanges will carefully consider whether 
allowing such retroactive recognition of an enumerated bona fide 
hedging exemption would, as noted by one commenter, diminish the 
overall integrity of the process.\781\ In addition, the Commission 
cautions exchanges to carefully consider whether to adopt in those 
rules the two safeguards recommended by that commenter: (i) Requiring 
market participants making use of the retroactive application to 
demonstrate that the applied-for hedge was required to address a sudden 
and unforeseen hedging need; and (ii) providing that if the emergency 
hedge recognition was not granted, exchange rules would continue to 
require the applicant to unwind its position in an orderly manner and 
also would deem the applicant to have been in violation for any period 
in which its position exceeded the applicable limits.\782\
---------------------------------------------------------------------------

    \780\ The Reproposal includes a similar modification to Sec.  
150.5(b)(5)(i).
    \781\ CL-NCGA-NGSA-60919 at 10-11.
    \782\ Id.
---------------------------------------------------------------------------

    Concerning the comment recommending greater discretion be given 
DCMs and SEFs that are trading facilities with respect to aggregation 
requirements, the Commission reiterates its belief in the benefits of 
requiring exchanges to conform to the federal standards on aggregation, 
including lower burden and less confusion for traders active on 
multiple exchanges,\783\ efficiencies in administration for both 
exchanges and the Commission, and the prevention of a ``race-to-the-
bottom'' wherein exchanges compete over lower standards. The Commission 
notes that the provision regarding aggregation in reproposed Sec.  
150.5(a)(5) incorporates by reference Sec.  150.4 and thus would, on a 
continuing basis, reflect any changes made to the aggregation standard 
provided in the section.
---------------------------------------------------------------------------

    \783\ The Commission's belief is supported by requests from 
multiple traders for industry-wide, standard aggregation 
requirements.

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[[Page 96790]]

c. Sec.  150.5(b)--Requirements and Acceptable Practices for Commodity 
Derivative Contracts That Are Not Subject to Federal Position Limits
i. December 2013 Position Limits Proposal
    The Commission set forth in Sec.  150.5(b), as proposed in the 
December 2013 Position Limits Proposal, requirements and acceptable 
practices that would generally update and reorganize the set of 
acceptable practices listed in current Sec.  150.5 as they relate to 
contracts that are not subject to the federal position limits, 
including physical and excluded commodities.\784\ As discussed above, 
the Commission also proposed to revise Sec.  150.5 to implement uniform 
requirements for DCMs and SEFs that are trading facilities relating to 
hedging exemptions across all types of commodity derivative contracts, 
including those that are not subject to federal position limits. The 
Commission further proposed to require DCMs and SEFs that are trading 
facilities to have uniform aggregation polices that mirrored the 
federal aggregation provisions for all types of commodity derivative 
contracts, including for contracts that were not subject to federal 
position limits.\785\
---------------------------------------------------------------------------

    \784\ For position limits purposes, Sec.  150.1(k), as proposed 
in the December 2013 Position Limits Proposal, 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.
    \785\ As Commission noted at that time, 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. 
December 2013 Position Limits Proposal, 78 FR at 75756.
---------------------------------------------------------------------------

    The previously proposed revisions to DCM and SEF acceptable 
practices generally concerned 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 referenced 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.\786\
---------------------------------------------------------------------------

    \786\ See December 2013 Position Limits Proposal, 78 FR at 
75757.
---------------------------------------------------------------------------

    For spot months under the December 2013 Position Limits Proposal, 
for a derivative contract that was based on a commodity with a 
measurable deliverable supply, previously proposed Sec.  
150.5(b)(1)(i)(A) updated 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.\787\ Previously proposed Sec.  150.5(b)(1)(i)(A) 
clarified 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.\788\
---------------------------------------------------------------------------

    \787\ As proposed in the December 2013 Position Limits Proposal, 
Sec.  150.5(b)(1)(i)(A) was 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 25 percent formula narrowly targeted 
the trading that may be most susceptible to, or likely to 
facilitate, price disruptions. The goal for the formula, as noted in 
the December 2013 Position Limits Proposal release, was 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. December 
2013 Position Limits Proposal, 78 FR at 75756, n. 686.
    \788\ The Commission noted in the December 2013 Position Limits 
Proposal that, 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. Previously 
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)). 
December 2013 Position Limits Proposal, 78 FR at 75756, n. 687.
---------------------------------------------------------------------------

    For a derivative contract that was based on a commodity without a 
measurable deliverable supply, the December 2013 Position Limits 
Proposal proposed for spot months, in Sec.  150.5(b)(1)(i)(B), to 
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.\789\
---------------------------------------------------------------------------

    \789\ December 2013 Position Limits Proposal, 78 FR at 75757. 
The Commission noted that 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. Id. at 75757, n. 688.
---------------------------------------------------------------------------

    Under previously proposed Sec.  150.5(b)(1)(ii)(A), the December 
2013 Position Limits Proposal preserved 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. As then proposed, the 
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. Additionally, the December 2013 
Position Limits Proposal proposed in Sec.  150.5(b)(1)(ii)(A), to 
codify for individual non-spot or all-months-combined, that if the 
commodity derivative contract was 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 that is a trading facility to 
adopt the same limit as applies to that pre-existing commodity 
derivative contract.\790\
---------------------------------------------------------------------------

    \790\ The Commission noted that ``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.'' December 
2013 Position Limits Proposal, 78 FR at 75757.
---------------------------------------------------------------------------

    In Sec.  150.5(b)(1)(ii)(B), the December 2013 Position Limits 
Proposal preserved the existing acceptable practice for individual non-
spot or all-months-combined in exempt and excluded commodity derivative 
contracts, 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.\791\ Previously 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 was no larger than a 
typical cash market transaction in the underlying commodity, or should 
be reduced if the notional quantity per contract was larger than a 
typical cash market transaction. Additionally, previously proposed 
Sec.  150.5(b)(1)(ii)(B) would codify a new acceptable practice for a 
DCM or SEF that is a trading facility to adopt the same limit as 
applied to the pre-existing contract if the new commodity contract was 
substantially the same as an existing contract.\792\
---------------------------------------------------------------------------

    \791\ 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).
    \792\ December 2013 Position Limits Proposal, 78 FR at 75757.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal provided in Sec.  
150.5(b)(1)(iii)

[[Page 96791]]

that if a commodity derivative contract was 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 expressed the belief that limiting a trader's position 
in cash-settled contracts in this way would diminish 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.\793\
---------------------------------------------------------------------------

    \793\ December 2013 Position Limits Proposal, 78 FR at 75757. As 
the Commission noted with respect to cash-settled contracts where 
the underlying product is a physical commodity with limited 
supplies, thus 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. Id. at 75757, n. 692.
---------------------------------------------------------------------------

    In previously proposed Sec.  150.5(b)(2)(i)(A), the Commission was 
updating the acceptable practices in current Sec.  150.5(c) for 
adjusting limit levels for the spot month.\794\ For a derivative 
contract that was based on a commodity with a measurable deliverable 
supply, previously proposed Sec.  150.5(b)(2)(i)(A) maintained 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 was based on a commodity without 
a measurable deliverable supply, previously proposed Sec.  
150.5(b)(2)(i)(B) would codify as 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. 
In addition, the December 2013 Position Limit Proposal would have 
codified in Sec.  150.5(b)(2)(i)(A) a new acceptable practice that spot 
month limit levels be reviewed no less than once every two years.\795\
---------------------------------------------------------------------------

    \794\ Id. at 75757.
    \795\ Id. at 75757-58.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal explained that then 
proposed Sec.  150.5(b)(2)(ii) maintained 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.\796\ Previously 
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.\797\ Previously proposed Sec.  150.5(b)(3) generally updated 
and reorganized the existing acceptable practices in current Sec.  
150.5(e) for a DCM or SEF that is a trading facility to adopt position 
accountability rules in lieu of position limits, under certain 
circumstances, for contracts that are not subject to federal position 
limits. As noted in the December 2013 Position Limits Proposal, this 
section would reiterate the DCM's authority, with conforming changes 
for SEFs, to require traders to provide information regarding their 
position when requested by the exchange.\798\ In addition, previously 
proposed Sec.  150.5(b)(3) would codify a new acceptable practice for a 
DCM or SEF to require traders to consent to not increase their position 
in a contract if so ordered, as well as a new acceptable practice for a 
DCM or SEF to require traders to reduce their position in an orderly 
manner.\799\
---------------------------------------------------------------------------

    \796\ Id. at 75758.
    \797\ Id.
    \798\ Id. Cf. 17 CFR 150.5(e)(2)-(3).
    \799\ December 2013 Position Limits Proposal, 78 FR at 75758.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal would maintain under 
Sec.  150.5(b)(3)(i) 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) Had an average month-end open interest of 50,000 or 
more contracts and an average daily volume of 5,000 or more contracts 
during the most recent calendar year; (2) had a liquid cash market; and 
(3) was not subject to federal limits in Sec.  150.2--provided, 
however, that such DCM or SEF 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.\800\
---------------------------------------------------------------------------

    \800\ The December 2013 Position Limits Proposal noted that 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.'' Id. at 75758. It also 
cited to the comparison of the ``minimum open interest and volume 
test'' in proposed Sec.  150.5(b)(3)(A) to that in current Sec.  
150.5(e)(3). Id.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal would maintain in Sec.  
150.5(b)(3)(ii)(A) 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 that had a highly 
liquid cash market and no legal impediment to delivery.\801\ For an 
excluded commodity derivative contract without a measurable deliverable 
supply, previously 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 was 
not a deliverable supply that was subject to manipulation. However, for 
an excluded commodity derivative contract that had a measurable 
deliverable supply, but that may not be highly liquid and/or was 
subject to some legal impediment to delivery, previously proposed Sec.  
150.5(b)(3)(ii)(A) set 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.\802\ 
Furthermore, the December 2013 Position Limits Proposal in Sec.  
150.5(b)(3)(ii) would remove the ``minimum open interest and volume'' 
test for excluded commodity derivative contracts generally.\803\ 
Finally, the December 2013 Position Limits Proposal would codify in 
Sec.  150.5(b)(3)(ii)(B) 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.
---------------------------------------------------------------------------

    \801\ Id.
    \802\ Id.
    \803\ Id. The December 2013 Position Limits Proposal pointed out 
that 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. Id.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal added in Sec.  
150.5(b)(3)(iii) 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 was substantially the same as an existing 
contract that was currently listed for trading on an exchange that had 
already

[[Page 96792]]

adopted position accountability levels in lieu of position limits.\804\
---------------------------------------------------------------------------

    \804\ See supra discussion of what is meant by ``substantially 
the same'' in this context. See also December 2013 Position Limits 
Proposal, 78 FR at 75757, n. 690.
---------------------------------------------------------------------------

    As previously proposed, Sec.  150.5(b)(4) would maintain the 
acceptable practice that for contracts not subject to federal position 
limits, DCMs and SEFs should calculate trading volume and open interest 
in the manner established in current Sec.  150.5(e)(4).\805\ The 
Commission stated in the December 2013 Position Limits Proposal that 
then proposed Sec.  150.5(b)(4) would build upon these standards by 
accounting for swaps in referenced contracts on a futures-equivalent 
basis.\806\
---------------------------------------------------------------------------

    \805\ As noted in the December 2013 Position Limits Proposal, 
for SEFs, trading volume and open interest for swaptions should be 
calculated on a delta-adjusted basis. See id. at 75758, n. 697.
    \806\ See id. at 75698-99 (defining ``Futures-equivalent'' in 
Sec.  150.1 to account for swaps in referenced contracts).
---------------------------------------------------------------------------

    As noted above, under the December 2013 Position Limits proposal, 
the Commission proposed to require DCMs and SEFs to have uniform 
hedging exemptions and 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. The Commission explained 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 
monitoring and enforcing exchange-set position limits.\807\ Therefore, 
the December 2013 Position Limits Proposal in 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 
previously proposed Sec.  150.1.\808\
---------------------------------------------------------------------------

    \807\ See December 2013 Position Limits Proposal, 78 FR at 
75756. See also supra regarding Sec.  150.5(a)(5).
    \808\ The requirement proposed in Sec.  150.5(b)(8) that DCMs 
and SEFs have uniform aggregation polices that mirror the federal 
aggregation provisions is addressed below.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal also set forth in Sec.  
150.5(b)(5)(ii) 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. The 
exemptions in Sec.  150.5(b)(5)(ii) under the December 2013 Position 
Limits Proposal generally tracked the exemptions then proposed in Sec.  
150.3; acceptable practices were suggested based on the same logic that 
underpinned those exemptions.\809\ The acceptable practices 
contemplated that a DCM or SEF might grant exemptions under certain 
circumstances for financial distress, intramarket and intermarket 
spread positions (discussed above), and qualifying cash-settled 
contract positions in the spot month.\810\ Previously proposed Sec.  
150.5(b)(5)(ii)(E) also set forth an acceptable practice for a DCM or 
SEF to grant for contracts on excluded commodities, a limited risk 
management exemption pursuant to rules submitted to the Commission, and 
consistent with the guidance in new Appendix A to part 150.\811\
---------------------------------------------------------------------------

    \809\ See December 2013 Position Limits Proposal, 78 FR at 
75735-41, 75827-28. See also supra discussion of the Sec.  150.3 
exemptions.
    \810\ See id.
    \811\ As the Commission noted, previously proposed 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 also 
specified that such exemptions be granted on a case-by-case basis, 
subject to a demonstrated need for the exemption, required that 
applicants for these exemptions be typically engaged in the buying, 
selling, or holding of cash market instruments, and 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. Id. See also December 2013 
Position Limits Proposal, 78 FR at 75756, n. 683.
---------------------------------------------------------------------------

    The December 2013 Position Limits Proposal provided in Sec.  
150.5(b)(6)-(7) acceptable practices relating to pre-enactment and 
transition period swap positions (as those terms were defined in 
previously proposed Sec.  150.1),\812\ as well as to commodity 
derivative contract positions acquired in good faith prior to the 
effective date of mandatory federal speculative position limits.\813\
---------------------------------------------------------------------------

    \812\ See supra discussion of pre-enactment and transition 
period swap positions.
    \813\ December 2013 Position Limits Proposal, 78 FR at 75756, 
75831.
---------------------------------------------------------------------------

    Additionally, for any contract that is not subject to federal 
position limits, previously proposed Sec.  150.5(b)(8) required the DCM 
or SEF that is a trading facility to conform to the uniform federal 
aggregation provisions.\814\ As noted above, 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. The requirement generally mirrored the 
requirement in Sec.  150.5(a)(5) for contracts that are subject to 
federal position limits by requiring the DCM or SEF that is a trading 
facility to have aggregation rules that conform to previously proposed 
Sec.  150.4.\815\
---------------------------------------------------------------------------

    \814\ 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.
    \815\ Id. at 75756.
---------------------------------------------------------------------------

ii. Comments Received to December 2013 Position Limits Proposal 
Regarding Sec.  150.5(b)
    Three commenters on previously proposed regulation Sec.  150.5 
recommended that the Commission not require SEFs to establish position 
limits.\816\ Two noted that because SEF participants may use more than 
one derivatives clearing organization (``DCO''), a SEF may not know 
when a position has been offset.\817\ Further, during the ongoing SEF 
registration process,\818\ a number of entities applying to become 
registered as SEFs told the Commission that they lacked access to 
information that would enable them to knowledgeably establish position 
limits or monitor positions.\819\ The Commission observes that this

[[Page 96793]]

information gap would also be a concern for DCMs in respect of swaps.
---------------------------------------------------------------------------

    \816\ CL-CMC-59634 at 14-15; CL-FIA-60392 at 10; and CL-ISDA/
SIFMA-59611 at 35. One commenter stated that SEFs should be exempt 
from the requirement to set positions limits because SEFs are in the 
early stages of development and could be harmed by limits that 
restrict liquidity. CL-ISDA/SIFMA-59611 at 35.
    \817\ CL-CMC-59634 at 14-15; and CL-FIA-60392 at 10.
    \818\ Under CEA section 5h(a)(1), no person may operate a 
facility for trading swaps unless the facility is registered as a 
SEF or DCM. 7 U.S.C. 7b-3(a)(1). A SEF must comply with core 
principles, including Core Principle 6 regarding position limits, as 
a condition of registration. CEA section 5h(f)(1), 7 U.S.C. 7b-
3(f)(1).
    \819\ For example, in a submission to the Commission under part 
40 of the Commission's regulations, BGC Derivative Markets, L.P. 
states that ``[t]he information to administer limits or 
accountability levels cannot be readily ascertained. Position limits 
or accountability levels apply market-wide to a trader's overall 
position in a given swap. To monitor this position, a SEF must have 
access to information about a trader's overall position. However, a 
SEF only has information about swap transactions that take place on 
its own Facility and has no way of knowing whether a particular 
trade on its facility adds to or reduces a trader's position. And 
because swaps may trade on a number of facilities or, in many cases, 
over-the-counter, a SEF does not know the size of the trader's 
overall swap position and thus cannot ascertain whether the trader's 
position relative to any position limit. Such information would be 
required to be supplied to a SEF from a variety of independent 
sources, including SDRs, DCOs, and market participants themselves. 
Unless coordinated by the Commission operating a centralized 
reporting system, such a data collection requirement would be 
duplicative as each separate SEF required reporting by each 
information sources.'' BGC Derivative Markets, L.P., Rule Submission 
2015-09 (Oct. 6, 2015).
---------------------------------------------------------------------------

    One commenter expressed the view that deliverable supply 
calculations used to establish spot month limits should be based on 
commodity specific actual physical transport/transmission, generation 
and production.\820\
---------------------------------------------------------------------------

    \820\ CL-EDF-60398 at 6-7.
---------------------------------------------------------------------------

    One commenter urged the Commission to allow the listing exchange to 
set non-spot month limits at least as high as the spot-month position 
limit, rather than base the non-spot month limit strictly on the open 
interest formula.\821\ Another commenter recommended that the 
Commission remove from Sec.  150.5(b)(1)(ii)(B) the provision setting a 
5,000 contract limit for non-spot-month or all-months-combined 
accountability levels for exempt commodities, because that level may 
not be appropriate for all markets; instead, the Commission should rely 
on the exchanges to set accountability levels for exempt commodity 
markets.\822\
---------------------------------------------------------------------------

    \821\ CL-ICE-59962 at 7.
    \822\ CL-Nodal-59695 at 3.
---------------------------------------------------------------------------

    One commenter recommended that DCMs be permitted to establish 
position accountability levels in lieu of position limits outside of 
the spot month.\823\ The commenter recommended that the administration 
of position accountability should be coordinated with the Commission 
and other DCMs to the extent that a market participant holds positions 
on more than one DCM.\824\
---------------------------------------------------------------------------

    \823\ CL-FIA-59595 at 5, 39 and 41; see also CL-FIA-60303 at 3-
4.
    \824\ CL-FIA-60392 at 9.
---------------------------------------------------------------------------

iii. 2016 Supplemental Position Limits Proposal
    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to revise Sec.  150.5(b)(5) from what was proposed in the 
December 2013 Position Limits Proposal; proposed Sec.  150.5(b) 
establishes requirements and acceptable practices that pertain to 
commodity derivative contracts not subject to federal position 
limits.\825\ The proposed revisions to Sec.  150.5(b)(5) would, under 
the 2016 Supplemental Position Limits Proposal, permit exchanges, in 
regards to commodity derivative contracts not subject to federal 
position limits, to recognize non-enumerated bona fide hedging 
positions, as well as spreads. Moreover, the exchanges would no longer 
be prohibited from recognizing spreads during the spot month.\826\ 
Instead, as the Commission noted in the 2016 Supplemental Position 
Limits Proposal, what it was proposing would, in part, maintain the 
status quo: Exchanges that currently recognize spreads in the spot 
month under current Sec.  150.5(a) would be able to continue to do so. 
Rather than a prohibition, the exchanges would be responsible for 
determining whether recognizing spreads, including spreads in the spot 
month, would further the policy objectives in section 4a(a)(3) of the 
Act.\827\
---------------------------------------------------------------------------

    \825\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38482.
    \826\ Id. at 38482, 38506-7. Compare December 2013 Position 
Limits Proposal, 78 FR at 75830.
    \827\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38482, 38506-07.
---------------------------------------------------------------------------

iv. Comments Received to 2016 Supplemental Position Limits Proposal 
Regarding Sec.  150.5(b)
Exchange-Administered Exemptions Under Sec.  150.5(b)
    Several commenters requested clarification as to the application of 
exchange-administered exemption requests to non-referenced contracts 
generally under Sec.  150.5(b).\828\ In addition, several commenters 
raised concerns with the requirement in Sec.  150.5(b)(5)(i) that the 
exchanges provide exemptions ``in a manner consistent with the process 
described in Sec.  150.9(a).'' \829\ Similarly, according to one 
commenter, the exchanges should not be bound to the same exemption 
process provided under proposed CFTC Regulation 150.9 when 
administering exemptions from exchange-set limits. Rather, the 
commenter recommended that the Commission: ``(i) not adopt proposed 
CFTC Regulation 150.5(b)(5)(i) in any final rule issued in this 
proceeding or (ii) clarify that the phrase `in a manner consistent with 
the process described in [proposed CFTC Regulation] 150.5(b)(5)(i)' 
does not mean that the Exchanges must apply the virtually identical 
process for recognizing non-enumerated bona fide hedging positions 
under proposed CFTC Regulation 150.9(a) to their exemption process for 
exchange-set speculative position limits.'' \830\
---------------------------------------------------------------------------

    \828\ CMC, for example, requested that the Commission clarify 
that exchange-granted hedge exemption procedures would be 
``applicable if, and to the extent that, the exchange granted 
exemption exceeds federally established speculative position limits 
and not otherwise.'' CL-CMC-60950 at 14. According to CME, on the 
other hand, proposed section 150.5(b) was unclear and ambiguous and 
so should be reproposed. For example, CME stated that the proposal 
was ``riddled with ambiguities and potential oversights,'' and, in 
connection with non-referenced contracts under section 150.5(b), CME 
also stated ``the scope of exchange discretion under proposed 
section 150.9(a) is unclear. Thus, exchanges could be bound by the 
five-day rule in recognizing as NEBFH positions certain enumerated 
hedge strategies for non-referenced contracts, despite the same 
five-day rule limitation not applying in similar scenarios today.'' 
CL-CME-60926 at 14-15.
    \829\ CL-CME-60926 at 14-15; CL-Working Group-60947 at 14; and 
CL-ICE-60929 at 8. For example, CME stated that requiring exchanges 
to recognize non-enumerated bona fide hedge positions for non-
referenced contracts ``in a manner consistent with the process 
described in Sec.  150.9(a)'' appears to ``break with historical 
practice in administering NEBFHs for non-referenced contracts,'' and 
``would appear to impose new burdensome and unnecessary compliance 
obligations on market participants that do not exist today.'' CL-
CME-60926 at 14-15.
    \830\ CL-Working Group-60947 at 14.
---------------------------------------------------------------------------

    Another commenter stated that the Commission should remove the 
requirements of Sec.  150.5(b) that apply the exemption procedures of 
Sec.  150.9 to exemptions granted for contracts in excluded commodities 
and physical commodities that are not subject to federal position 
limits. In support of this request, the commenter maintained that 
exchange exemption programs have been operating successfully without 
the need for such rules, and exchanges do not require additional 
guidance from the Commission on how to assess recognitions under the 
2016 Supplemental Position Limits Proposal and that rule enforcement 
reviews are adequate.\831\
---------------------------------------------------------------------------

    \831\ CL-ICE-60929 at 8.
---------------------------------------------------------------------------

Treatment of Spread and Anticipatory Hedge Exemptions Under Sec.  
150.5(b)
    Several commenters requested that the Commission clarify that 
spread and anticipatory hedge exemptions are unnecessary for excluded 
commodities and other products not subject to federal limits. For 
example, one commenter seeks clarity regarding the application of Sec.  
150.5(b) to spread exemption and anticipatory hedge exemption requests, 
stating that ``[p]roposed section 150.5(b) is silent with respect to 
anticipatory hedges contemplated under the process in proposed section 
150.11, and makes no reference in proposed section 150.5(b)(5)(ii)(C) 
to the process in proposed section 150.10 when describing spread 
exemptions an exchange may recognize. The Commission must clarify 
whether it intends that market participants and exchanges may avail 
themselves of such processes in applying for and recognizing exemptions 
from exchange limits for non-referenced contracts.'' \832\ On the other 
hand, in the associated footnote, the same commenter observes 
``[h]owever, in its cost-benefit analysis, the Commission notes that 
proposed section 150.11 `works in concert with' `proposed Sec.  
150.5(b)(5), with the effect that recognized anticipatory enumerated

[[Page 96794]]

bona fide hedging positions may exceed exchange-set position limits for 
contracts not subject to federal position limits.' '' \833\
---------------------------------------------------------------------------

    \832\ CL-CME-60926 at 15.
    \833\ Id.
---------------------------------------------------------------------------

    Another commenter urges the Commission to clarify that spread and 
anticipatory hedge exemptions are unnecessary for excluded commodities 
and other products not subject to federal limits. In this regard, the 
commenter seeks the removal of requirements found in Sec.  
150.5(b).\834\ A third commenter states that extending the requirements 
for exchange hedge exemption rules to contracts on excluded commodities 
is ``clearly an error'' that needs to be rectified, stating that there 
was no discussion of this expansion in the preamble to the 
Supplemental. According to the commenter, ``there is no basis in the 
Dodd-Frank amendments to the CEA for this extension of the Commission's 
authority over exchange position limits on excluded commodities. To the 
contrary, that authority is clearly limited to position limits on 
contracts on physical commodities.'' \835\
---------------------------------------------------------------------------

    \834\ CL-CMC-60950 at 14.
    \835\ CL-ISDA-60931 at 11.
---------------------------------------------------------------------------

Reporting Requirements Under Sec.  150.5(b)
    According to one commenter, the 2016 Supplemental Position Limits 
Proposal does not provide any explanation regarding the Commission's 
need to receive from the exchanges the same exemption reports for non-
referenced contracts that it would receive for referenced contracts. 
The commenter states that the 2016 Supplemental Position Limits 
Proposal characterizes exchange submissions of exemption recipient 
reports to the CFTC as ``support[ing] the Commission's surveillance 
program, by facilitating the tracking of non-enumerated bona fide 
hedging positions recognized by the exchange, and helping the 
Commission to ensure that an applicant's activities conform to the 
terms of recognition that the exchange has established.'' \836\ While 
acknowledging that the Commission has a surveillance obligation with 
respect to federal limits, the commenter maintains that, ``the same 
obligation has never before existed with respect to exchange-set limits 
for non-referenced contracts, and does not exist today.'' \837\ The 
commenter also states that the Commission has misinterpreted its 
mandate and therefore should drop this unnecessary reporting 
requirement and related procedures with respect to non-referenced 
contracts.''
---------------------------------------------------------------------------

    \836\ CL-CME-60926 at 15, quoting the 2016 Supplemental Position 
Limits Proposal, 81 FR at 38475.
    \837\ Id.
---------------------------------------------------------------------------

Five-Day Rule Under Sec.  150.5(b)
    As noted above, several commenters \838\ addressed the five-day 
rule, suggesting that the decision whether to apply the five-day rule 
to a particular contract should be delegated to the exchanges as the 
exchanges are in the best position to evaluate facts and circumstances, 
and different markets have different dynamics and needs.\839\ And, 
specifically in connection with non-referenced contracts under Sec.  
150.5(b), one commenter states that, as it believes that the scope of 
exchange discretion under proposed section 150.9(a) is unclear, 
``exchanges could be bound by the five-day rule in recognizing as non-
enumerated bona fide hedging positions certain enumerated hedge 
strategies for non-referenced contracts, despite the same five-day rule 
limitation not applying in similar scenarios today.'' \840\
---------------------------------------------------------------------------

    \838\ E.g., CL-NCGA-ASA-60917 at 1-2; CL-CME-60926 at 14-15; CL-
ICE-60929 at 7-8; CL-ISDA-60931 at 11; CL-CCI-60935 at 3; CL-MGEX-
60936 at 4; CL-Working Group-60947 at 5, 7-9; CL-IECAssn-60949 at 7-
9; CL-CMC-60950 at 9-14; CL-NCC-ACSA-60972 at 2.
    \839\ See, e.g, CL-ISDA-60931 at 10; CL-CCI-60935 at 3; CL-MGEX-
60936 at 11; CL-Working Group-60947 at 7-9.
    \840\ CL-CME-60926 at 14-15.
---------------------------------------------------------------------------

Comment Letter Received After the Close of the Comment Period for the 
2016 Supplemental Position Limits Proposal Regarding Limit Levels Under 
Sec.  150.5(b)
    One commenter noted that when the CEA addresses ``linked 
contracts'' in CEA section 4(b)(1)(B)(ii)(I), in relation to FBOTS, it 
provides that the Commission may not permit an FBOT to provide direct 
access to participants located in the United States unless the 
Commission determines that the FBOT (or the foreign authority 
overseeing the FBOT) adopts position limits that are comparable to the 
position limits adopted by the registered entity for the contract(s) 
against which the FBOT contract settles.\841\ According to the 
commenter, CEA section 4(b), which was added by the Dodd-Frank Act, 
``contains an explicit Congressional endorsement of `comparable' '' 
limits for cash-settled contracts in relation to the physically-
delivered contracts to which they are linked.\842\ The statutory 
definition of ``linked contract,'' the commenter stated, ``mirrors the 
definition of `referenced contract' in the Commission's 2013 position 
limits proposal: Both definitions capture cash-settled contracts that 
are `linked' to the price of a physically-delivered contract traded on 
a DCM (referred to as a `core referenced futures contract' in the 
proposal).'' \843\ That commenter stated that the only place in the CEA 
which addresses how to treat a cash-settled contract and its 
physically-delivered benchmark contract for position limit purposes is 
in CEA section 4(b), claiming that ``Congress unmistakably wanted the 
two trading instruments to be treated `comparably.' '' \844\
---------------------------------------------------------------------------

    \841\ See CL-CME-61007 at 2-4; CL-CME-61008 at 2-3.
    \842\ See CL-CME-61007 at 2.
    \843\ Id. at 3. CME claims that the underlying Congressional 
intent is clear, stating that whether a cash-settled contract is 
called a ``linked contract'' or a ``referenced contract,'' ``the 
limit levels and hedge exemptions for that contract and the related 
physically-delivered contract must be `comparable.'' Id.
    \844\ Id.
---------------------------------------------------------------------------

    In addition, according to the commenter, when the Commission, in 
response to the Dodd-Frank Act provisions regarding FBOTs in amended 
CEA section 4(b), adopted final Sec.  48.8(c)(1)(ii)(A), ``it 
acknowledged that a linked contract and its physically-delivered 
benchmark contract `create a single market' capable of being affected 
through trading in either of the linked or physically-delivered 
markets,'' and further noted that the Commission ``observed that the 
price discovery process would be protected by `ensuring that [ ] linked 
contracts have position limits and accountability provisions that are 
comparable to the corresponding [DCM] contracts [to which they are 
linked].' '' \845\
---------------------------------------------------------------------------

    \845\ Id. [footnotes omitted]. The Commission notes that CME 
incorrectly attributed preamble language as pertaining to Sec.  
48.8(c)(1)(ii)(A), which addresses statutory requirements, when it 
stated that the Commission ``acknowledged that a linked contract and 
its physically-delivered benchmark contract `create a single market' 
capable of being affected through trading in either of the linked or 
physically-delivered markets'' as this discussion actually addressed 
the Commission's adoption of its second set of conditions for linked 
contracts, found in Sec.  48.8(c)(2) (Other Conditions on Linked 
Contracts).
---------------------------------------------------------------------------

iv. Commission Determination Regarding Sec.  150.5(b)
    The Commission has determined to repropose Sec.  150.5(b) generally 
as proposed in the the 2016 Supplemental Position Limits Proposal, for 
the reasons stated above, with specific exceptions discussed 
below.\846\ An overall non-substantive change has been made in 
reproposing Sec.  150.5 pertaining to excluded commodities. To provide

[[Page 96795]]

greater clarity regarding which provisions concern excluded 
commodities, the Commission proposes to move all provisions applying to 
excluded commodities from Sec.  150.5(b) into Sec.  150.5(c). As the 
Commission observed in the December 2013 Position Limits Proposal, 
``CEA section 4a(a) only mandates position limits with respect to 
physical commodity derivatives (i.e., agricultural commodities and 
exempt commodities).
---------------------------------------------------------------------------

    \846\ The Commission is reproposing the following sections 
without further discussion, for the reasons provided above, since no 
substantive comments were received: Sec.  150.5(b)(6)(Pre-enactment 
and transition period swap positions), Sec.  150.5(b)(7) (Pre-
existing positions), and Sec.  150.5(b)(9) (Additional acceptable 
practices).
---------------------------------------------------------------------------

    Additionally, the Commission proposes to make some substantive 
revisions specific to excluded commodities in what was previously Sec.  
150.5 (b), addressed in the discussion of Sec.  150.5(c).
Limit Levels for Commodity Derivative Contracts in a Physical Commodity 
Not Subject to Federal Limits
    In response to the comment regarding the method for calculating 
deliverable supply, the Commission notes that guidance for calculating 
deliverable supply can be found in Appendix C to part 38. Amendments to 
part 38 are beyond the scope of this rulemaking. However, that guidance 
already provides that deliverable supply calculations are estimates 
based on what ``reasonably can be expected to be readily available'' on 
a monthly basis based on a number of types of data from the physical 
marketing channels, as suggested by the commenter, and these 
calculations are done for each month and each commodity separately. 
Furthermore, much of Sec.  150.5(b) reiterates longstanding guidance 
and acceptable practices for DCMs, rather than proposing new concepts 
for administering limits on contracts that are not subject to federal 
limits under Sec.  150.2.
    The Commission agrees with the commenter urging the Commission to 
allow exchanges to set non-spot month limits at least as high as the 
spot-month position limit, in the event the open interest formula would 
result in a limit level lower than the spot month. Accordingly, 
consistent with the recommended revisions to the initial limit level 
listings for contracts subject to federal limits found in Sec.  
150.2(e)(4)(iv), the Commission proposes to revise Sec.  
150.5(b)(2)(ii) to allow exchanges to set non-spot month limit levels 
at the maximum of the spot month limit level, the level derived from 
the 10/2.5% formula, or 5,000 contracts. To conform with those 
revisions, the Commission also proposes to revise Sec.  
150.5(b)(1)(ii)(A)-(B) to remove the distinction between agricultural 
and exempt commodities.
    Regarding the commenter who expressed concern regarding 
requirements for accountability levels for exempt commodities, the 
Commission notes that the provisions set forth guidance and acceptable 
practices for exchanges in setting position limit levels and 
accountability levels and, as guidance and acceptable practices, are 
not binding regulations. Under the Commission's guidance, an initial 
non-spot month limit level of no more than 5,000 is viewed as suitable.
    Similarly, in response to the commenter who recommended that DCMs 
be permitted to establish position accountability levels in lieu of 
position limits outside the spot month and coordinate the 
administration of such levels with the Commission and other DCMs, the 
Commission agrees that position accountability may be permitted for 
certain physical commodity derivative contracts. Reproposed Sec.  
150.5(b)(3), therefore, provides guidance and acceptable practices 
concerning exchange adoption of position accountability outside the 
spot month for contracts 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. The 
Commission again notes that guidance and acceptable practices do not 
establish mandatory means of compliance. As such, in regards to meeting 
the specified volume and open interest thresholds in Sec.  150.5(b)(3), 
the Commission notes that the guidance in Sec.  150.5(b)(3)(i) may not 
be the only circumstances under which sufficiently high liquidity may 
be shown to exist for the establishment of position accountability 
levels in lieu of position limits.
    The December 2013 Position Limits Proposal provided in Sec.  
150.5(b)(1)(iii) that if a commodity derivative contract was 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.\847\ However, the 
Commission is reproposing Sec.  150.5(b)(1)(iii) with a modification: 
While the previously proposed guidance in Sec.  150.5(b)(1)(iii) 
provided that the exchange should adopt the ``same'' spot-month, 
individual non-spot month, and all-months combined limit levels as the 
original price referenced contract, the Commission is reproposing Sec.  
150.5(c)(1)(iii) to provide that the limit levels should, instead, be 
``comparable.''
---------------------------------------------------------------------------

    \847\ The Commission expressed the belief that, based on its 
enforcement experience, limiting a trader's position in cash-settled 
contracts in this way would diminish 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. See December 2013 
Position Limits Proposal, 78 FR at 75757. As the Commission noted 
with respect to cash-settled contracts where the underlying product 
is a physical commodity with limited supplies, thus 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. Id. at 75757, n. 692.
---------------------------------------------------------------------------

    As pointed out by one commenter,\848\ the CEA establishes a 
comparability standard for linked FBOT contracts in CEA section 
4(b)(1)(B)(ii)(I), when it provides that the Commission may not permit 
an FBOT to provide direct access to participants located in the United 
States unless the Commission determines that the FBOT (or the foreign 
authority overseeing the FBOT) adopts position limits that are 
``comparable to'' the position limits adopted by the registered entity 
for the contract(s) against which the FBOT contract settles.\849\ In 
addition, as noted by the commenter, the Commission, in adopting Sec.  
48.8(c)(2), recognized that the comparability standard and its 
associated requirements would protect the price discovery process by 
ensuring that the linked contracts and the U.S. contracts to which they 
are linked ``have position limits and accountability provisions that 
are comparable to the corresponding [DCM] contracts [to which they are 
linked].' '' \850\ The Commission notes that this change will better 
align Sec.  150.5(b)(1)(iii) with the statute and with the standard 
provided in Sec.  48.8(c).\851\ Moreover, use of

[[Page 96796]]

``comparable'' rather than ``same'' limit levels provides exchanges 
with a more flexible standard based on statutory language.\852\ This 
change also provides a standard that is consistent with existing 
practice for domestic contracts that are linked to the price of a 
physical-delivery contract.\853\
---------------------------------------------------------------------------

    \848\ See, e.g., CL-CME-61007 at 2-4; CL-CME-61008 at 2-3.
    \849\ CL-CME-61007 at 2. ``Registered entities'' are defined in 
CEA section 1a(40) as DCMs, DCOs, SEFs, SDRs, notice-registered DCMs 
under CEA section 5f, and any electronic trading facility upon which 
a contract is executed or traded which the Commission has determined 
is a significant price discovery contract. According to CME, CEA 
Section 4(b) ``contains an explicit Congressional endorsement of 
`comparable' '' limits for cash-settled contracts in relation to the 
physically-delivered contracts to which they are linked. See CL-CME-
61007 at 2.
    \850\ CL-CME-61007 at 3. See 76 FR 80674, 80685, 80697 (Dec. 23, 
2011). See also Sec.  48.8(c)(1)(ii)(A).
    \851\ The comparability standard is also used in determinations 
as to which foreign DCOs are subject to comparable, comprehensive 
supervision and regulation by the appropriate government authority 
in the DCO's home country. See CEA section 5b)(h). See also the 
Commission's Notice of Comparability Determination for Certain 
Requirements Under the European Market Infrastructure Regulation, 81 
FR 15260 (Mar. 22, 2016).
    \852\ As the Commission explained in preamble to final part 48 
in connection with comparability determinations, ``[t]he 
Commission's determination of the comparability of the foreign 
regulatory regime to which the FBOT applying for registration is 
subject will not be a ``line by line'' examination of the foreign 
regulator's approach to supervision of the FBOTs it regulates. 
Rather, it will be a principles-based review conducted in a manner 
consistent with the part 48 regulations pursuant to which the 
Commission will look to determine if that regime supports and 
enforces regulatory objectives in the oversight of the FBOT and the 
clearing organization that are substantially equivalent to the 
regulatory objectives supported and enforced by the Commission in 
its oversight of DCMs and DCOs.'' 76 FR 80674, 80680 (Dec. 23, 
2011). See also Sec.  48.5(d)(5).
    \853\ For example, both CME and ICE currently have conditional 
spot-month limit exemptions for cash-settled natural gas contracts 
at a level up to five times the level of the spot-month limit level 
on CME's economically-equivalent NYMEX Henry Hub Natural Gas 
(physical-delivery) futures contract to which they settle.
---------------------------------------------------------------------------

    The Commission proposes to revise Sec.  150.5(b)(4)(B) regarding 
the calculation of open interest for use in setting exchange-set 
speculative position limits to provide that a DCM or SEF that is a 
trading facility would include swaps in their open interest calculation 
only if such entities are required to administer position limits on 
swap contracts of their facilities. This revision clarifies and 
harmonizes Sec.  150.5(b)(4)(B) with the relief in Appendix E to part 
150, as well as in appendices to parts 37 and 38, which delays for DCMs 
and SEFs that are trading facilities and lack access to sufficient swap 
position information the requirement to establish and monitor position 
limits on swaps at this time. This approach conforms Sec.  150.5(b) 
with other proposed changes regarding the treatment of swaps.\854\
---------------------------------------------------------------------------

    \854\ As noted above, the relief was proposed in the 2016 
Supplemental Position Limits Proposal, 81 FR at 38459-62. See also 
DCM Core Principle 5, Position Limitations or Accountability 
(contained in CEA section 5(d)(5), 7 U.S.C. 7(d)(5)) and SEF Core 
Principle 6, Position Limits or Accountability (contained in CEA 
section 5h(f)(6), 7 U.S.C. 7b-3(f)(6)).
---------------------------------------------------------------------------

Exchange--Administered Exemptions for Commodity Derivative Contracts in 
a Physical Commodity Not Subject to Federal Limits
    The Commission is reproposing Sec.  150.5(b)(5)(i) with 
modifications to clarify that it is guidance rather than a regulatory 
requirement. In addition, as modified, it provides that under exchange 
rules allowing a trader to file an application for an enumerated bona 
fide hedging exemption, the application should be filed no later than 
five business days after the trader assumed the position that exceeded 
a position limit.\855\ As noted above, the Commission expects that 
exchanges will carefully consider whether allowing retroactive 
recognition of an enumerated bona fide hedging exemption would, as 
noted by one commenter, diminish the overall integrity of the process, 
and should carefully consider whether to adopt in those rules the two 
safeguards noted: (i) To continue to require market participants making 
use of the retroactive application to demonstrate that the applied-for 
hedge was required to address a sudden and unforeseen hedging need; and 
(ii) providing that if the emergency hedge recognition was not granted, 
exchange rules would continue to require the applicant to promptly 
unwind its position and also would deem the applicant to have been in 
violation for any period in which its position exceeded the applicable 
limits.
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    \855\ The modification made to Sec.  150.5(b)(5)(i) is similar 
manner to its the Commission's modification of Sec.  
150.5(a)(2)(ii), but, as mentioned, Sec.  150.5(b)(5)(i) is guidance 
rather than a regulatory requirement.
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    Additionally, the Commission is reproposing Sec.  150.5(b)(5)(i) 
with modifications to clarify, as requested by commenters,\856\ that 
the exchanges have reasonable discretion as to whether they apply to 
their exemption process from exchange-set speculative position limits, 
a virtually identical process as provided for recognizing non-
enumerated bona fide hedging positions under CFTC Regulation 150.9(a). 
As explained in the discussion regarding the changes to the bona fide 
hedging definition under Sec.  150.1, the Commission is proposes a 
phased approach with respect to the definition of a bona fide hedging 
position applicable to physical commodities.\857\ The Commission 
recognizes that exchanges, under Sec.  150.9, may need to adapt their 
current process to recognize non-enumerated bona fide hedging positions 
for commodity derivative contracts that are subject to a federal 
position limit under Sec.  150.2, or adopt a new one. In turn, market 
participants will need to seek recognition of a non-enumerated bona 
fide hedge from an exchange under that new process. In light of this 
implementation issue, the Commission proposes to limit the mandatory 
scope of the new definition of bona fide hedging position to contracts 
that are subject to a federal position limit.\858\ This means that the 
Commission would permit exchanges to maintain both their current bona 
fide hedging position definition and their existing processes for 
recognizing non-enumerated bona fide hedging positions for physical 
commodity contracts not subject to federal limits under Sec.  150.2. 
The Commission notes an exchange may, but need not, adopt for physical 
commodities not subject to federal limits the new bona fide hedging 
position definition and the new process to recognize non-enumerated 
bona fide hedging positions.
---------------------------------------------------------------------------

    \856\ See CL-Working Group-60947 at 14; see also CL-ICE-60929 at 
8, 32. As previously proposed, Sec.  150.5(b)(5)(i) provides, ``(i) 
Hedge exemption. Any hedge exemption rules adopted by a designated 
contract market or swap execution facility that is a trading 
facility must conform to the definition of bona fide hedging 
position in Sec.  150.1 or provide for recognition as a non-
enumerated bona fide hedge in a manner consistent with the process 
described in Sec.  150.9(a).''
    \857\ See also December 2013 Position Limits Proposal, 78 FR at 
75725 (stating ``[t]he 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. 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.). . . . 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.'').
    \858\ See also supra discussion under regarding the bona fide 
hedging position definition.
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    In addition, the Commission is proposing that, for enumerated bona 
fide hedging positions, exchange rules may allow traders to file an 
application for an enumerated bona fide hedging exemption within five 
business days after the trader assumed the position that exceeded a 
position limit.
    Finally, as to Sec.  150.5(b)(5)(ii) (Other exemptions), the 
Commission did not receive any comments regarding Sec.  
150.5(b)(5)(ii)(A) (Financial distress), and is reproposing this 
exemption without change.
Conditional Spot Month Limit Exemption for Commodity Derivative 
Contracts in a Physical Commodity Not Subject to Federal Limits
    While the conditional spot month limit exemption is addressed in 
more detail under Sec.  150.3, after consideration of comments, the 
Commission is reproposing Sec.  150.5(b)(5)(ii)(B) with a 
modification.\859\ The December 2013

[[Page 96797]]

Position Limits Proposal proposed guidance that an exchange may adopt a 
conditional spot month position limit exemption for cash-settled 
contracts, with one of two provisos being that such positions should 
not exceed five times the level of the spot-month limit specified by 
the exchange that lists the physical-delivery contract to which the 
cash-settled contracts were directly or indirectly linked.\860\ As 
reproposed, the guidance recommends that such conditional exemptions 
should not exceed two times the level of the spot-month limit specified 
by the exchange that lists the applicable physical-delivery contract.
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    \859\ Most comments concerning the conditional spot month limit 
were submitted by CME and ICE; recent letters include: CL-CME-61007; 
CL-ICE-61009; CL-CME-61008; CL-ICE-60929; CL-CME-60926.
    \860\ The second proviso included in Sec.  150.5(b)(5)(ii)(B) 
was that the person holding or controlling the positions should not 
hold or control positions in such spot-month physical-delivery 
contract.
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    After review of comments and an impact analysis regarding the 
federal limits, the Commission believes that a five-times conditional 
exemption is too large, other than in natural gas because, in the 
markets that the Commission proposes to subject to federal limits, the 
Commission observed few or no market participants with positions in 
cash-settled contracts in the aggregate that exceed 25 percent of 
deliverable supply in the spot month. This is so even though cash-
settled contracts that are swaps are not currently subject to position 
limits. A five-times conditional exemption would not ensure liquidity 
for bona fide hedgers in the spot month for cash-settled contracts 
because there appear to be few or no positions that large (other than 
in natural gas). Consequently, and in light of the other three policy 
objectives of CEA section 4a(a)(3)(B), the Commission reproposes a more 
cautious approach.\861\
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    \861\ As noted above, it is the Commission's responsibility 
under CEA section 4a(a)(3)(B) to set limits, to the maximum extent 
practicable, in its discretion, that, in addition to ensuring 
sufficient market liquidity for bona fide hedgers, diminish, 
eliminate or prevent excessive speculation; deter and prevent market 
manipulation, squeezes, and corners; and ensure that the price 
discovery function of the underlying market is not disrupted.
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    Since transactions of large speculative traders may tend to cause 
unwarranted price changes, exchanges should exercise caution in 
determining whether such conditional exemptions are warranted; for 
example, an exchange may determine that a conditional exemption is 
warranted because such a speculative trader is demonstrably providing 
liquidity for bona fide hedgers. Where an exchange may not have access 
to data regarding a market participant's cash-settled positions away 
from a particular exchange, such exchange should require, for any 
conditional spot-month limit exemption it grants, that a trader report 
promptly to such exchange the trader's aggregate positions in cash-
settled contracts, physical-delivery contracts, and cash market 
positions.
    As noted above, under reproposed Sec.  150.5(b)(5)(ii)(B), an 
exchange has the choice of whether or not to adopt a conditional spot 
month position limit exemption for cash-settled contracts that are not 
subject to federal limits. As also discussed above regarding reproposed 
Sec.  150.3(c), the Commission is not proposing a conditional spot-
month limit for agricultural contracts subject to federal limits under 
reproposed Sec.  150.2. Further, the Commission notes that the current 
cash-settled natural gas spot month limit rules of two commenters, CME 
Group (which operates NYMEX) and ICE, both include the same spot-month 
limit level and the same conditional spot-month limit exemption. In 
each case the current cash-settled conditional exemption is five times 
the limit for the physical-delivery contract. Such natural gas 
contracts would be subject to federal limits under reproposed Sec.  
150.2, so the guidance in reproposed Sec.  150.5(b) would not be 
applicable to those contracts.\862\
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    \862\ The Commission notes that reproposed Sec.  
150.5(b)(5)(ii)(B) retains both of the recommended provisos, 
although, as noted above, the guidance recommends that such 
positions should not exceed two times the level of the spot-month 
limit specified by the exchange that lists the applicable physical-
delivery contract, rather than five times.
---------------------------------------------------------------------------

Treatment of Spread and Anticipatory Hedge Exemptions for Commodity 
Derivative Contracts in a Physical Commodity Not Subject to Federal 
Limits
    In regards to the exemption for intramarket and intermarket spread 
positions under Sec.  150.5(b)(5)(ii)(C), the comments received 
concerned the exchange process for providing spread exemptions under 
Sec.  150.10. The Commission addresses those comments below in its 
discussion of Sec.  150.10, and is reproposing Sec.  150.5(b)(5)(ii)(C) 
as proposed in the 2016 Supplemental Position Limits Proposal.
    The Commission points out, however, that reproposed Sec.  
150.5(b)(5)(ii)(C) would apply only to physical commodity derivative 
contracts, and would not apply to any derivative contract in an 
excluded commodity. Furthermore, as noted above, reproposed Sec.  
150.5(b)(5)(ii)(C) provides guidance rather than rigid requirements. 
Instead, under Sec.  150.5(b)(5)(ii)(C), exchanges should take into 
account whether granting a spread exemption in a physical commodity 
derivative would, to the maximum extent practicable, ensure sufficient 
market liquidity for bona fide hedgers, and not unduly reduce the 
effectiveness of position limits to diminish, eliminate, or prevent 
excessive speculation; deter and prevent market manipulation, squeezes, 
and corners; and ensure that the price discovery function of the 
underlying market is not disrupted.\863\
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    \863\ As noted in the December 2013 Position Limits Proposal, 
the guidance is consistent with the statutory policy objectives for 
position limits on physical commodity derivatives in CEA section 
4a(a)(3)(B). See December 2013 Position Limits Proposal, 78 FR at 
38464. The Commission interprets the CEA as providing it with the 
statutory authority to exempt spreads that are consistent with the 
other policy objectives for position limits, such as those in CEA 
section 4a(a)(3)(B). Id. CEA section 4a(a)(3)(B) provides that the 
Commission shall set limits to the maximum extent practicable, in 
its discretion--to diminish, eliminate, or prevent excessive 
speculation as described under this section; to deter and prevent 
market manipulation, squeezes, and corners; to ensure sufficient 
market liquidity for bona fide hedgers; and to ensure that the price 
discovery function of the underlying market is not disrupted.
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Five-Day Rule for Commodity Derivative Contracts in a Physical 
Commodity Not Subject to Federal Limits
    While the Commission's determination regarding the five-day rule is 
addressed elsewhere,\864\ the Commission points out that, as discussed 
in connection with the definition of bona fide hedging position and in 
relation to exchange processes under Sec.  150.9, Sec.  150.10, and 
Sec.  150.11, and as noted above in connection with Sec.  150.5(a), the 
five-day rule would only apply to certain enumerated positions (pass-
through swap offsets, anticipatory, and cross-commodity hedges),\865\ 
rather than when determining whether to recognize as non-enumerated 
bona fide hedging positions certain non-enumerated hedge strategies for 
non-referenced contracts. As reproposed, therefore, Sec.  150.5(b) 
would apply the five-day rule only to pass-through swap offsets, 
anticipatory, and cross-commodity hedges. However, in regards to 
exchange processes under Sec.  150.9, Sec.  150.10, and Sec.  150.11, 
the Commission

[[Page 96798]]

proposes to allow exchanges to waive the five-day rule on a case-by-
case basis.
---------------------------------------------------------------------------

    \864\ See the discussion regarding the five-day rule in 
connection with the definition of bona fide hedging position and the 
discussion of Sec.  150.9 (Process for recognition of positions as 
non-enumerated bona fide hedges).
    \865\ See Sec.  150.1 definition of bona fide hedging position, 
sections (2)(ii)(A), (3)(iii), (4), and (5) (Other enumerated 
hedging position). To provide greater clarity as to which bona fide 
hedging positions the five-day rule applies, the reproposed rules 
reorganize the definition.
---------------------------------------------------------------------------

    As the Commission cautioned above, exchanges should carefully 
consider whether to recognize a position as a bona fide hedge or to 
exempt a spread position held during the last few days of trading in 
physical-delivery contracts. The Commission points to the tools that 
exchanges currently use to address concerns during the spot month; as 
two commenters observed, current tools include requiring gradual 
reduction of the position (``step down'' requirements) or revoking 
exemptions to protect the price discovery process in core referenced 
futures contracts approaching expiration. Consequently, under the 
reproposed rule, exchanges may recognize positions, on a case-by-case 
basis in physical-delivery contracts that would otherwise be subject to 
the five-day rule, as non-enumerated bona fide hedging positions, by 
applying the exchanges experience and expertise in protecting its own 
physical-delivery market.
Reporting Requirements for Commodity Derivative Contracts in a Physical 
Commodity Not Subject to Federal Limits
    In response to the comment questioning the proposed reporting 
requirements by a claim that, ``while the Commission has a surveillance 
obligation with respect to federal limits, the same obligation has 
never before existed with respect to exchange-set limits for non-
referenced contracts, and does not exist today,'' \866\ the Commission 
points out, as it did in the 2016 Supplemental Position Limits 
Proposal, that the Futures Trading Act of 1982 ``gave the Commission, 
under section 4a(5) [since redesignated as section 4a(e)] of the Act, 
the authority to directly enforce violations of exchange-set, 
Commission-approved speculative position limits in addition to position 
limits established directly by the Commission through orders or 
regulations.'' \867\ And, since 2008, it has also been a violation of 
the Act for any person to violate an exchange position limit rule 
certified by the exchange.\868\ To address any confusion that might 
have led to such a comment, the Commission reiterates, under CEA 
section 4a(e), its authority to enforce violations of exchange-set 
speculative position limits, whether certified or Commission-approved. 
As the Commission explained in the 2016 Supplemental Position Limits 
Proposal, exchanges, as SROs, do not act only as independent, private 
actors.\869\ In fact, to repeat the explanation provided by the 
Commission in 1981, when the Act is read as a whole, ``it is apparent 
that Congress envisioned cooperative efforts between the self-
regulatory organizations and the Commission. Thus, the exchanges, as 
well as the Commission, have a continuing responsibility in this matter 
under the Act.'' \870\ The 2016 Supplemental Position Limits Proposal 
pointed out that the ``Commission's approach to its oversight of its 
SROs was subsequently ratified by Congress in 1982, when it gave the 
CFTC authority to enforce exchange set limits.'' \871\ In addition, as 
the Commission observed in 2010, and reiterated in the 2016 
Supplemental Position Limits Proposal, ``since 1982, the Act's 
framework explicitly anticipates the concurrent application of 
Commission and exchange-set speculative position limits.'' \872\ The 
Commission further noted that the ``concurrent application of limits is 
particularly consistent with an exchange's close knowledge of trading 
activity on that facility and the Commission's greater capacity for 
monitoring trading and implementing remedial measures across 
interconnected commodity futures and option markets.'' \873\
---------------------------------------------------------------------------

    \866\ CL-CME-60926 at 15.
    \867\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38466, n. 85 (quoting the Federal Speculative Position Limits for 
Referenced Energy Contracts and Associated Regulations, 75 FR 4144, 
4145 (Jan. 36, 2010)).
    \868\ See Futures Trading Act of 1982, Public Law 97-444, 96 
Stat. 2299-30 (1983) (amending CEA section 4a by including, in what 
was then a new CEA section 4a(5), since been re-designated as CEA 
section 4a(e) ``. . . It shall be a violation of this chapter for 
any person to violate any bylaw, rule, regulation, or resolution of 
any contract market, derivatives transaction execution facility, or 
other board of trade licensed, designated, or registered by the 
Commission or electronic trading facility with respect to a 
significant price discovery contract fixing limits on the amount of 
trading which may be done or positions which may be held by any 
person under contracts of sale of any commodity for future delivery 
or under options on such contracts or commodities, if such bylaw, 
rule, regulation, or resolution has been approved by the Commission 
or certified by a registered entity pursuant to section 7a-2(c)(1) 
of this title: Provided, That the provisions of section 13(a)(5) of 
this title shall apply only to those who knowingly violate such 
limits.'').
    \869\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38465-66.
    \870\ Establishment of Speculative Position Limits, 46 FR 50938, 
50939 (Oct. 16, 1981). As the Commission noted at that time that 
``[s]ince many exchanges have already implemented their own 
speculative position limits on certain contracts, the new rule 
merely effectuates completion of a regulatory philosophy the 
industry and the Commission appear to share.'' Id. at 50940.
    \871\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38466. See also Futures Trading Act of 1982, Public Law 97-444, 96 
Stat. 2299-30 (1983). In 2010, the Commission noted that the 1982 
legislation ``also gave the Commission, under section 4a(5) of the 
Act, the authority to directly enforce violations of exchange-set, 
Commission-approved speculative position limits in addition to 
position limits established directly by the Commission through 
orders or regulations.'' Federal Speculative Position Limits for 
Referenced Energy Contracts and Associated Regulations, 75 FR 4144, 
4145 (Jan. 36, 2010) (``2010 Position Limits Proposal for Referenced 
Energy Contracts''). Section 4a(5) has since been re-designated as 
section 4a(e) of the Act.
    \872\ 2010 Position Limits for Referenced Energy Contracts at 
4145; see also 2016 Supplemental Position Limits Proposal, 81 FR at 
38466.
    \873\ See 2010 Position Limits for Referenced Energy Contracts, 
75 FR at 4145; see also 2016 Supplemental Position Limits Proposal, 
81 FR at 38466.
---------------------------------------------------------------------------

    The Commission retains the power to approve or disapprove the rules 
of exchanges, under standards set out pursuant to the CEA, and to 
review an exchange's compliance with the exchange's rules, by way of 
additional examples of the Commission's continuing responsibility in 
this matter under the Act.
v. Commission Determination Regarding Sec.  150.5(c)
    As noted above, in an overall non-substantive change made in 
reproposing Sec.  150.5, the Commission moved all provisions applying 
to excluded commodities from Sec.  150.5(b) into reproposed Sec.  
150.5(c) to provide greater clarity regarding which provisions concern 
excluded commodities. The Commission has determined to repropose the 
rule largely as proposed for excluded commodities (previously under 
Sec.  150.5(b)), for the reasons noted above, with certain changes 
discussed below.\874\
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    \874\ The Commission is reproposing the following sections 
without further discussion, for the reasons provided above, because 
it received no substantive comments: Sec.  150.5(c)(6) (Pre-
enactment and transition period swap positions), Sec.  150.5(c)(7) 
(Pre-existing positions), and Sec.  150.5(b)(9) (Additional 
acceptable practices).
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Limit Levels for Excluded Commodities
    The Commission is reproposing the provisions under Sec.  
150.5(c)(1) regarding levels of limits for excluded commodities as 
modified and reproposed under Sec.  150.5(b)(1),\875\ to reference 
excluded commodities and to remove provisions that were solely 
addressed to agricultural commodities.\876\ These provisions generally 
provide guidance rather than rigid requirements; the guidance for 
levels of limits remains the same for

[[Page 96799]]

excluded commodities as for all other commodity derivative contracts 
that are not subject to the limits set forth in reproposed Sec.  150.2, 
including derivative contracts in a physical commodity as defined in 
reproposed Sec.  150.1.
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    \875\ As reproposed, Sec.  150.5(c)(1)(iii), like Sec.  
150.5(b)(1)(iii), provides that the spot-month, individual non-spot 
month, and all-months combined limit levels should be ``comparable'' 
rather than the ``same.''
    \876\ See supra for discussion of the modifications made to the 
reproposed provisions of Sec.  150.5(b)(1) as compared to the 
December 2103 Position Limits Proposal; the explanation provided 
above also pertains to the inclusion of those modifications in 
reproposed Sec.  150.5(c)(1).
---------------------------------------------------------------------------

    Similarly, as to adjustment of limit levels for excluded commodity 
derivative contracts under Sec.  150.5(c)(2), the reproposed provisions 
are modified to reference only excluded commodities and to remove 
provisions that were solely addressed to agricultural commodities. As 
reproposed, Sec.  150.5(c)(2)(i) provides guidance that the spot month 
position limits for excluded commodity derivative contracts ``should be 
maintained 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.''
    The Commission did not receive comments regarding Sec.  
150.5(c)(3). The guidance in Sec.  150.5(c)(3), on exchange adoption of 
position accountability levels in lieu of speculative position limits, 
has been reproposed as was previously proposed in Sec.  150.5(b)(3), 
modified to remove provisions under Sec.  150.5(b)(3)(i), which were 
solely addressed to physical commodity derivative contracts, and to 
reference excluded commodities.
    As to the calculation of open interest for use in setting exchange-
set speculative position limits for excluded commodities, the 
Commission is reproposing, in Sec.  150.5(c)(4), the same guidance for 
excluded commodities that is being reproposed under Sec.  150.5(b)(4) 
as for all other commodity derivative contracts that are not subject to 
the limits set forth in Sec.  150.2, including the modification to 
provide that a DCM or SEF that is a trading facility would include 
swaps in its open interest calculation only if such entity is required 
to administer position limits on swap contracts of its facility.
Exchange--Administered Exemptions for Excluded Commodities
    In regards to hedge exemptions, the Commission is reproposing in 
new Sec.  150.5(c)(5)(i) for contracts in excluded commodities a 
modification of what was previously proposed in Sec.  150.5(b)(5)(i) 
that eliminates the guidance that exchanges ``may provide for 
recognition of a non-enumerated bona fide hedge in a manner consistent 
with the process described in Sec.  150.9(a).'' That provision was 
intended to apply only to physical commodity contracts and not to 
exemptions granted by exchanges for contracts in excluded 
commodities.\877\
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    \877\ In addition, as noted above, the Commission is reproposing 
Sec.  150.5(b)(5)(i) with a modification that clarifies that this 
provision is guidance in the case of commodity derivatives contracts 
in a physical commodity not subject to federal limits.
---------------------------------------------------------------------------

    As noted above, in reproposing the definition of bona fide hedging 
position, the Commission is clarifying that an exchange may otherwise 
recognize as bona fide any position in a commodity derivative contract 
in an excluded commodity, so long as such recognition is pursuant to 
such exchange's rules. Although the Commission's standards in the 
December 2013 Position Limits Proposal applied the incidental test and 
the orderly trading requirements to all commodities, the Commission, as 
previously described, proposed in the 2016 Supplemental Position Limits 
Proposal to remove both those standards from the definition of bona 
fide hedging position.\878\ Moreover, the reproposed definition of bona 
fide hedging position would provide only that the position is either: 
(i) Enumerated in the definition (in paragraphs (3), (4), or (5)) and 
meets the economically appropriate test; or (ii) recognized by an 
exchange under rules previously submitted to the Commission.\879\ The 
Commission's standards for recognizing a position as a bona fide hedge 
in an excluded commodity, therefore, would not include the additional 
requirements applicable to physical commodities subject to federal 
limits. Consequently, as reproposed, the exchanges would have 
reasonable discretion to comply with core principles regarding position 
limits on excluded commodities so long as the exchange does so pursuant 
to exchange rules previously submitted to the Commission under Part 40.
---------------------------------------------------------------------------

    \878\ See 2016 Supplemental Position Limits Proposal, definition 
of bona fide hedging position (amending the definition previously 
proposed in the December 2013 Position Limits Proposal), 78 FR at 
38463-64, 38505-06.
    \879\ The economically appropriate test has historically been 
interpreted primarily in the context of physical commodities, rather 
than applied to excluded commodities.
---------------------------------------------------------------------------

    In addition, in conjunction with the amendments to the definition 
of bona fide hedging positions in regards to excluded commodities,\880\ 
the Commission is reproposing Sec.  150.5(c)(5)(ii), proposed as Sec.  
150.5(b)(5)(ii)(D) in the 2016 Supplemental Position Limits Proposal, 
with no further modification, to afford greater flexibility for 
exchanges when granting exemptions for excluded commodities. The 2016 
Supplemental Position Limits Proposal provided, in addition to granting 
exemptions under paragraphs (b)(5)(ii)(A), (b)(5)(ii)(B), and 
(b)(5)(ii)(C) of Sec.  150.5, that exchanges may grant a ``limited'' 
risk management exemptions pursuant to rules consistent with the 
guidance in Appendix A of part 150. As reproposed, Sec.  
150.5(c)(5)(ii) eliminates the modifier ``limited'' from the risk 
management exemptions, and provides merely that exchanges may grant, in 
addition to the exemptions under paragraphs (b)(5)(ii)(A), 
(b)(5)(ii)(B), and (b)(5)(ii)(C), risk management exemptions pursuant 
to rules submitted to the Commission, ``including'' for a position that 
is consistent with the guidance in Appendix A of part 150.
---------------------------------------------------------------------------

    \880\ In each case pursuant to rules submitted to the 
Commission, consistent with the guidance in Appendix A of this part.
---------------------------------------------------------------------------

    In regards to the provisions addressing applications for exemptions 
for positions in excluded commodities, the Commission is modifying what 
was copied from Sec.  150.5(b)(5)(iii) to provide, under Sec.  
150.5(c)(5)(iii), simply that an exchange may allow a person to file an 
exemption application for excluded commodities after the person assumes 
the position that exceeded a position limit.
    Finally, in reproposing the aggregation provision for excluded 
commodities under Sec.  150.5(c)(8), the Commission is not merely 
mirroring the aggregation provision as previously proposed in Sec.  
150.5(b)(8). As noted above, the reproposed aggregation provisions for 
physical commodity derivatives contracts, whether under Sec.  
150.5(a)(8) or Sec.  150.5(b)(8), provide that exchanges must have 
aggregation provisions that conform to Sec.  150.4. Reproposed Sec.  
150.5(c)(8), consistent with the rest of reproposed Sec.  150.5(c), 
would instead provide guidance, that exchanges ``should'' have 
aggregation rules for excluded commodity derivative contracts that 
conform to Sec.  150.4.

E. 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

1. Current Part 19
    The market and large trader reporting rules are contained in parts 
15 through 21 of the Commission's regulations.\881\ Collectively, these 
reporting rules effectuate the Commission's market and financial 
surveillance programs by enabling the Commission to gather 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

[[Page 96800]]

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.\882\ 
Section 4i of the Act requires the filing of such reports as the 
Commission may require when positions equal or exceed Commission-set 
levels.\883\
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    \881\ 17 CFR parts 15-21.
    \882\ See CEA section 4g(a); 7 U.S.C. 6g(a).
    \883\ 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 hedging 
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.\884\ 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,\885\ which includes the soy complex, and 
CFTC Form 304 Report: Statement of Cash Positions in Cotton.\886\ 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.\887\
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    \884\ 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).
    \885\ 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.
    \886\ 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.
    \887\ 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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2. Amendments to Part 19
    In the December 2013 Position Limits Proposal, the Commission 
proposed to amend part 19 so that it would conform to the Commission's 
proposed changes to part 150.\888\ First, the Commission proposed 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 proposed 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 proposed to add new series '04 reporting forms to 
effectuate these additional reporting requirements. Third, the 
Commission proposed to update the manner of part 19 reporting. Lastly, 
the Commission proposed to update both the type of data that would be 
required in series '04 reports as well as the timeframe for filing such 
reports.
---------------------------------------------------------------------------

    \888\ See December 2013 Position Limits Proposal, 78 FR at 
75741-75746.
---------------------------------------------------------------------------

    Comments Received: One commenter acknowledges concerns presented by 
Commission staff at the Staff Roundtable that exemptions from position 
limits be limited to prevent abuse, but does not believe that the 
adoption of additional recordkeeping or reporting rules or the 
development of costly infrastructure is required because statutory and 
regulatory safeguards already exist or are already proposed in the 
December 2013 Position Limits Proposal, noting that: (i) The series '04 
forms as well as DCM exemption documents will be required of market 
participants, who face significant penalties for false reporting, and 
the Commission may request additional information if the information 
provided is unsatisfactory; and (ii) market participants claiming a 
bona fide hedging exemption are still subject to anti-disruptive 
trading prohibitions in CEA section 4c(a)(5), anti-manipulation 
prohibitions in CEA sections 6(c) and 9(c), the orderly trading 
requirement in proposed Sec.  150.1, and DCM oversight. The commenter 
stated that these requirements comprise a ``thorough and robust 
regulatory structure'' that does not need to be augmented with new 
recordkeeping, reporting, or other obligations to prevent misuse of 
hedging exemptions.\889\ A second commenter echoed that additional 
recordkeeping or reporting obligations are unnecessary and would create 
unnecessary regulatory burdens.\890\
---------------------------------------------------------------------------

    \889\ CL-Working Group-59959 at 3-4.
    \890\ CL-NFP-60393 at 15-16.
---------------------------------------------------------------------------

    Another commenter stated that the various forms required by the 
regime, while not lengthy, represent significant data collection and 
categorization that will require a non-trivial amount of work to 
accurately prepare and file. The commenter claimed that a comprehensive 
position limits regime could be implemented with a ``far less 
burdensome'' set of filings and requested that the Commission review 
the proposed forms and ensure they are ``as clear, limited, and 
workable'' as possible to reduce burden. The commenter stated that it 
is not aware of any software vendors that currently provide solutions 
that can support a commercial firm's ability to file the proposed 
forms.\891\
---------------------------------------------------------------------------

    \891\ CL-COPE-59662 at 24; CL-COPE-60932 at 10; CL-EEI-EPSA-
60925 at 9.
---------------------------------------------------------------------------

    One commenter recommended that the Commission eliminate the series 
'04 reports in light of the application and reporting requirements laid 
out in the 2016 Supplemental Position Limits Proposal. The commenter 
asserted that the application requirements are in addition to the 
series '04 forms, which the commenter claims ``only provide the 
Commission with a limited surveillance benefit.'' \892\ Another 
commenter raised concerns regarding forms filed under part 19 and the 
data required to be filed with exchanges under Sec. Sec.  150.9-11. The 
commenter stated that the 2016 Supplemental Position Limits Proposal 
requires that ``those exceeding the federal limits file the proposed 
forms including Form 204'' but lacks ``meaningful guidance'' regarding 
the data that must be maintained ``effectively in real-time'' to 
populate the forms.\893\
---------------------------------------------------------------------------

    \892\ CL-FIA-60937 at 17.
    \893\ CL-EEI-EPSA-60925 at 9.
---------------------------------------------------------------------------

    Several commenters requested that the Commission create user-
friendly guidebooks for the forms so that all entities can clearly 
understand any required forms and build the systems to file such forms, 
including providing workshops and/or hot lines to improve the 
forms.\894\
---------------------------------------------------------------------------

    \894\ CL-COPE-59662 at 24; CL-COPE-60932 at 10; CL-ASR-60933 at 
4; CL-Working Group-60947 at 17-18; CL-EEI-EPSA-60925 at 3.
---------------------------------------------------------------------------

    One commenter expressed concern for reporting requirements in 
conflict with other regulatory requirements (such as FASB ASC 
815).\895\
---------------------------------------------------------------------------

    \895\ CL-U.S. Dairy-59597 at 6.
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    Finally, two commenters recommended modifying or removing the 
requirement to certify series '04 reports as ``true and correct''. One 
commenter suggested that the requirement be removed due to the 
difficulty of making such a certification

[[Page 96801]]

and the fact that CEA section 6(c)(2) already prohibits the submission 
of false or misleading information.\896\ Another noted that the 
requirement to report very specific information relating to hedges and 
cash market activity involves data that may change over time. The 
commenter suggested the Commission adopt a good-faith standard 
regarding ``best effort'' estimates of the data when verifying the 
accuracy of Form 204 submissions and, assuming the estimate of physical 
activity does not otherwise impact the bona fide hedge exemption (e.g. 
cause the firm to lose the exemption), not penalize entities for 
providing the closest approximation of the position possible.\897\
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    \896\ See CL-CMC-59634 at 17.
    \897\ CL-Working Group-59693 at 65.
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    Commission Reproposal: The Commission responds to specific comments 
regarding the content and timing of the series '04 forms and other 
concerns below. The Commission agrees with the commenters that the 
forms should be clear and workable, and offers several clarifications 
and amendments below in response to comments about particular aspects 
of the series '04 reports.
    The Commission notes that the information required on the series 
'04 reports represents a trader's most basic position data, including 
the number of units of the cash commodity that the firm has purchased 
or sold, or the size of a swap position that is being offset in the 
futures market. The Commission believes this information is readily 
available to traders, who routinely make trading decisions based on the 
same data that is required on the series '04 reports. The Commission is 
proposing to move to an entirely electronic filing system, allowing for 
efficiencies in populating and submitting forms that require the same 
information every month. Most traders who are required to file the 
series '04 reports must do so for only one day out of the month, 
further lowering the burden for filers. In short, the Commission 
believes potential burdens under the Reproposal have been reduced 
wherever possible while still providing adequate information for the 
Commission's Surveillance program. For market participants who may 
require assistance in monitoring for speculative position limits and 
gathering the information required for the series '04 reports, the 
Commission is aware of several software companies who, prior to the 
vacation of the Part 151 Rulemaking, produced tools that could be 
useful to market participants in fulfilling their compliance 
obligations under the new position limits regime.
    The Commission notes that the reporting obligations proposed in the 
2016 Supplemental Position Limits Proposal are intended to be 
complimentary to, not duplicative of, the series '04 reporting forms. 
In particular, the Commission notes the distinction between Form 204 
enumerated hedging reporting and exchange-based non-enumerated hedging 
reporting. The 2016 Supplemental Position Limits Proposal provides 
exchanges with the authority to require reporting from market 
participants. That is, regarding an exchange's process for non-
enumerated bona fide hedging position recognition, the exchange has 
discretion to implement any additional reporting that it may require. 
The Commission declines to eliminate series '04 reporting in response 
to the commenters because, as noted throughout this section, the data 
provided on the forms is critical to the mission of the Commission's 
Surveillance program to detect and deter manipulation and abusive 
trading practices in physical commodity markets.
    In response to the commenters that requested guidebooks for the 
series '04 reporting forms, the Commission believes that it is less 
confusing to ensure that form instructions are clear and detailed than 
it is to provide generalized guidebooks that may not respond to 
specific issues. The Commission has clarified the sample series `04 
forms found in Appendix A to part 19, including instructions to such 
forms, and invites comments in order to avoid future confusion. 
Specifically, the Commission has added instructions regarding how to 
fill out the trader identification section of each form; reorganized 
instructions relating to individual fields on each form; edited the 
examples of each form to reduce confusion and match changes to 
information required as described in this section; and clarified the 
authority for the certifications made on the signature/authorization 
page of each form.
    The Commission's longstanding experience with collecting and 
reviewing Form 204 and Form 304 has shown that many questions about the 
series '04 reports are specific to the circumstances and trading 
strategies of an individual market participant, and do not lend 
themselves to generalization that would be helpful to many market 
participants.
    The Commission also notes, in response to the commenter expressing 
concerns about other regulatory requirements, the policy objectives and 
standards for hedging under financial accounting standards differ from 
the statutory policy objectives and standards for hedging under the 
Act. Because of this, reporting requirements, and the associated 
burdens, would also differ between the series '04 reports and 
accounting statements.
    Finally, the Commission is proposing to amend the certification 
language found at the end of each form to clarify that the 
certification requires nothing more than is already required of market 
participants in section 6(c)(2) of the Act. In response to the 
commenters' request for a ``best effort'' standard, the Commission 
added the phrase ``to the best of my knowledge'' preceding the 
certification from the authorized representative of the reporting 
trader that the information on the form is true and correct. The 
Commission has also added instructions to each form clarifying what is 
required on the signature/authorization page of each form. The 
Commission notes that, in the recent past, the Division of Market 
Oversight has issued advisories and guidance on proper filing of series 
'04 reports, and the Division of Enforcement has settled several cases 
regarding lack of accuracy and/or timeliness in filing series '04 
forms.\898\ The Commission believes the certification language is an 
important reminder to reporting traders of their responsibilities to 
file accurate information under several sections of the Act, including 
but not limited to CEA section 6(c)(2).
---------------------------------------------------------------------------

    \898\ See, e.g., ``Obligation of Reportable Market Participants 
to File CFTC Form 204 Reports,'' CFTC Staff Advisory 13-42, July 8, 
2013; and CFTC Dockets Nos. 16-21, 15-41, 16-07, 16-20.
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a. Amended cross references
    Proposed Rule: As discussed above, in the December 2013 Position 
Limits Proposal, the Commission 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. As a 
result, 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.
    The Commission also proposed expanding Part 19 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. To 
accomplish this, ``positions in commodity derivative contracts,'' as 
defined in proposed Sec.  150.1, would replace ``futures and option 
positions'' throughout amended

[[Page 96802]]

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)).\899\ This amendment was intended to harmonize the 
reporting requirements of part 19 with proposed amendments to part 150 
that encompass swap transactions.
---------------------------------------------------------------------------

    \899\ 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). The Commission 
noted that the current reportable position definition essentially 
identifies futures and option positions in excess of speculative 
position limits. Proposed Sec.  19.00(a) would simply make clear that 
the reporting requirement applies to commodity derivative contract 
positions (including swaps) that exceed speculative position limits, as 
discussed below.
    Comments Received: The Commission received no comments on the 
proposed cross-referencing amendments.
    Commission Reproposal: The Commission is repurposing the amended 
cross-references in part 19, as originally proposed.
b. Persons required to report--Sec.  19.00(a)
    Proposed Rule: Because 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, the Commission proposed 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.\900\ The Commission 
also proposed to require that anyone exceeding a federal limit who has 
received a special call related to part 150 must file a series '04 
form. 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.
---------------------------------------------------------------------------

    \900\ See 17 CFR part 19. Current part 19 cross-references the 
definition of reportable position in 17 CFR 15.00(p).
---------------------------------------------------------------------------

    Series '04 reports currently refers to Form 204 and Form 304, which 
are listed in current Sec.  15.02.\901\ The Commission proposed to add 
three new series '04 reporting forms to effectuate the expanded 
reporting requirements of part 19.\902\ Proposed Form 504 would be 
added for use by persons claiming the conditional spot-month limit 
exemption pursuant to proposed Sec.  150.3(c).\903\ 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.\904\ Proposed Form 704 would be added for use 
by persons claiming a bona fide hedge exemption for certain 
anticipatory bona fide hedging positions.\905\
---------------------------------------------------------------------------

    \901\ 17 CFR 15.02.
    \902\ As noted in the December 2013 Position Limits Proposal, 
the Commission is avoiding the use of any form numbers with ``404'' 
to avoid confusion with the part 151 Rulemaking, which required 
Forms 404, 404A, and 404S. See December 2013 Position Limits 
Proposal, 78 FR at 75742.
    \903\ See supra discussion of proposed Sec.  150.3(c).
    \904\ Proposed Form 604 would replace Form 404S (as contemplated 
in vacated part 151).
    \905\ 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), (4)(iii), (4)(iv) and (5), 
respectively, of the Commission's amended definition of bona fide 
hedging transactions in proposed Sec.  150.1 as discussed above.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on proposed 
Sec.  19.00(a) regarding who must file series '04 reports.
    Commission Reproposal: The Commission is reproposing the expansion 
of Sec.  19.00(a), as originally proposed.
c. Manner of reporting--Sec.  19.00(b)
i. Excluding certain source commodities, products or byproducts of the 
cash commodity hedged--Sec.  19.00(b)(1)
    Proposed Rule: 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.\906\ The 
Commission has proposed to clarify the meaning of ``economically 
appropriate'' in light of this reporting exclusion of certain cash 
positions.\907\ Therefore, in the December 2013 Position Limits 
Proposal, the Commission proposed in Sec.  19.00(b)(1) that 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.\908\
---------------------------------------------------------------------------

    \906\ 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'').
    \907\ See supra discussion of the ``economically appropriate 
test'' as it relates to the definition of bona fide hedging 
position. 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 a hedge of unfilled anticipated requirements.
    \908\ 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.
---------------------------------------------------------------------------

    The Commission explained in the December 2013 Position Limits 
Proposal that the original part 19 reporting exclusion was intended to 
cover only cash positions that were not capable of being delivered 
under the terms of any derivative contract, an intention that 
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. The Commission also noted that 
the instructions on current Form 204 go further than current Sec.  
19.00(b)(1) by allowing the exclusion of certain source commodities in 
addition to products and byproducts, when it is the firm's normal 
business practice to do so.
    Comments Received: One commenter suggested the Commission expand 
the provision in proposed Sec.  19.00(b)(1) that allows a reporting 
person to exclude source commodities, products or byproducts in 
determining its cash position for bona fide hedging to allow a person 
to also exclude inventory and contracts of the actual commodity in the 
course of his or her regular business practice. The commenter also 
noted that proposed Sec.  19.00(b)(1) only permits this exclusion if 
the amount is de minimis, despite there being ``many circumstances'' 
that make the inclusion of such source commodities irrelevant for 
reporting purposes. The commenter requested that the Commission only 
require a reporting person to calculate its cash positions in 
accordance with its regular business practice and report the

[[Page 96803]]

cash positions that it considered in making its bona fide hedging 
determinations.\909\
---------------------------------------------------------------------------

    \909\ See CL-Working Group-60396 at 16-17; CL-Working Group-
60947 at 15-17.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing Sec.  
19.00(b)(1), as originally proposed, because the Commission is 
concerned that adopting the commenter's request could lead to ``cherry-
picking'' a cash market position in an attempt to justify a speculative 
position as a hedge. As noted in the December 2013 Position Limits 
Proposal, the Commission's clarification of the Sec.  19.00(b)(1) 
reporting exclusion was proposed to prevent the definition of bona fide 
hedging positions in proposed Sec.  150.1 from being swallowed by this 
reporting rule. The Commission stated ``. . . 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.'' \910\ If a 
person were only required to report cash positions that are offset by 
particular derivative positions, then the form would not provide an 
indication as to whether the derivative position is economically 
appropriate to the reduction of risk, making the inclusion of source 
commodities very relevant for reporting purposes, contrary to the 
commenter's suggestion.
---------------------------------------------------------------------------

    \910\ See December 2013 Position Limits Proposal, 78 FR at 
75743. The Commission provided an example: ``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.
---------------------------------------------------------------------------

    Because of these and other concerns, market participants have 
historically been required to report cash market information in 
aggregate form for the commodity as a whole, not the ``line item'' 
style of hedge reporting requested by the commenter (where firms report 
cash trades by category, tranche, or corresponding futures position). 
Further, since it is important for Surveillance purposes to receive a 
snapshot of a market participant's cash market position, the series '04 
forms currently require a market participant to provide relevant 
inventories and fixed price contracts in the hedged (or cross-hedged) 
commodity. The Commission believes it is necessary to maintain this 
aggregate reporting in order for the Commission's Surveillance program 
to properly monitor for position limit violations and to prevent market 
manipulation.
    Further, the Commission believes that firms may find reporting an 
aggregate cash market position less burdensome than attempting to 
identify portions of that position that most closely align with 
individual hedge positions as, according to some commenters, many firms 
hedge on a portfolio basis, making identifying the particular hedge 
being used difficult.\911\
---------------------------------------------------------------------------

    \911\ See CL-Working Group-59693 at 65.
---------------------------------------------------------------------------

ii. Cross-commodity Hedges, Standards and Conversion Factors--Sec.  
19.00(b)(2)-(3)
    Proposed Rules: In the December 2013 Position Limits Proposal, the 
Commission proposed under Sec.  19.00(b)(2) instructions for reporting 
a cash position in a commodity that is different from the commodity 
underlying the futures contract used for hedging.\912\ The Commission 
also proposed to maintain the requirement in Sec.  19.00(b)(3) that 
standards and conversion factors used in computing cash positions for 
reporting purposes must be made available to the Commission upon 
request.\913\ The Commission clarified 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. Finally, the Commission provided 
examples of completed series '04 forms in proposed Appendix A to part 
19 along with blank forms and instructions.\914\
---------------------------------------------------------------------------

    \912\ See December 2013 Position Limits Proposal, 78 FR at 
75743. The proposed Sec.  19.00(b)(2) is consistent with provisions 
in the current section, but 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.
    \913\ See December 2013 Position Limits Proposal, 78 FR at 
75743.
    \914\ Id.
---------------------------------------------------------------------------

    Comments Received: The Commission received no comments on proposed 
Sec. Sec.  19.00(b)(2)-(3).
    Commission Reproposal: The Commission is reproposing Sec. Sec.  
19.00(b)(2)-(3), as originally proposed.
d. Information Required--Sec.  19.01(a)
i. Bona Fide Hedgers Reporting on Form 204--Sec.  19.01(a)(3)
    Proposed Rule: 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 proposed to continue 
using Forms 204 and 304, which will feature only minor changes to the 
types of data to be reported under Sec.  19.01(a)(3).\915\ These 
changes include removing the modifier ``fixed price'' from ``fixed 
price cash position;'' requiring cash market position information to be 
submitted in both the cash market unit of measurement (e.g. barrels or 
bushels) and futures equivalents; and adding a specific request for 
data concerning open price contracts to accommodate open price pairs. 
In addition, the monthly reporting requirements for cotton, including 
the granularity of equity, certificated and non-certificated cotton 
stocks, would be moved to Form 204, while weekly reporting for cotton 
would be retained as a separate report made on Form 304 in order to 
maintain the collection of data required by the Commission to publish 
its weekly public cotton ``on call'' report.
---------------------------------------------------------------------------

    \915\ The list of data required for persons filing on Forms 204 
and 304 has been relocated from current Sec.  19.01(a) to proposed 
Sec.  19.01(a)(3).
---------------------------------------------------------------------------

    Comments Received: The Commission received several comments 
regarding the proposed revisions to Form 204. These comments can be 
grouped loosely into three categories: general comments on bona fide 
hedge reporting; comments regarding the general information required on 
Form 204; and comments regarding the more specific nature of the cash 
market information required to be reported. The Commission responds to 
each category separately below.
    Comments: One commenter stated that CFTC should reduce the 
complexity and compliance burden of bona fide hedging record keeping 
and reporting by using a model similar to the current exchange-based 
exemption process.\916\ The commenter also stated that the requirement 
to keep records and file reports, in futures equivalents, regarding the 
commercial entity's cash market contracts and derivative market 
positions on a real-time basis globally, will be complex and impose a 
significant compliance burden. The

[[Page 96804]]

commenter noted such records are not needed for commercial 
purposes.\917\
---------------------------------------------------------------------------

    \916\ CL-ASR-59668 at 3.
    \917\ CL-ASR-59668 at 7; CL-ASR-60933 at 5.
---------------------------------------------------------------------------

    One commenter requested that the Commission provide for a single 
hedge exemption application and reporting process, and should not 
require applicants to file duplicative forms at the exchange and at the 
Commission. The commenter noted its support for rules that would 
delegate, to the exchanges, (1) the hedge exemption application and 
approval process, and (2) hedge exemption reporting (if any is 
required). The commenter argued that the exchanges, rather than the 
Commission, have a long history with enforcing position limits on all 
of their contracts and are in a much better position than the 
Commission to judge the applicant's hedging needs and set an 
appropriate hedge level for the hedge being sought. Thus, the commenter 
suggested, the exchanges should be the point of contact for market 
participants seeking hedge exemptions.\918\
---------------------------------------------------------------------------

    \918\ CL-AGA-59935 at 13.
---------------------------------------------------------------------------

    One commenter requested that the Commission address all pending 
requests for CEA 4a(a)(7) exemptions and respond to all requests for 
bona fide hedging exemptions from the energy industry.\919\
---------------------------------------------------------------------------

    \919\ CL-NFP-60393 at 15-16.
---------------------------------------------------------------------------

    Commission Reproposal: In response to the first commenter, the 
Commission notes that, while the exchange referred to by the commenter 
does not have a reporting process analogous to Form 204, it does 
require an application prior to the establishment of a position that 
exceeds a position limit. In contrast, advance notice is not required 
for most federal enumerated bona fide hedging positions.\920\ In the 
Commission's experience, the series '04 reports have been useful and 
beneficial to the Commission's Surveillance program and the Commission 
finds no compelling reason to change the forms to conform to the 
exchange's process. Further, the Commission notes that Form 204 is 
filed once a month as of the close of business of the last Friday of 
the month; it is not and has never been required to be filed on a real-
time basis globally. A market participant only has to file Form 204 if 
it is over the limit at any point during the month, and the form 
requires only cash market activity (not derivatives market positions).
---------------------------------------------------------------------------

    \920\ The Commission notes that advance notice is required for 
recognition of anticipatory hedging positions by the Commission. See 
below for more discussion of anticipatory hedging reporting 
requirements.
---------------------------------------------------------------------------

    The second commenter was responding to questions raised at the 
Energy and Environmental Markets Advisory Council Meeting in June 2014; 
the Commission notes in response to that commenter that there is no 
federal exemption application process for most enumerated hedges. For 
non-enumerated hedges and certain enumerated anticipatory hedges, in 
response to the EEMAC meeting and other comments from market 
participants, the Commission proposed a single exchange based process 
for recognizing bona fide hedges for both federal and exchange limits. 
Under this process, proposed in the 2016 Supplemental Position Limits 
Proposal, market participants would not be required to file with both 
the exchange and the Commission.\921\
---------------------------------------------------------------------------

    \921\ See supra the discussion of proposed Sec. Sec.  150.9 and 
150.11.
---------------------------------------------------------------------------

    Finally, in response to the commenter's request that the Commission 
respond to pending requests for exemptions under CEA section 4a(a)(7), 
the Commission notes that it responded to the outstanding section 
4a(a)(7) requests in the December 2013 Position Limits Proposal. In 
particular, the Commission proposed to include some of the energy 
industry's requests in the definition of bona fide hedging position and 
declined to include other requests.\922\
---------------------------------------------------------------------------

    \922\ The reasoning behind the Commission's determinations with 
respect to previous requests for exemption under CEA section 
4a(a)(7) is documented in the December 2013 Position Limits 
Proposal, 78 FR at 75719-75722. See also the definition of bona fide 
hedging position discussed supra.
---------------------------------------------------------------------------

    Comments: One commenter recommended that the Commission clarify 
that column three of Form 204 should permit a market participant to 
identify the number of futures-equivalent referenced contracts that 
hedge an identified amount of cash-market positions, but without 
separately identifying the positions in each referenced contract. The 
commenter stated that separate identification would add to the 
financial burden, but that it does not believe that it adds any benefit 
to the Commission.\923\ Two commenters also recommended the Commission 
remove from Form 204 the requirement for reporting non-referenced 
contracts, noting that the Commission did not explain why a market 
participant should report commodity derivative contracts that are not 
referenced contracts.\924\
---------------------------------------------------------------------------

    \923\ CL-FIA-59595 at 38.
    \924\ The Commission notes that the commenters are referring to 
titular language on column 3 of the example Form 204 found in 
proposed Appendix A to part 19, which states ``Commodity Derivative 
Contract or Referenced Contract'' as the information required in 
that column. CL-FIA-59595 at 38; CL-Working Group-59693 at 65.
---------------------------------------------------------------------------

    One commenter also recommended that the Commission either delete or 
make optional the identification of a particular enumerated position in 
column two of Section A or provide a good-faith standard. The commenter 
claimed that many energy firms hedge on a portfolio basis, and would 
not be able to identify a particular enumerated position that applies 
to the referenced contract position needing bona fide hedging 
treatment.\925\
---------------------------------------------------------------------------

    \925\ CL-Working Group-59693 at 65.
---------------------------------------------------------------------------

    One commenter asked for clarification regarding whether Section C 
of Form 204, which requires information regarding cotton stocks, is 
required of market participants in all commodities or just those in 
cotton markets.\926\
---------------------------------------------------------------------------

    \926\ CL-ASR-60933 at 4.
---------------------------------------------------------------------------

    One commenter recommended that the Commission remove the 
requirement in Form 204 to submit futures-equivalent derivative 
positions, stating that the Commission did not explain why it needs to 
obtain data on a market participant's futures-equivalent position as 
part of proposed Form 204 in light of the presumption that the 
Commission already has a market participant's future-equivalent 
position from large-trader reporting rules and access to SDR data.\927\ 
Another commenter noted that Form 204 mixes units of measurement 
between futures and cash positions and requested the Commission require 
market participants to use either cash units or futures units. The 
commenter noted that it's an easy conversion to make but that the 
``mix'' of both units is confusing.\928\
---------------------------------------------------------------------------

    \927\ CL-FIA-59595 at 37.
    \928\ CL-ASR-60933 at 4.
---------------------------------------------------------------------------

    Commission Reproposal: With respect to the comments regarding 
column three of Form 204, the Commission clarifies that Form 204 allows 
filers to identify multiple referenced contracts used for hedging a 
particular commodity cash position in the same line of Form 204. 
Because position limits under Sec.  150.2 are to be imposed on 
referenced contracts, cash positions hedged by such referenced 
contracts should be reported on an aggregate basis, not separated out 
by individual contract. However, the Commission declines to adopt the 
commenters' recommendation to delete the phrase ``Commodity Derivative 
Contract'' from the title of column three, because Sec.  19.00(a)(3) 
allows the Commission to require filing of a series '04 form of anyone 
holding a reportable position under Sec.  15.00(p)(1), which may 
involve a commodity derivative contract that does not fit the 
definition of referenced

[[Page 96805]]

contract.\929\ Further, the Commission can require a special call 
respondent to file their response using the relevant series '04 form, 
and the Form 204 may be filed in order to claim exemptions from 
Sec. Sec.  150.3(b) or 150.3(d), exemptions which may not involve a 
referenced contract. In sum, because the Commission may require the 
filing of Form 204 for purposes other than bona fide hedging, the form 
should include both ``Commodity Derivative Contract'' and, separately, 
``Referenced Contract'' in the title of column three. To avoid further 
confusion, the Commission has rephrased the wording of the column title 
and amended the instructions to the form.
---------------------------------------------------------------------------

    \929\ The Commission notes that Form 704 has been removed from 
the list of series '04 forms that could be required under a special 
call. This is a non-substantive change resulting from changes made 
to Sec.  150.7, discussed infra.
---------------------------------------------------------------------------

    With respect to column two of Form 204, the Commission is proposing 
to adopt the commenter's recommendation to delete the requirement to 
identify which paragraphs of the bona fide hedging definition are 
represented by the hedged position. The requirement seemed to be 
confusing to commenters who found it unclear whether the column 
required the identification of all bona fide hedge definition 
paragraphs used for the total cash market position or the 
identification of separate cash positions for each paragraph used. 
While the requirement was intended to provide insight into which 
enumerated provision of the bona fide hedging definition was being 
relied upon in order to provide context to the cash position, the 
column was never intended to prevent multiple paragraphs being cited at 
once. Given the confusion, the Commission is concerned that the 
information in column two may not provide the intended information 
while being burdensome to implement for both market participants and 
Commission staff. For these reasons, the Commission is proposing to 
delete column two of Form 204, and has updated the sample forms in 
Appendix A to part 19 accordingly.
    In response to the commenter requesting clarification regarding 
Section C of Form 204, the Commission confirms that Section C is only 
required of entities which hold positions in cotton markets that must 
be reported on Form 204. Further, the Commission proposes that, in 
order for the Commission to effectively evaluate the legitimacy of a 
claimed bona fide hedging position, filers of Section C of Form 204 
will be required to differentiate between equity stock held in their 
capacities as merchants, producers, and/or agents in cotton. The 
Commission has updated Section C of Form 204 and Sec.  
19.01(a)(3)(vi)(A) to reflect this change. The Commission does not 
believe this distinction will create any significant extra burden on 
cotton merchants, as the Commission understands that many entities in 
cotton markets will hold equity stocks in just one of the three 
capacities required on the form.
    The Commission notes in response to the last commenter that Form 
204 does not require the futures equivalent value of derivative 
positions but rather the futures equivalent of the cash position 
underlying a hedged position (e.g., 20,000,000 barrels of crude oil is 
equivalent to 20,000 futures equivalents, given a 1,000 barrel unit of 
trading for the futures contract). The futures equivalent of the cash 
position quantity is not available from any Commission data source 
because cash positions are not reported to the Commission under, for 
example, large trader reporting or swap data repository regulations. 
The Commission is proposing to require firms to report both the cash 
market unit of measurement and the futures equivalent measurement for a 
position in order to easily identify the size of the position 
underlying a hedge position, and has updated Sec.  19.01(a)(3), 
instructions to the sample Form 204 in Appendix A to part 19, and the 
field names on the Form 204 itself to clarify this requirement. The 
Commission agrees with the commenter that it is an easy conversion to 
make, and does not anticipate that this requirement will create any 
significant extra burden on market participants. Obtaining the futures 
equivalent information directly from the market participant--as opposed 
to calculating it upon receipt of the form--is necessary particularly 
with respect to cross-commodity hedging where calculating the hedging 
ratio may not be as clear-cut. In its experience administering and 
collecting Form 204, the Commission has noted much confusion regarding 
whether cash market information should be reported in futures 
equivalents or in cash market units. Currently, the form requires cash 
market units, but the Commission has seen both units of measurement 
used (sometimes on the same form), which requires Commission staff to 
contact traders in order to validate the numbers on the form. The 
Commission is proposing to require both in order to avoid such 
confusion.
    Comment: One commenter proposed modifications to the information 
required to be reported on Form 204. Specifically, the commenter 
suggested that the filer should be required to report the aggregate 
quantity of cash positions that underlie bona fide hedging positions in 
equivalent core referenced futures contract units, excluding all or 
part of the commodity that it excludes in its regular business 
practice. The commenter also suggested that if the filer is cross 
hedging, the filer must also report the aggregated quantity of bona 
fide hedge positions it is cross hedging in terms of the actual 
commodity as well as specify the futures market in which it is 
hedging.\930\
---------------------------------------------------------------------------

    \930\ CL-Working Group-60947 at 17-18.
---------------------------------------------------------------------------

    Another commenter suggested that the information required on Form 
204 is ``ambiguous'' and asked the Commission to clarify what scope of, 
for example, stocks or fixed price purchase and sales agreements must 
be reported as well as what level of data precision is required.\931\
---------------------------------------------------------------------------

    \931\ CL-COPE-60932 at 10. The commenter made the same requests 
for clarification regarding the cash market information required on 
Form 504; since the information is similar, the Commission is 
responding here to the comment for both forms.
---------------------------------------------------------------------------

    A commenter requested that the Commission allow hedges to be 
reported on a ``macro'' basis (e.g. futures positions vs. cash 
positions) as opposed to requiring the matching of individual physical 
market transactions to enumerated bona fide hedges. The commenter 
stated that performing specific linkage of individual physical 
transactions to individual hedge transactions is burdensome and does 
not provide any ``managerial or economic benefit.'' \932\
---------------------------------------------------------------------------

    \932\ CL-ASR-60933 at 5.
---------------------------------------------------------------------------

    In contrast, another commenter suggested that the Commission tailor 
the series '04 reports to require ``only the information that is 
required to justify the claimed hedge exemption.'' The commenter stated 
that Form 204 appears to require a market participant to list all cash 
market exposures, even if the exposures are not relevant to the bona 
fide hedge exemption being claimed, which it believes would provide no 
value to the Commission in determining whether a hedge was bona 
fide.\933\
---------------------------------------------------------------------------

    \933\ See CL-Working Group-60396 at 17.
---------------------------------------------------------------------------

    Another commenter stated that because the prompt (spot) month for 
certain referenced contracts will no longer trade as of the last Friday 
of the month, a market participant that exceeds a spot-month position 
limit who no longer has that spot-month position should not be required 
to report futures-equivalent positions for referenced contract on Form 
204.\934\ The commenter recommended that the Commission should require 
a market

[[Page 96806]]

participant with a position in excess of a spot-month position limit to 
report on Form 204 only the cash-market activity related to that 
particular spot-month derivative position, and not to require it to 
report cash-market activity related to non-spot-month positions where 
it did not exceed a non-spot-month position limit; the commenter stated 
that the burden associated with such a reporting obligation would 
increase significantly.\935\ Separately, another commenter claimed that 
Form 204 appears to address only non-spot-month position limits and 
asked the Commission to clarify how it will distinguish reporting on 
Form 204 that is related to a spot-month position limit versus a non-
spot-month position limit.\936\
---------------------------------------------------------------------------

    \934\ CL-FIA-59595 at 37-38.
    \935\ CL-FIA-59595 at 38.
    \936\ CL-ASR-60933 at 4.
---------------------------------------------------------------------------

    One commenter recommended that reporting rules require traders to 
identify the specific risk being hedged at the time a trade is 
initiated, to maintain records of termination or unwinding of a hedge 
when the underlying risk has been sold or otherwise resolved, and to 
create a practical audit trail for individual trades, to discourage 
traders from attempting to mask speculative trades under the guise of 
hedges.\937\
---------------------------------------------------------------------------

    \937\ CL-Sen. Levin-59637 at 8.
---------------------------------------------------------------------------

    Commission Reproposal: In response to the modifications to Form 204 
proposed by the commenter, the Commission notes that no modifications 
are necessary because the form, as proposed, requires the reporting of 
aggregated quantity of cash positions that underlie bona fide hedging 
positions in equivalent core referenced futures contract units, 
excluding a de minimis portion of the commodity, products, and 
byproducts that it excludes in its regular business practice.\938\ 
Reproposed Form 204 also requires cross-hedgers to report the 
aggregated quantity of bona fide hedging positions it is cross hedging 
in terms of the actual commodity as well as specify the futures market 
in which it is hedging.
---------------------------------------------------------------------------

    \938\ See supra discussion of the exclusion of certain source 
commodities, products, and byproducts of the cash commodity hedged 
when reporting on Form 204.
---------------------------------------------------------------------------

    The Commission reproposes that the Form 204 requires a market 
participant to report all cash market positions in any commodity in 
which the participant has exceeded a spot-month or non-spot-month 
position limit. Form 204 is not intended to match a firm's hedged 
positions to underlying cash positions on a one-to-one basis; rather, 
it is intended to provide a ``snapshot'' into the firm's cash market 
position in a particular commodity as of one day during a month. The 
information on this form is used for several purposes in addition to 
reviewing hedged positions, including helping Surveillance analysts 
understand changes in the market fundamentals in underlying commodity 
markets.\939\ The Commission believes that adopting the commenters' 
recommendations to require cash market information underlying a single 
derivative hedge position would result in a more burdensome reporting 
process for firms, particularly those who hedge on a portfolio basis. 
Instead, the Commission is confirming that, as requested by the 
commenter, cash market positions should be reported on an aggregated or 
``macro'' basis.
---------------------------------------------------------------------------

    \939\ In the December 2013 Position Limits Proposal, the 
Commission highlighted the importance of the data collected on Form 
204 to its Surveillance program, stating that ``[c]ollection 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.'' See December 2013 Position Limits 
Proposal, 78 FR at 75742.
---------------------------------------------------------------------------

    The Commission notes that this ``snapshot'' requirement has 
historically been--and is currently--required on Form 204 for the nine 
legacy agricultural contracts. Further, the Commission understands that 
exchange hedge application forms require similar cash position 
information; firms that have applied to an exchange for hedge 
exemptions in non-legacy contracts should already be familiar with 
providing cash market information when they exceed a position limit or 
a position accountability level.
    The commenters that focus on the Form 204 as it relates to 
exceeding either spot-month position limits or non-spot-month position 
limits contrast each other: one believed Form 204 was to be filed in 
response to exceeding only spot-month position limits and the other 
that Form 204 was to be filed in response to exceeding only non-spot-
month position limits. However, the Commission has never distinguished 
between spot-month limits and non-spot-month limits with respect to the 
filing of Form 204. The Commission notes that, as discussed in the 
December 2013 Position Limits Proposal, Form 204 is used to review 
positions that exceed speculative limits in general, not just in the 
spot-month.\940\ Because of this, the Commission is not adopting the 
commenter's recommendation to only require Form 204 when a market 
participant exceeds a spot-month limit.
---------------------------------------------------------------------------

    \940\ The Commission stated that the Form 204 ``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'' 
because the Commission is seeking to ``ensure that any person who 
claims any exemption from federal speculative position limits can 
demonstrate a legitimate purpose for doing so.'' See December 2013 
Position Limits Proposal, 78 FR at 75741-2.
---------------------------------------------------------------------------

    In response to the commenter who suggested the Commission require a 
``practical audit trail'' for bona fide hedgers, the Commission notes 
that other sections of the Commission's regulations provide rules 
regarding detailed individual transaction recordkeeping as suggested by 
the commenter.
ii. Cotton Merchants and Dealers Reporting on Form 304--Sec.  19.02
    Proposed Rule: In the December 2013 Position Limits Proposal, the 
Commission proposed to continue to require the filing of Form 304, 
which requires information on the quantity of call cotton bought or 
sold, on a weekly basis. The Commission noted that Form 304 is required 
in order for the Commission to produce its weekly cotton ``on call'' 
report.\941\ The Commission also proposed to relocate the list of 
required information for Form 304 from current Sec.  19.01(a) to 
proposed Sec.  19.01(a)(3).
---------------------------------------------------------------------------

    \941\ The Commission's Weekly Cotton On-Call Report can be found 
here: http://www.cftc.gov/MarketReports/CottonOnCall/index.htm.
---------------------------------------------------------------------------

    Comments Received: The Commission did not receive any comments on 
the proposed changes to Form 304.
    Commission Reproposal: The Commission is reproposing Form 304, as 
originally proposed.
iii. Conditional Spot-Month Limit Exemption Reporting on Form 504--
Sec.  19.01(a)(1)
    Proposed Rule: As 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. In the December 2013 Position Limits Proposal, the 
Commission noted its concern about the cash market trading of those 
availing themselves of the conditional spot-month limit exemption and 
so proposed to 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

[[Page 96807]]

special commodity contracts specified by the Commission.
    The Commission proposed to require reporting on new Form 504 for 
conditional spot-month limit exemptions in the natural gas commodity 
derivative contracts only.
    Comments Received: One commenter stated its belief that the 
information required on Form 504 is redundant of information required 
on Form 204 and would overly burden hedgers.\942\ The commenter 
suggested that, if the Commission decides to retain the conditional 
spot-month limit exemption, and thereby Form 504, the Commission should 
require only an affirmative representation from market participants 
that they do not hold any physical delivery Referenced Contracts.\943\
---------------------------------------------------------------------------

    \942\ CL-Working Group-59693 at 65-66.
    \943\ CL-Working Group-59693 at 65-66.
---------------------------------------------------------------------------

    Another commenter stated that Form 504 creates a burden for hedgers 
to track their cash business and affected contracts and to create 
systems to file multiple forms. The commenter noted its belief that 
end-users/hedgers should never be subjected to the daily filing of 
reports.\944\ Further, the commenter suggested the Commission delete 
Form 504 entirely, asserting that it will be unnecessary if the 
Commission adopts the commenter's separate cash settled limit idea (the 
commenter proposed a higher cash settled limit with no condition on the 
physical delivery market).\945\ Another commenter suggested deleting 
the Form 504 because it believes that no matter how extensive the 
Commission makes reporting requirements, the Commission will still need 
to request additional information on a case-by-case basis to ensure 
hedge transactions are legitimate.\946\
---------------------------------------------------------------------------

    \944\ CL-COPE-59662 at 24.
    \945\ CL-COPE-59662 at 24.
    \946\ CL-NGFA-60941 at 7-8.
---------------------------------------------------------------------------

    A third commenter suggested that the Commission should modify the 
data requirements for Form 504 in a manner similar to the approach used 
by ICE Futures U.S. for natural gas contracts, that is, requiring a 
description of a market participant's cash-market positions as of a 
specified date filed in advance of the spot-month.\947\
---------------------------------------------------------------------------

    \947\ CL-FIA-59595 at 37.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has tentatively determined 
under Sec.  19.03 to designate the Henry Hub Natural Gas referenced 
contracts for reporting of a conditional spot-month limit exemption 
under Sec.  19.00(a)(1)(i).
    In response to the first three commenters, the Commission 
reiterates a key distinction between the Form 504 and the Form 204. 
Form 504 is required of speculators that are relying upon the 
conditional spot-month limit exemption. Form 204 is required for 
hedgers that exceed position limits. To the extent a firm is hedging, 
there is no requirement to file the Form 504.
    In the unlikely event that a firm is both hedging and relying upon 
the conditional spot-month limit exemption, the firm would be required 
to file both forms at most one day a month, given the timing of the 
spot-month in natural gas markets (the only market for which Form 504 
will be required at first). In that event, however, the Commission 
believes that requiring similar information on both forms should 
encourage filing efficiencies rather than duplicating the burden. For 
example, both forms require the filer to identify fixed price purchase 
commitments; the Commission believes it is not overly burdensome for 
the same firm to report such similar information on the Form 204 and 
the Form 504, should a market participant ever be required to file both 
forms.
    The Commission is not adopting the commenters' recommendations to 
delete the Form 504 or to require only an affirmative representation 
that the condition of the conditional spot-month limit exemption has 
been met (i.e. that the trader holds no position in physical delivery 
referenced contracts). The Commission explained in the December 2013 
Position Limits Proposal that its primary motive in requiring the cash 
market information required on Form 504 is the need to detect and deter 
manipulative activities in the underlying cash commodity that might be 
used to benefit a derivatives position (or vice-versa).\948\
---------------------------------------------------------------------------

    \948\ Specifically, the Commission stated that ``[w]hile 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.'' See December 
2013 Position Limits Proposal, 78 FR at 75744.
---------------------------------------------------------------------------

    In response to the third commenter, the Commission does not believe 
that a description of a cash market position is sufficient to allow 
Commission staff to administer its Surveillance program. Descriptions 
are not as exact as reported information, and the Commission believes 
the information gathered in daily Form 504 reports would be more 
complete--and thus more beneficial--in determining compliance and 
detecting and deterring manipulation.
    The Commission notes that since the Commission is proposing to 
limit the conditional spot month limit exemption to natural gas 
markets, the Form 504 will only be required from participants in 
natural gas markets who seek to avail themselves of the conditional 
spot-month limit exemption and any corresponding burden will apply to 
only those participants.
iv. Pass-Through Swap Exemption Reporting on Form 604--Sec.  
19.01(a)(2)
    Proposed Rule: As 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.\949\ The first type of position, filed on Section A of Form 604, 
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 
(e.g., cross commodity hedging positions). The second type of position, 
filed on Section B of Form 604, is a cash-settled swap (whether or not 
the swap is, itself, a referenced contract) executed opposite a bona 
fide hedger that is offset with physical-delivery referenced contracts 
held into a spot-month.
---------------------------------------------------------------------------

    \949\ Under the definition of bona fide hedging position in 
Section 4a(c)(2) of the Act, 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. 
As such, positions in commodity derivative contracts that reduce the 
risk of pass-through swaps would qualify as bona fide hedging 
positions. See supra discussion of the proposed definition of bona 
fide hedging position.
---------------------------------------------------------------------------

    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.\950\
---------------------------------------------------------------------------

    \950\ 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 that are referenced 
contracts will be netted with offsetting referenced contract 
positions outside the spot month pursuant to proposed Sec.  
150.2(b).
---------------------------------------------------------------------------

    Comments Received: The Commission received three comments regarding 
Form 604, all from the same commenter. These comments and the 
Commission's responses are detailed below.
    Comment: One commenter recommended that the Commission remove the 
requirement in Form 604 to submit futures-equivalent derivative

[[Page 96808]]

positions, claiming that the Commission did not explain why it needs to 
obtain data on a market participant's futures-equivalent position as 
part of proposed Form 604 in light of the commenter's presumption that 
the Commission already has a market participant's future-equivalent 
position from large-trader reporting rules and access to SDR data.\951\
---------------------------------------------------------------------------

    \951\ CL-FIA-59595 at 37.
---------------------------------------------------------------------------

    Commission Reproposal: In response to the commenter, the Commission 
notes that futures-equivalent position information is necessary to 
allow staff to match the offset futures position with the non-
referenced-contract swap position underlying the hedge because such 
positions are not subject to part 20 reporting. The Commission notes 
that Form 604 is filed outside of the spot month only if the swap 
position being offset is not a referenced contract. Since only 
referenced contracts are automatically netted for purposes of 
determining compliance with position limits, the Commission would not 
have knowledge or reason to net a pass-through swap position with the 
participant's futures positions without the filing of Form 604. During 
the spot month, the Commission notes that, while it has access to 
referenced contract swap positions in part 20 data, the Commission 
would not know that a particular swap forms the basis for a pass-
through swap offset exemption, and so again would not have knowledge or 
reason to net a pass-through swap position with the participant's 
futures position. Without Section B of Form 604 filed during the spot 
month, the Commission may believe a firm is in violation of physical-
delivery spot month limits despite the firm being eligible for a pass-
through swap offset exemption. The Commission is proposing to require 
the identification of a particular swap position and the offsetting 
referenced contract position to alleviate concerns about the disruption 
of the price discovery function of the underlying physical-delivery 
contract during the spot month period.
    Comment: The same commenter also noted that the spot-month for 
certain referenced contracts will no longer trade as of the last Friday 
of the month and so recommended that a market participant exceeding a 
spot-month position limit who no longer has that spot-month position 
should not be required to report futures-equivalent derivatives 
positions for referenced contract on Form 604.\952\
---------------------------------------------------------------------------

    \952\ CL-FIA-59595 at 37-38.
---------------------------------------------------------------------------

    Commission Reproposal: As proposed, pass-through swap offsets that 
last into the spot-month would be filed daily during the spot period, 
not as of the last Friday of the month.\953\ Pass-through swap offset 
positions outside of the spot-month are required to be filed as of the 
last Friday of the month. The Commission expects that, in most cases, 
the Form 604 would be filed outside of the spot-month which means only 
Section A would need to be filed. That filing is required as of the 
last Friday of the month, the same timeline that is required for the 
Form 204, for convenience and ease of filing.
---------------------------------------------------------------------------

    \953\ See supra discussion regarding the time and place of 
filing series '04 reports.
---------------------------------------------------------------------------

    Comment: Finally, the commenter recommended that CFTC require a 
market participant with a position in excess of a spot-month position 
limit to report on Form 604 only the cash-market activity related to 
that particular spot-month derivative position, and not to require it 
to report cash-market activity related to non-spot-month positions 
where it did not exceed a non-spot-month position limit, since the 
burden associated with such a reporting obligation would increase 
significantly.\954\
---------------------------------------------------------------------------

    \954\ CL-FIA-59595 at 38.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission notes in response to the 
commenter that neither Sections A nor B of Form 604 would require the 
filer to report cash market activity.
    This commenter makes the same remarks regarding Form 204, but the 
Form 204 requires cash-market activity in a particular commodity 
whereas the Form 604 requires information on a particular swap market 
position.
    The Commission is reproposing Form 604, as originally proposed.
e. Time and Place of Filing Reports--Sec.  19.01(b)
    Proposed Rule: As proposed, Sec.  19.01(b)(1) would require all 
reports except those submitted in response to special calls or on Form 
504, Form 604 during the spot-month, or Form 704 to be filed monthly as 
of the close of business on the last Friday of the month and not later 
than 9 a.m. Eastern Time on the third business day following the last 
Friday of the month.\955\ For reports submitted on Form 504 and Form 
604 during the spot-month, proposed Sec.  19.01(b)(2) would require 
filings to be submitted as of the close of business for each day the 
person exceeds the limit during the spot period and not later than 9 
a.m. Easter Time on the next business day following the date of the 
report.\956\ Finally, 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.
---------------------------------------------------------------------------

    \955\ The timeframe for filing Form 704 is included as part of 
proposed Sec.  150.7. See supra for discussion regarding the filing 
of Form 704.
    \956\ In proposed Sec.  19.01(b)(2), the Commission 
inadvertently failed to include reports filed under Sec.  
19.00(a)(1)(ii)(B) (i.e. Form 604 during the spot month) in the same 
filing timeframe as reports filed under Sec.  19.00(a)(1)(i) (i.e. 
Form 504). The correct filing timeframe was described in multiple 
places on the forms published in the Federal Register as part of the 
December 2013 Position Limits Proposal.
---------------------------------------------------------------------------

    Comments Received: One commenter stated its support for the 
proposed monthly, rather than daily, filing of Form 204.\957\ Another 
commenter recommended an annual Form 204 filing requirement, rather 
than a monthly filing requirement. The commenter noted that because the 
general size and nature of its business is relatively constant, the 
differences between each monthly report would be insignificant. The 
commenter recommended the CFTC ``not impose additional costs of monthly 
reporting without a demonstration of significant additional regulatory 
benefits.'' The commenter noted its futures position typically exceeds 
the proposed position limits, but such positions are bona fide hedging 
positions. In addition to futures, the commenter noted it executes a 
small notional volume of swaps as hedges of forward contracts.\958\
---------------------------------------------------------------------------

    \957\ CL-Working Group-59693 at 65.
    \958\ CL-DFA-59621 at 2.
---------------------------------------------------------------------------

    Similarly, another commenter suggested that if the Commission does 
not eliminate the forms in favor of the requirements in the 2016 
Supplemental Position Limits Proposal the Commission should require 
only an annual notice that details its maximum cash market exposure 
that justifies an exemption, to be filed with the exchange.\959\
---------------------------------------------------------------------------

    \959\ CL-FIA-60937 at 17.
---------------------------------------------------------------------------

    One commenter suggested that the reporting date for Form 204 should 
be the close of business on the day prior to the beginning of the spot 
period and that it should be required to filed no later than the 15th 
day of the month following a month in which a filer exceeded a federal 
limit to allow the market participant sufficient time to collect and 
report its information.\960\
---------------------------------------------------------------------------

    \960\ CL-Working Group-60947 at 17-18.
---------------------------------------------------------------------------

    With regards to proposed Sec.  19.01(b)(2), one commenter 
recommended CFTC change the proposed next-day reporting of Form 504 for 
the conditional spot-month limit exemption and Form 604 for the pass-
through swap offsets during the spot-month, to a monthly basis, noting

[[Page 96809]]

market participants need time to generate and collect data and verify 
the accuracy of the reported data. The commenter further stated that 
CFTC did not explain why it needs the data on Form 504 or Form 604 on a 
next-day basis.\961\
---------------------------------------------------------------------------

    \961\ CL-FIA-59595 at 35.
---------------------------------------------------------------------------

    Another asserted that the daily filing requirement (Form 504) for 
participants who rely on the conditional spot-month limit exemption 
``imposes significant burdens and substantial costs on market 
participants.'' The commenter urged a monthly rather than a daily 
filing of all cash market positions, which the commenter claimed is 
consistent with current exchange practices.\962\
---------------------------------------------------------------------------

    \962\ CL-ICE-59669 at 7.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing Sec.  
19.01(b)(1), as originally proposed, with some minor clarifications to 
the language to make the text easier to follow. As discussed above, the 
Commission believes that Form 204 provides a monthly ``snapshot'' of 
the cash market positions of traders whose positions are in excess of 
spot-month or non-spot-month speculative position limits and for that 
reason it is necessary to provide its Surveillance program the ability 
to detect and deter market manipulation and protect the price discovery 
process. The Commission is retaining the last Friday of the month as 
the required reporting date in order to avoid confusion and 
uncertainty, particularly for those participants who already file Form 
204 and thus are accustomed to that reporting date.
    In response to the commenters' suggestions that Form 204 be filed 
annually, the Commission notes that throughout the course of a year, 
most commodities subject to federal position limits under proposed 
Sec.  150.2 are subject to seasonality of prices as well as less 
predictable imbalances in supply and demand such that an annual filing 
would not provide Surveillance insight into cash market trends 
underlying changes in the derivative markets. This insight is necessary 
for Surveillance to determine whether price changes in derivative 
markets are caused by fundamental factors or manipulative behavior. 
Further, the Commission believes that an annual filing could actually 
be more burdensome for firms, as an annual filing could lead to special 
calls or requests between filings for additional information in order 
for the Commission's Surveillance program to fulfill its responsibility 
to detect and deter market manipulation. In addition, the Commission 
notes that while one participant's positions may remain constant 
throughout a year, the same is not true for many other market 
participants. The Commission believes that varying the filing 
arrangement depending on a particular market or market participant is 
impractical and would lead to increased burdens for market participants 
due to uncertainty regarding when each firm, or each firm by each 
commodity, is supposed to file.
    The Commission is reproposing, as originally proposed, the 
provision in proposed Sec.  19.01(b)(2) to require next-day, daily 
filing of Forms 504 and 604 in the spot-month. In response to the 
commenter, the Commission notes that it described its rationale for 
requiring Forms 504 and 604 daily during the spot-month in the December 
2013 Position Limits Proposal.\963\ In order to detect and deter 
manipulation during the spot-month, concurrent information regarding 
the cash positions of a speculator holding a conditional spot-month 
limit exemption (Form 504) or the swap contract underlying a large 
offsetting position in the physical delivery contract (Form 604) is 
necessary during the spot-month. Receiving Forms 504 or 604 before or 
after the spot-month period would not help the Surveillance program to 
protect the price discovery process of physical-delivery contracts and 
to ensure that market participants have a qualifying pass-through swap 
contract position underlying offsetting futures positions held during 
the spot-month.
---------------------------------------------------------------------------

    \963\ December 2013 Position Limits Proposal, 78 FR at 75744-5. 
The Commission noted that its experience overseeing the ``dramatic 
instances of disruptive trading practices in the natural gas 
markets'' warranted enhanced reporting for that commodity during the 
spot month on Form 504. The Commission noted its intent to wait 
until it gained additional experience with limits in other 
commodities before imposing enhanced reporting requirements for 
those commodities. The Commission further noted that it was 
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 (such as a 
swap), and that such a large position could disrupt the price 
discovery function of the core referenced futures contract.
---------------------------------------------------------------------------

    The Commission notes that, as reproposed, the Form 504 is required 
only for the Natural Gas commodity, which has a 3-day spot period.\964\ 
Daily reporting of the Form 504 during the spot-month allows 
Surveillance to monitor a market participant's cash market activity 
that could impact or benefit their derivatives position. Given the 
short filing period for natural gas and the importance of accurate 
information during the spot-month, the Commission believes that 
requiring the Form 504 to be filed daily provides an important benefit 
that outweighs the potential burdens for filers
---------------------------------------------------------------------------

    \964\ Reproposed Sec.  150.3(c) provides a conditional spot-
month limit exemption only for the natural gas cash-settled 
referenced contracts.
---------------------------------------------------------------------------

    As a practical matter, the Commission notes that the Form 604 is 
collected during the spot-month only under particular circumstances, 
i.e. for an offsetting position in physical delivery referenced 
contracts during the spot-month. Because the ``five-day rule'' applies 
to such positions, the spot-month filing of the Form 604 would only 
occur in contracts whose spot-month period is longer than 5 days 
(excluding, for example, energy contracts but including many 
agricultural commodities).\965\
---------------------------------------------------------------------------

    \965\ It should be noted, however that an exchange, using its 
discretion, could require the filing of Form 604, for example, in an 
energy contract, as part of the exchange's recognition of a non-
enumerated bona fide hedging position under Sec.  150.9, discussed 
below.
---------------------------------------------------------------------------

    The Commission is reproposing Sec. Sec.  19.01(b)(1)-(2), as 
originally proposed, with some minor clarifications to the language to 
make the text easier to follow. The Commission inadvertently left out 
of proposed Sec.  19.01(b)(2) a reference to the requirement to file 
Section B of Form 604 (pass-through swap offsets held into the spot-
month). No commenter appeared to be confused about this requirement, as 
the correct timeframe was described in multiple places on the forms 
published in the Federal Register as part of the December 2013 Position 
Limits Proposal, but to avoid future confusion the Commission has 
modified the language--but not the substance--of Sec.  19.01(b)(1)-(2) 
to clarify the time and place for filing series '04 reports.
    Finally, the Commission is reproposing the electronic filing 
requirement, as originally proposed.\966\ Further instructions on 
submitting '04 reports will be available at http://www.cftc.gov/Forms/index.htm.
---------------------------------------------------------------------------

    \966\ The Commission notes that the electronic filing 
requirement was proposed in Sec.  19.01(b)(3) but due to other 
changes within that section it is now located in Sec.  19.01(b)(4). 
The substance of the requirement has not changed.
---------------------------------------------------------------------------

F. Sec.  150.7--Reporting Requirements for Anticipatory Hedging 
Positions

1. Reporting Requirements for Anticipatory Hedging Positions and New 
Form 704
    Proposed Rule: The Commission's revised definition of bona fide 
hedging in Sec.  150.1 enumerates two new types of anticipatory bona 
hedging positions. Two existing types of anticipatory hedges are being 
continued from the existing definition of bona fide hedging in current 
Sec.  1.3(z): Hedges of unfilled anticipated requirements and hedges of

[[Page 96810]]

unsold anticipated production, as well as anticipatory cross-commodity 
hedges of such requirements or production.\967\ The revised Sec.  150.1 
definition expands 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.\968\ 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 proposed 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.
---------------------------------------------------------------------------

    \967\ 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.
    \968\ See sections (4)(iii), (4)(iv), and (5), respectively, of 
the definition of bona fide hedging positions in Sec.  150.1, 
discussed above.
---------------------------------------------------------------------------

    The Commission proposed 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 Sec.  150.1 are 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 allows the 
Commission to review a proposed position before a trader exceeds the 
position limits and, thereby, allows the Commission to prevent 
excessive speculation in the event that a trader were to misconstrue 
the purpose of these limited exemptions.\969\ The trader's initial 
statement on Form 704 provides a detailed description of the person's 
anticipated activity (i.e., unfilled anticipated requirements, unsold 
anticipated production, etc.).\970\ 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 Sec.  150.7 
would become effective ten days after submission. As 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.
---------------------------------------------------------------------------

    \969\ 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.
    \970\ Proposed 150.7(d)(2) would require additional information 
for cross hedges, for reasons discussed above.
---------------------------------------------------------------------------

    As 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. In addition, 
Sec.  150.7(g) would 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, 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.
    For purposes of simplicity, the special reporting requirements for 
anticipatory hedges are located within the Commission's position limits 
regime in part 150, and alongside the Commission's updated definition 
of bona fide hedging positions in Sec.  150.1. Thus, the Commission is 
proposing to delete the reporting requirements for anticipatory hedges 
in current Sec.  1.48 because that section would be duplicative.
    Comments Received: One commenter asserted that the reporting 
requirements for anticipatory hedges of an operational or commercial 
risk comprising an initial, supplementary and annual report are unduly 
burdensome. The commenter recommended that the Commission require 
either an initial and annual report or an initial and supplementary 
report.\971\
---------------------------------------------------------------------------

    \971\ CL-IECAssn-59679 at 11.
---------------------------------------------------------------------------

    Another commenter suggested deleting the Form 704 because it 
believes that no matter how extensive the Commission makes reporting 
requirements, the Commission will still need to request additional 
information on a case-by-case basis to ensure hedge transactions are 
legitimate.\972\ The commenter suggested that the Commission should be 
able to achieve its goal of obtaining enough information to determine 
whether to request additional information using the Form 204 along with 
currently collected data sources and so the additional burden of the 
new series '04 reports outweighs the benefit to the Commission.\973\
---------------------------------------------------------------------------

    \972\ CL-NGFA-60941 at 7-8.
    \973\ Id.
---------------------------------------------------------------------------

    Several commenters remarked on the cost associated with the 
proposed Form 704. One commenter stated that the additional reporting 
requirements, including new Form 704 to replace the reporting 
requirements under current rule 1.48, and annual and monthly reporting 
requirements under proposed rules 150.7(f) and 150.7(g) ``will impose 
significant additional regulatory and compliance burdens on commercials 
and believes that the Commission should consider alternatives, 
including targeted special calls when appropriate.'' \974\ Another 
commenter stated the reporting requirements for the series 04 forms is 
overly burdensome and would impose a substantial cost to market 
participants because while the proposal would require the Commission to 
respond fairly quickly, it does not provide an indication of whether 
the Commission will deem the requirement accepted if the Commission 
doesn't respond within a time frame. The commenter is concerned that a 
market participant may have to refuse business if it does not receive 
an approved exemption in advance of a transaction.\975\ A third 
commenter stated that Form 704 is ``commercially impracticable and 
unduly burdensome'' because it would require filers to

[[Page 96811]]

``analyze each transaction to see if it fits into an enumerated hedge 
category.'' The commenter is concerned that such ``piecemeal review'' 
would require a legal memorandum and the development of new software to 
track positions and, since the Commission proposed that Form 704 to be 
used in proposed Sec.  150.11, the burden associated with the form has 
increased.\976\
---------------------------------------------------------------------------

    \974\ CL-APGA-59722 at 10.
    \975\ CL-EDF-59961 at 6.
    \976\ CL-EEI-EPSA-60925 at 9.
---------------------------------------------------------------------------

    One commenter highlighted discrepancies between the instructions 
for Form 704 and the data on the sample Form 704. The commenter noted 
that instructions for column five request the ``Cash commodity same as 
(S) or cross-hedged (C-H) with Core Reference Futures Contract (CFRC)'' 
while the sample Form 704 lists ``CL-NYMEX'' as the information 
reported in that column. The commenter also noted that Form 704 has 
eleven columns, while the sample Form 704 contains only ten columns, 
omitting a column for ``Core Referenced Futures contract (CRFC).'' 
\977\
---------------------------------------------------------------------------

    \977\ CL-FIA-59595 at 39.
---------------------------------------------------------------------------

    The commenter also requested that the Commission clarify 
instructions for column six of proposed Form 704 to permit a reasonable 
estimate of anticipated production (or other anticipatory hedge) based 
on commercial experience, in the event the market participant does not 
have three years of data related to the anticipated hedge, for example, 
of anticipated production of a newly developed well.\978\
---------------------------------------------------------------------------

    \978\ CL-FIA-59595 at 39.
---------------------------------------------------------------------------

    Commission Reproposal: As discussed in the December 2013 Position 
Limits Proposal, the Commission remains concerned about distinguishing 
between anticipatory reduction of risk and speculation.\979\ Therefore, 
the Commission is again proposing the requirement to file Form 704 for 
anticipatory hedges. The Commission notes that most of the information 
required on Form 704 is currently required under Sec.  1.48, and that 
such information is not found in any other Commission data source, 
including Form 204.
---------------------------------------------------------------------------

    \979\ See December 2013 Position Limits Proposal, 78 FR at 
75746.
---------------------------------------------------------------------------

    The Commission is proposing several changes to Sec.  150.7 in order 
to make the requirements for Form 704 clearer and more concise. For 
example, the Commission is adopting the commenter's suggestion to 
require the initial statement and annual update but eliminate the 
supplemental filing as proposed in Sec.  150.7(e). Current Sec.  1.48 
contains a requirement for supplemental filings similar to proposed 
Sec.  150.7(e), but unlike current Sec.  1.48, the proposed rules also 
require monthly reporting on Form 204 and annual updates to the initial 
statement. After considering the commenter's concerns, the Commission 
believe the monthly reporting on Form 204 and annual updates on Form 
704 will provide sufficient updates to the initial statement and is 
deleting the supplemental filing provision in proposed Sec.  150.7(e) 
to reduce the burden on filers as suggested by the commenter.
    In addition, the Commission is combining the list of required 
information on Form 704 into one section, since such information is 
almost identical for the initial statement and the required annual 
updates. In this Reproposal, two nearly identical lists of information 
have been combined into one list in Sec.  150.7(d). This reorganization 
is intended to make compliance with Sec.  150.7, including the filing 
of Form 704, simpler and easier to understand for market participants. 
Changes have been made throughout part 19 and part 150 to conform to 
the deletion of the required supplemental filing and the reorganization 
of Sec.  150.7. In particular, the Commission altered Sec.  19.01(a)(4) 
to reflect the deletion of the supplemental update and to clarify that 
persons required to file series '04 reports under Sec.  19.00(a)(1)(iv) 
must file only Form 204 as required in Sec.  150.7(e).
    Finally, the sample Form 704 found in Appendix A to part 19 has 
also been updated to reflect the combination of the initial statement 
and annual update into one section. Specifically, on proposed Form 704 
had two sections: Section A required information regarding the initial 
statement and supplemental updates and Section B was required for 
annual updates. Due to the above-mentioned changes, Section B has been 
deleted and Section A has been re-labeled as requiring information 
regarding both the initial statement and the annual update. In order to 
differentiate between a firm's initial statement and its annual updates 
regarding the same, the Commission has added a check-box field that 
requires traders to identify whether they are filing Form 704 to submit 
an initial statement or to file the required annual update. The 
Commission believes the addition of this field poses no significant 
additional burden; rather, the Commission believes the changes to the 
form, as discussed above, reduce burden to a far greater extent than a 
minor addition of a check box adds burden.
    In response to the commenter who suggested the Commission consider 
target special calls and other alternatives to the annual and monthly 
filings, the Commission believes these filings are critical to the 
Commission's Surveillance program. Anticipatory hedges, because they 
are by definition forward-looking, require additional detail regarding 
the firm's commercial practices in order to ensure that a firm is not 
using the provisions in proposed Sec.  150.7 to evade position limits. 
In contrast, special calls are backward-looking and would not provide 
the Commission's Surveillance program with the information needed to 
prevent markets from being susceptible to excessive speculation. 
However, the Commission expects the new filing requirements to be an 
improvement over current practice under Sec.  1.48 because as facts and 
circumstances change, Surveillance will have a more timely 
understanding of the market participant's hedging needs.
    The Commission notes in response to the commenter that Form 704 is 
filed in anticipation of risk to be assumed at a future date; market 
participants will need to provide a detailed description of anticipated 
activity but there is no requirement to analyze individual transactions 
or submit a memorandum.
    The Commission also notes that concerns regarding a firm having to 
decline business, because an exemption has not been approved, are 
unwarranted. Series '04 reports (other than the initial statement of 
Form 704) are self-effectuating and do not require Commission 
notification to become effective. With respect to Form 704, the 
Commission explained in the December 2013 Position Limits Proposal that 
if the Commission does not notify a market participant within the 
timeframe indicated in Sec.  150.7(b), the filing becomes effective 
automatically.\980\
---------------------------------------------------------------------------

    \980\ See the December 2013 Position Limits Proposal, 78 FR at 
75746: ``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 Sec.  150.1. . . . Otherwise, Form 
704 filings that conform to the requirements set forth in proposed 
Sec.  150.7 would become effective ten days after submission.''
---------------------------------------------------------------------------

    The commenter is correct in noting that there is an error on the 
Sample Form 704 such that column five (``Core Referenced Futures 
Contract (CRFC)'') was inadvertently omitted from the Sample Form 
provided in the proposed rules. The Commission is amending the Sample 
Form 704 in the reproposed rules to ensure it accurately reflects the 
requirements of the Form 704 as described in Sec.  150.7(d). Further, 
the Commission is deleting the condition that requires the specified 
operating

[[Page 96812]]

period may not exceed one year for agricultural commodities, as end-
users in certain agricultural commodities may hedge their positions 
several years out along the curve.
    The Commission notes, in response to the commenter's concern 
regarding column 6 of Form 704, that the requirement to file the past 
three years of annual production is also in current Sec.  1.48. 
Understanding the recent history of a firm's production is necessary to 
ensure the requested anticipated hedging amount is reasonable. However, 
the Commission notes that it may permit a reasonable, supported 
estimate of anticipated production for less than three years of annual 
production data, in the Commission's discretion, if a market 
participant does not have three years of data. The Commission is 
amending the form instructions to clarify that Commission staff could 
determine that such an estimate is reasonable and so would be accepted.
    Finally, the Commission notes that several references to other 
provisions within part 150 contained in Sec. Sec.  150.7(b), 150.7(d), 
and 150.7(h) were incorrectly cited in the December 2013 Position 
Limits Proposal; the Commission is revising these paragraphs to ensure 
all references are up-to-date and correct.
2. Delegation
    Proposed Rule: In Sec.  150.7(i), the Commission proposed to 
delegate to the Division of Market Oversight director or staff the 
authority: To provide notice to a firm who has filed Form 704 that they 
do not meet the requirements for bona fide hedging; to request 
additional or updated information under Sec.  150.7(c); and to request 
under Sec.  150.7(d)(2) information concerning the basis for and 
derivation of conversion factors used in computing the position 
information provided in Form 704.
    Comments Received: The Commission received no comments on the 
proposed delegation of authority under Sec.  150.7.
    Commission Reproposal: The Commission is reproposing Sec.  
150.7(i), as originally proposed.

G. Sec.  150.9--Process for Recognition of Positions as Non-Enumerated 
Bona Fide Hedging Positions

1. Overview of Proposed Rules Related to Recognition of Bona Fide 
Hedging Positions and Granting of Spread Exemptions
    In the 2016 Supplemental Position Limits Proposal, the Commission 
noted that it was proposing three sets of Commission rules under which 
an exchange could take action to recognize certain bona fide hedging 
positions and to grant certain spread exemptions, with regard to both 
exchange-set and federal position limits.\981\ The Commission pointed 
out that in each case, the proposed rules would establish a formal CFTC 
review process that would permit the Commission to revoke all such 
exchange actions.
---------------------------------------------------------------------------

    \981\ See generally 2016 Supplemental Position Limits Proposal, 
81 FR at 38464-82; the Commission incorporates herein its 
explanation of its proposed adoption of Sec. Sec.  150.9, 150.10 and 
150.11. Under the proposal, exchanges would be able to: (i) 
Recognize certain non-enumerated bona fide hedging positions, i.e., 
positions that are not enumerated by the Commission's rules 
(pursuant to proposed Sec.  150.9); (ii) grant exemptions to 
position limits for certain spread positions (pursuant to proposed 
Sec.  150.10); and (iii) recognize certain enumerated anticipatory 
bona fide hedging positions (pursuant to proposed Sec.  150.11).
---------------------------------------------------------------------------

    As the Commission observed at that time, its authority to permit 
certain exchanges to recognize positions as bona fide hedging positions 
is found, in part, in CEA section 4a(c)(1), and under CEA section 
8a(5), which provides that the Commission may make such rules as, in 
the judgment of the Commission, are reasonably necessary to effectuate 
any of the provisions or to accomplish any of the purposes of the CEA. 
CEA section 4a(c)(1) provides that no CFTC rule applies to 
``transaction or positions which are shown to be bona fide hedging 
transactions or positions,'' as those terms are defined by Commission 
rule consistent with the purposes of the CEA.\982\ The Commission noted 
that ``shown to be'' is passive voice, which could encompass either a 
position holder or an exchange being able to ``show'' that a position 
is entitled to treatment as a bona fide hedging position, and does not 
specify that the Commission must determine in advance whether the 
position or transaction was shown to be bona fide. The Commission 
interpreted CEA section 4a(c)(1) to authorize the Commission to permit 
certain SROs (i.e., DCMs and SEFs, meeting certain criteria) to 
recognize positions as bona fide hedging positions for purposes of 
federal limits, subject to Commission review.
---------------------------------------------------------------------------

    \982\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38464.
---------------------------------------------------------------------------

    The Commission observed that for decades, exchanges have operated 
as self-regulatory organizations, and pointed out further that these 
self-regulatory organizations have been charged with carrying out 
regulatory functions, including, since 2001, complying with core 
principles, and operate subject to the regulatory oversight of the 
Commission pursuant to the CEA as a whole, and more specifically, CEA 
sections 5 and 5h.\983\ In addition, the Commission pointed out that as 
self-regulatory organizations, exchanges do not act only as 
independent, private actors; \984\ when the Act is read as a whole, as 
the Commission noted in 1981, ``it is apparent that Congress envisioned 
cooperative efforts between the self-regulatory organizations and the 
Commission. Thus, the exchanges, as well as the Commission, have a 
continuing responsibility in this matter under the Act.'' \985\ The 
Commission

[[Page 96813]]

noted that its approach to its oversight of its SROs was subsequently 
ratified by Congress in 1982, when it gave the CFTC authority to 
enforce exchange set limits. Further, the Commission observed that as 
it stated in 2010, ``since 1982, the Act's framework explicitly 
anticipates the concurrent application of Commission and exchange-set 
speculative position limits. The Commission further noted that the 
`concurrent application of limits is particularly consistent with an 
exchange's close knowledge of trading activity on that facility and the 
Commission's greater capacity for monitoring trading and implementing 
remedial measures across interconnected commodity futures and option 
markets.' '' \986\
---------------------------------------------------------------------------

    \983\ Id. at 38465. The Commission noted that CFTC Sec.  1.3(ee) 
defines SRO to mean a DCM, SEF, or registered futures association 
(such as the National Futures Association), and also pointed out 
that under the Commission's regulations, self-regulatory 
organizations have certain delineated regulatory responsibilities, 
which are carried out under Commission oversight and which are 
subject to Commission review. Id.
    \984\ Id. The Commission stated that it ``views as instructive'' 
three examples of case law addressing grants of authority by an 
agency (the Securities and Exchange Commission, the `SEC') to a 
self-regulatory organization (`SRO') (in the SEC cases the SRO was 
NASD, now FINRA), providing insight into the factors addressed by 
the court regarding oversight of an SRO;
    (i) In 1952, the Second Circuit reviewed an SEC order that 
failed to set aside a penalty fixed by NASD suspending the defendant 
broker-dealer from membership. Citing Sunshine Anthracite Coal Co. 
v. Adkins, 310 U.S. 381 (1940), the Second Circuit found that, in 
light of the statutory provisions vesting the SEC with power to 
approve or disapprove NASD's rules according to reasonably fixed 
statutory standards, and the fact that NASD disciplinary actions are 
subject to SEC review, there was `no merit in the contention that 
the Maloney Act unconstitutionally delegates power to the NASD.' 
R.H. Johnson v. Securities and Exchange Commission, 198 F. 2d 690, 
695 (2d Cir. 1952).
    (ii) In 1977, the Third Circuit, in Todd & Co. v. Securities and 
Exchange Commission (`Todd'), 557 F.2d 1008 (3rd Cir. 1977), 
likewise concluded that the Act did not unconstitutionally delegate 
legislative power to a private institution. The Todd court 
articulated critical factors that kept the Maloney Act within 
constitutional bounds. First, the SEC had the power, according to 
reasonably fixed statutory standards, to approve or disapprove 
NASD's rules before they could go into effect. Second, all NASD 
judgments of rule violations or penalty assessments were subject to 
SEC review. Third, all NASD adjudications were subject to a de novo 
(non-deferential) standard of review by the SEC, which could be 
aided by additional evidence, if necessary. Id. at 1012. Based on 
these factors, the court found that `[NASD's] rules and its 
disciplinary actions were subject to full review by the SEC, a 
wholly public body, which must base its decision on its own 
findings' and thus that the statutory scheme was constitutional. Id. 
at 1012-13. See also First Jersey Securities v. Bergen, 605 F.2d 690 
(1979), applying the same three-part test delineated in Todd, and 
then upholding a statutory narrowing of the Todd test.
    (iii) In 1982, the Ninth Circuit considered the 
constitutionality of Congress' delegation to NASD in Sorrel v. 
Securities and Exchange Commission, 679 F. 2d 1323 (9th Cir. 1982). 
Sorrel followed R.H. Johnson, Todd and First Jersey in holding that 
because the SEC reviews NASD rules according to reasonably fixed 
standards, and the SEC can review any NASD disciplinary action, the 
Maloney Act does not impermissibly delegate power to NASD.''
    \985\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38465.
    \986\ Id. at 38466.
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    The Commission also noted that under its proposal, it would retain 
the power to approve or disapprove the rules of exchanges, under 
standards set out pursuant to the CEA, and to review an exchange's 
compliance with those rules.\987\ Moreover, the Commission observed 
that it was not diluting its ability to recognize or not recognize bona 
fide hedging positions or to grant or not grant spread exemptions, as 
it reserved to itself the ability to review any exchange action, and to 
review any application by a market participant to an exchange, whether 
prior to or after disposition of such application by an exchange.
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    \987\ The Commission stated that ``In connection with 
recognition of bona fide hedging positions, the Commission notes 
that the statute is silent or ambiguous with respect to the specific 
issue--whether the CFTC may authorize SROs to recognize positions as 
bona fide hedging positions. CEA section 4a(c) provides that no 
Commission rule establishing federal position limits applies to 
positions which are shown to be bona fide hedging positions, as such 
term shall be defined by the CFTC. As noted above, the `shown to be' 
phrase is passive voice, which could encompass either a position 
holder or an exchange being able to ``show'' that a position is 
entitled to treatment as a bona fide hedge, and does not specify 
that the Commission must be the party determining in advance whether 
the position or transaction was shown to be bona fide; the 
Commission interprets that provision to permit certain SROs (i.e., 
DCMs and SEFs, meeting certain criteria) to recognize positions as 
bona fide hedges for purposes of federal limits when done so within 
a regime where the Commission can review and modify or overturn such 
determinations. Under the 2016 Position Limits Supplemental 
Proposal, an SRO's recognition is tentative, because the Commission 
would reserve the power to review the recognition, subject to the 
reasonably fixed statutory standards in CEA section 4a(c)(2) 
(directing the CFTC to define the term bona fide hedging position). 
An SRO's recognition would also be constrained by the SRO's rules, 
which would be subject to CFTC review under the proposal. The SROs 
are parties that are subject to Commission authority, their rules 
are subject to Commission review and their actions are subject to 
Commission de novo review under the proposal--SRO rules and actions 
may be changed by the Commission at any time.'' Id.
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2. Proposed Sec.  150.9--General
    Proposed Rule: In light of DCM experience in granting non-
enumerated bona fide hedging position exemptions to exchange-set 
position limits for futures contracts, and after consideration of 
comments recommending exchange review of non-enumerated bona fide 
hedging position requests, the Commission proposed to permit exchanges 
to recognize non-enumerated bona fide hedging positions with respect to 
the proposed federal speculative position limits. Under proposed Sec.  
150.9, an exchange, as an SRO \988\ that is under Commission oversight 
and whose rules are subject to Commission review,\989\ could establish 
rules under which the exchange could recognize as non-enumerated bona 
fide hedging positions, positions that meet the general definition of 
bona fide hedging position in proposed Sec.  150.1, which implements 
the statutory directive in CEA section 4a(c) for the general definition 
of bona fide hedging positions in physical commodities.\990\ The 
exchange's recognition would be subject to review by the Commission. 
Exchange recognition of a position as a non-enumerated bona fide 
hedging position would allow the market participant to exceed the 
federal position limit to the extent that it relied upon the exchange's 
recognition unless and until such time that the Commission notified the 
market participant to the contrary.\991\ The Commission could issue 
such a notification in accordance with the proposed review procedures. 
That is, if a party were to hold positions pursuant to a non-enumerated 
bona fide hedging position recognition granted by the exchange, such 
positions would not be subject to federal position limits, unless or 
until the Commission were to determine that such non-enumerated bona 
fide hedging position recognition was inconsistent with the CEA or CFTC 
regulations thereunder. Under this framework, the Commission would 
continue to exercise its authority in this regard by reviewing an 
exchange's determination and verifying whether the facts and 
circumstances in respect of a derivative position satisfy the 
requirements of the general definition of bona fide hedging position 
proposed in Sec.  150.1.\992\ If the Commission determined that the 
exchange-granted recognition was inconsistent with section 4a(c) of the 
Act and the Commission's general definition of bona fide hedging 
position in Sec.  150.1 and so notified a market participant relying on 
such recognition, the market participant would be required to reduce 
the derivative position or otherwise come into compliance with position 
limits within a commercially reasonable amount of time.
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    \988\ As noted above, under the Commission's regulations, SROs 
have certain delineated regulatory responsibilities, which are 
carried out under Commission oversight and which are subject to 
Commission review. See also 2016 Position Limits Supplemental 
Proposal, n. 126 (describing reviews of DCMs carried out by the 
Commission).
    \989\ See CEA section 5c(c), 7 U.S.C. 7a-2(a) (providing 
Commission with authority to review rules and rule amendments of 
registered entities, including DCMs).
    \990\ As previously noted, Congress has required in CEA section 
4a(c) that the Commission, within specific parameters, define what 
constitutes a bona fide hedging position for the purpose of 
implementing federal position limits on physical commodity 
derivatives, including, as previously stated, the inclusion in new 
section 4a(c)(2) of a directive to narrow the bona fide hedging 
definition for physical commodity positions from that currently in 
Commission regulation Sec.  1.3(z). See 2016 Supplemental Position 
Limits Proposal, nn. 32 and 105 and accompanying text; see also 
December 2013 Positions Limits Proposal at 75705. In response to 
that mandate, the Commission proposed in its December 2013 Position 
Limits Proposal to add a definition of bona fide hedging position in 
Sec.  150.1, to replace the definition in current Sec.  1.3(z). See 
78 FR at 75706, 75823.
    For the avoidance of doubt, the Commission is still reviewing 
comments received on these provisions. The Commission is proposing 
to finalize the general definition of bona fide hedging position 
based on the standards of CEA section 4a(c), and may further define 
the bona fide hedging position definition consistent with those 
standards.
    \991\ See generally the discussion of proposed Sec.  150.9(d) 
and the requirements regarding the review of applications by the 
Commission in the 2016 Position Limits Supplemental Proposal. The 
Commission noted that exchange participation is voluntary, not 
mandatory and that exchanges could elect not to administer the 
process. Market participants could still request a staff 
interpretive letter under Sec.  140.99 or seek exemptive relief 
under CEA section 4a(a)(7), per the December 2013 Position Limits 
Proposal. The process does not protect exchanges or applicants from 
charges of violations of applicable sections of the CEA or other 
Commission regulations. For instance, a market participant's 
compliance with position limits or an exemption thereto would 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; see the discussion of Sec.  150.6 
(Ongoing application of the Act and Commission regulations) as 
proposed in the December 2013 Position Limits Proposal, 78 FR at 
75746-7.
    \992\ See the general discussion of the Commission's review 
process proposed in Sec.  150.9(d); see also the requirement for a 
weekly report, proposed in Sec.  150.9(c), which would support the 
Commission's surveillance program by facilitating the tracking of 
non-enumerated bona fide hedging positions recognized by exchanges, 
keeping the Commission informed of the manner in which an exchange 
is administering its procedures for recognizing such non-enumerated 
bona fide hedging positions.
---------------------------------------------------------------------------

    The Commission noted its belief that permitting exchanges to so 
recognize non-enumerated bona fide hedging positions is consistent with 
its statutory

[[Page 96814]]

obligation to set and enforce position limits on physical commodity 
contracts, because the Commission would be retaining its authority to 
determine ultimately whether any non-enumerated bona fide hedging 
positions so recognized is in fact a bona fide hedging position. The 
Commission's authority to set position limits does not extend to any 
position that is shown to be a bona fide hedging position.\993\ 
Further, most, if not all, DCMs already have a framework and 
application process to recognize non-enumerated positions, for purposes 
of exchange-set limits, as within the meaning of the general bona fide 
hedging definition in Sec.  1.3(z)(1).\994\ The Commission has a long 
history of overseeing the performance of the DCMs in granting 
exemptions under current exchange rules regarding exchange-set position 
limits \995\ and believed that it would be efficient and in the best 
interest of the markets, in light of current resource constraints,\996\ 
to rely on the exchanges to initially process applications for 
recognition of positions as non-enumerated bona fide hedging positions. 
In addition, because many market participants are familiar with current 
DCM practices regarding bona fide hedging positions, permitting DCMs to 
build on current practice may reduce the burden on market participants. 
Moreover, the Commission believed that the process outlined in the 2016 
Position Limits Supplemental Proposal should reduce duplicative efforts 
because market participants seeking recognition of a non-enumerated 
bona fide hedging position would be able to file one application for 
relief, only to an exchange, rather than to both an exchange with 
respect to exchange-set limits and to the Commission with respect to 
federal limits.\997\
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    \993\ CEA section 4a(c)(1), 7 U.S.C. 6a(c)(1). See also 2016 
Position Limits Supplemental Proposal, n. 65.
    \994\ Rulebooks for some DCMs can be found in the links to their 
associated documents on the Commission's Web site at http://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=TradingOrganizations.
    \995\ The Commission based this view on its long experience 
overseeing DCMs and their compliance with the requirements of CEA 
section 5 and part 38 of the Commission's regulations, 17 CFR part 
38. As the Commission noted in the 2016 Supplemental Position Limits 
Proposal, under part 38, a DCM must comply, on an initial and 
ongoing basis, with twenty-three Core Principles established in 
section 5(d) of the CEA, 7 U.S.C. 7(d), and part 38 of the CFTC's 
regulations and with the implementing regulations under part 38. The 
Division of Market Oversight's Market Compliance Section conducts 
regular reviews of each DCM's ongoing compliance with core 
principles through the self-regulatory programs operated by the 
exchange in order to enforce its rules, prevent market manipulation 
and customer and market abuses, and ensure the recording and safe 
storage of trade information. These reviews are known as rule 
enforcement reviews (``RERs''). Some periodic RERs examine a DCM's 
market surveillance program for compliance with Core Principle 4, 
Monitoring of Trading, and Core Principle 5, Position Limitations or 
Accountability. On some occasions, these two types of RERs may be 
combined in a single RER. Market Compliance can also conduct 
horizontal RERs of the compliance of multiple exchanges in regard to 
particular core principles. In conducting an RER, the Division of 
Market Oversight (DMO) staff examines trading and compliance 
activities at the exchange in question over an extended time period 
selected by DMO, typically the twelve months immediately preceding 
the start of the review. Staff conducts extensive review of 
documents and systems used by the exchange in carrying out its self-
regulatory responsibilities; interviews compliance officials and 
staff of the exchange; and prepares a detailed written report of 
findings. In nearly all cases, the RER report is made available to 
the public and posted on CFTC.gov. See materials regarding RERs of 
DCMs at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmruleenf on the Commission's Web site. Recent RERs conducted 
by DMO covering DCM Core Principle 5 and exemptions from position 
limits have included the Minneapolis Grain Exchange, Inc. (``MGEX'') 
(June 5, 2015), ICE Futures U.S. (July 22, 2014), the Chicago 
Mercantile Exchange (``CME'') and the Chicago Board of Trade 
(``CBOT'') (July 26, 2013), and the New York Mercantile Exchange 
(May 19, 2008). While DMO may sometimes identify deficiencies or 
make recommendations for improvements, it is the Commission's view 
that it should be permissible for DCMs to process applications for 
exchange recognition of positions as non-enumerated bona fide 
hedging positions. Consistent with the fifteen SEF core principles 
established in section 5h(f) of the CEA, 7 U.S.C. 7b-3(f), and with 
the implementing regulations under part 37, 17 CFR part 37, the 
Commission will perform similar RERs for SEFs. The Commission's 
preliminary view is that it should be permissible for SEFs to 
process applications as well, after obtaining the requisite 
experience administering exchange-set position limits discussed 
below. See 2016 Supplemental Position Limits Proposal, 81 FR at 
38469, n. 126 and accompanying text.
    \996\ Since the enactment of the Dodd-Frank Act, Commissioners, 
CFTC staff, and public officials have expressed repeatedly and 
publicly that Commission resources have not kept pace with the 
CFTC's expanded jurisdiction and increased responsibilities. The 
Commission anticipates there may be hundreds of applications for 
non-enumerated bona fide hedging positions. This is based on the 
number of exemptions currently processed by DCMs. For example, under 
the existing process, during the period from June 15, 2011 to June 
15, 2012, the Market Surveillance Department of ICE Futures U.S. 
received 142 exemption applications, 121 of which related to bona 
fide hedging position requests, while 21 related to arbitrage or 
cash-and-carry requests; 92 new exemptions were granted. Rule 
Enforcement review of ICE Futures U.S., July 22, 2014, p. 40. Also 
under the existing process, during the period from November 1, 2010 
to October 31, 2011, the Market Surveillance Group from the CME 
Market Regulation Department took action on and approved 420 
exemption applications for products traded on CME and CBOT, 
including 114 new exemptive applications, 295 applications for 
renewal, 10 applications for increased levels, and one temporary 
exemption on an inter-commodity spread. Rule Enforcement Review of 
the Chicago Mercantile Exchange and the Chicago Board of Trade, July 
26, 2013, p. 54. These statistics are now a few years old, and it is 
possible that the number of applications under the processes 
outlined in this proposal will increase relative to the number of 
applications described in the RERs. The CFTC would need to shift 
substantial resources, to the detriment of other oversight 
activities, to process so many requests and applications and has 
determined, as described below, to permit exchanges to process 
applications initially. The Commission anticipates it will 
regularly, as practicable, check a sample of the exemptions granted, 
including in cases where the facts warrant special attention, 
retrospectively as described below, including through RERs.
    \997\ One commenter specifically requested that the Commission 
streamline duplicative processes. CL-AGA-60382 at 12 (stating that 
``AGA . . . urges the Commission to ensure that hedge exemption 
requests and any hedge reporting do not require duplicative filings 
at both the exchanges and the Commission, and therefore recommends 
revising the rules to streamline the process by providing that an 
applicant need only apply to and report to the exchanges, while the 
Commission could receive any necessary data and applications by 
coordinating data flow between the exchanges and the Commission.''). 
See also CL-Working Group-60396 (explaining that ``To avoid 
employing duplicative efforts, the Commission should simply rely on 
DCMs to administer bona fide hedge exemptions from federal 
speculative position limits as they carry out their core duties to 
ensure orderly markets.'').
---------------------------------------------------------------------------

Comments Received
Exchange Authority Under the Proposal
    The Commission received some comments on its 2016 Supplemental 
Position Limits Proposal that addressed concerns only marginally 
responsive to that proposal; the Commission will address those comments 
in connection with the relevant provisions.\998\
---------------------------------------------------------------------------

    \998\ One commenter expressed the view that Class III milk 
should not be subject to the prohibition on holding cross commodity 
hedge positions in the spot month or during the last five days, 
because it is a cash settled contract. CL-DFA-60927 at 5. The 
Commission is addressing Class III milk separately.
---------------------------------------------------------------------------

    Several commenters supported the Commission's proposal to allow 
exchanges to recognize non-enumerated bona fide hedge positions with 
respect to federal speculative position limits; \999\ on the other 
hand, some commenters expressed views against any Commission 
involvement in the exchange-administered exemption process. That is, 
according to those commenters, exchanges should be given full 
discretion or greater leeway to manage an exemption process without 
Commission interference.\1000\ In addition, a commenter requested that 
the Commission provide additional regulatory certainty for end-users, 
including that the Commission should simply expand the DCM's current 
authority to grant bona fide hedge exemptions and maintain the 
Commission's current oversight role in respect of DCM processes and 
rules under the DCM Core Principles.\1001\
---------------------------------------------------------------------------

    \999\ CL-NMPF-60956 at 2; CL-ISDA-60931 at 6-7; CL-API-60939 at 
4; CL-NFP-60942 at 6-8; and CL-IECAssn-60949 at 3-4.
    \1000\ CL-CME-60926 at 7; CL-NGFA-60941 at 3.
    \1001\ CL-NFP-60942 at 6-8.
---------------------------------------------------------------------------

    Similarly, some commenters expressed the view that there could be 
circumstances where multiple

[[Page 96815]]

commercial firms face similar risks and require recognition of 
positions as non-enumerated bona fide hedges for the same purpose, and 
there should be a method for a generic recognition of non-enumerated 
bona fide hedge positions for commercial firms meeting satisfy 
specified facts and circumstances, allowing an exchange to announce 
generic recognition of non-enumerated bona fide hedges for hedgers that 
satisfy certain facts and circumstances; to allow exchange to announce 
generic recognition for hedgers that certain specified facts.\1002\
---------------------------------------------------------------------------

    \1002\ CL-EEI-EPSA-60925 at 9 (noting also that ``unlike a hedge 
exemption, the exchanges are not granting a firm specific quantity 
of bona fide hedging contracts but, rather, are validating the bona 
fide nature of a hedge transaction''); CL-COPE-60932 at 8-9 
(recommending that ``[t]he Supplemental NOPR should be revised to 
permit the DCM to generically recognize a non-enumerated bona fide 
hedge in cases where multiple commercial firms have sought a non-
enumerated bona fide hedge for a similar risk, based upon similar 
circumstances.'').
---------------------------------------------------------------------------

    Others did not support providing exchanges with such authority. 
Instead, those commenters asserted that only the Commission can 
appropriately and comprehensively administer exemptions to federal 
limits,\1003\ or cited concerns with respect to conflicts of interest 
that could arise between for-profit exchanges and their exemption-
seeking customers.\1004\ In the alternative, several of these 
commenters recommended that the Commission make any final non-
enumerated bona fide hedging position determinations, or that exchanges 
have a limited advisory role with respect to granting exemptions. One 
commenter expressed the view that it is concerned that the Commission's 
constrained resources will prevent the Commission from effectively 
overseeing self-regulatory organizations' recognition of bona fide 
hedging position exemptions. The commenter suggested that the 
Commission at least provide guidance regarding what is the Commission's 
authority in the event that an exchange-managed position accountability 
level fails in numerous contracts to prevent speculation, or raises 
other concerns.\1005\ Further to this point, the commenter expressed 
the view that it was concerned that granting exemptions from position 
limits for swaps that are traded by high frequency trading strategies 
will exacerbate price volatility to the detriment of commercial hedgers 
by increasing momentum or rumor trading and the costs of hedging in 
such a price volatile environment. The commenter believes that this 
will impact the Commission's ability to review and oversee exchange 
exemptions, especially if the Commission does not have access to open 
interest swap data and the intra-day high frequency trading data to 
determine whether such exchange-granted exemption is economically 
appropriate.\1006\
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    \1003\ CL-Better Markets-60928 at 3-5; CL-Public Citizen-60940 
at 3; CL-PMAA-NEFI-60952 at 2; CL-AFR-60953 at 2-3; CL-RER1-60961 at 
1.
    \1004\ CL-Public Citizen-60940 at 3; CL-PMAA-NEFI-60952 at 2; 
CL-RER2-60962 at 1; CL-AFR-60953 at 2-3; CL-RER1-60961 at 1; CL-
PMAA-NEFI-60952 at 2; CL-RER2-60962 at 1; CL-Better Markets-60928 at 
3-5; CL-Public Citizen-60940 at 1-2; CL-AFR-60953 at 3-4.
    \1005\ CL-IATP-60951 at 2.
    \1006\ CL-IATP-60951 at 6.
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Implementation Timeline
    Regarding implementation of final regulations, one commenter 
requested that the CFTC provide a sufficient phase-in period for 
exchanges to review non-enumerated hedges ahead of implementation 
because it is hard to discern the number of current positions that will 
not be considered bona fide hedging positions in the proposed rule 
unless granted a non-enumerated bona fide hedging position e exemption 
from an exchange.\1007\
---------------------------------------------------------------------------

    \1007\ CL-NCFC-60930 at 5.
---------------------------------------------------------------------------

Commission Reproposal Regarding Sec.  150.9
    As explained further below, in this Reproposal, the Commission is 
adopting certain amendments to the proposed Sec.  150.9 and providing 
certain clarifications. In response to various general comments and 
recommendations for the non-enumerated bona fide hedging position 
process, the Commission provides the following responses.
Exchange Authority Under Reproposed Sec.  150.9
    In response to comments that the Commission should give exchanges 
greater leeway or discretion for purposes of federal position limits in 
the exemption process and expand DCM's current authority to grant bona 
fide hedge exemptions, the Commission believes, as noted above, that it 
would be an illegal delegation to give full discretion to exchanges to 
recognize positions or transactions as bona fide hedging positions, for 
purposes of federal position limits, without reasonably fixed statutory 
standards (such as the requirement that exchanges use the Commission's 
bona fide hedging position definition, which incorporates the standards 
of CEA section 4a(c)), and with no ability for the Commission to make a 
de novo review.\1008\ Instead, as observed above, the Commission 
believes it has the authority to provide exchanges with the ability to 
do so pursuant to reasonably fixed statutory standards and subject to 
CFTC de novo review.\1009\
---------------------------------------------------------------------------

    \1008\ See supra section G.1. (discussing the Commission's 
authority to adopt Sec.  150.9); see also discussion regarding 
adoption of Sec.  150.9(d).
    \1009\ As observed above, the Second Circuit found in Sunshine 
Anthracite Coal Co. v. Adkins, that in light of statutory provisions 
vesting the SEC with power to approve or disapprove NASD's rules 
according to reasonably fixed statutory standards, and the fact that 
NASD disciplinary actions are subject to SEC review, there was ``no 
merit in the contention that the Maloney Act unconstitutionally 
delegates power to the NASD.'' R.H. Johnson v. Securities and 
Exchange Commission, 198 F. 2d 690, 695 (2d Cir. 1952). See supra 
discussion under preamble section G.1; see also preamble discussion 
regarding the adoption of Sec.  150.9(d).
---------------------------------------------------------------------------

    Similarly, regarding requests to provide exchanges with a method 
for a generic recognition of a non-enumerated bona fide hedging 
position that allows an exchange to announce generic recognition of 
non-enumerated bona fide hedging positions for hedgers that satisfy 
certain facts and circumstances, the Commission notes that, as 
discussed above, it would be an illegal delegation of Commission 
authority to give full discretion to exchanges to recognize positions 
or transactions as enumerated bona fide hedging positions without 
reasonably fixed statutory standards, and without review by the 
Commission, for purposes of federal position limits. Instead, the 
Commission points out that any exchange can petition the Commission 
under Sec.  13.2 for recognition of a typical position as an enumerated 
bona fide hedging position if the exchange believes there is a fact 
pattern that is so certain as to not require a facts and circumstances 
review.
    In this light, the Commission is reproposing a consistent approach, 
subject to amendments described below, for processing recognitions of 
bona fide hedging positions for purposes of federal position limits 
(i.e., a standard process that the Commission, exchanges and market 
participants know and understand). As was noted in the 2016 Position 
Limits Proposal, the Commission believes that the consistent approach 
under reproposed Sec.  150.9 should increase administrative certainty 
for applicants seeking recognition of non-enumerated bona fide hedging 
positions in the form of reduced application-production time by market 
participants and reduced response time by exchanges and reduce 
duplicative efforts because applicants would be saved the expense of 
applying to both an exchange for relief from exchange-set

[[Page 96816]]

position limits and to the Commission for relief from federal 
limits.\1010\
---------------------------------------------------------------------------

    \1010\ See, e.g., 2016 Position Limits Proposal at 38470, 38488.
---------------------------------------------------------------------------

    The Commission, however, clarifies that exchanges can recognize 
strategies as non-enumerated bona fide hedging positions for purposes 
of federal position limits (including those that the Commission has not 
enumerated) so long as a facts-and-circumstances review leads the 
exchange to believe that such strategies meet the definition of bona 
fide hedging position. Further, regarding comments that exchanges 
should not have authority to grant exemptions, the Commission disagrees 
and believes the exchange's experience administering position limits to 
its actively traded contract, and the Commission's de novo review of 
exchange determinations that positions are bona fide hedging positions 
(afterwards) are adequate to guard against or remedy any conflicts of 
interest. The Commission points out that it has had a long history of 
cooperative enforcement of position limits with DCMs and, in addition 
notes that when recognizing non-enumerated bona fide hedging positions 
for purposes of federal limits, exchanges are required to use the 
Commission's bona fide hedging position definition.\1011\
---------------------------------------------------------------------------

    \1011\ See Sec.  150.9(a)(1).
---------------------------------------------------------------------------

    As to the concerns that allowing bona fide hedging position 
determinations for swap positions that are traded by high frequency 
trading strategies will exacerbate price volatility to the detriment of 
commercial hedgers and impact the Commission's ability to review and 
oversee exchange determinations (especially if the Commission does not 
have access to open interest swap data and the intra-day high frequency 
trading data to determine whether such exchange-granted determination 
is economically appropriate), the Commission notes that it does have 
access to open interest swap data, trade data and order data. The 
Commission views its access to open interest swap data, trade data and 
order data as well as its ability under Sec.  150.9 to review all 
exchange recognitions as sufficient to allow it to carry out its 
responsibilities under the Act.
General Reproposal Under Sec.  150.9
    Regarding implementation timing, the Commission is proposing to 
implement a delayed compliance date after publication of a final rule, 
as discussed above.\1012\
---------------------------------------------------------------------------

    \1012\ See discussion under Proposed Compliance Date, above; see 
also Sec.  150.2(e)(1).
---------------------------------------------------------------------------

3. Proposed Sec.  150.9(a)--Requirements for a Designated Contract 
Market or Swap Execution Facility To Recognize Non-Enumerated Bona Fide 
Hedging Positions
a. Proposed Sec.  150.9(a)(1)
Proposed Rule
    The Commission contemplated in proposed Sec.  150.9(a)(1) that 
exchanges may voluntarily elect to process non-enumerated bona fide 
hedging position applications by filing new rules or rule amendments 
with the Commission pursuant to part 40 of the Commission's 
regulations. The Commission anticipated that, consistent with current 
practice, most exchanges will self-certify such new rules or rule 
amendments pursuant to Sec.  40.6. The Commission expected that the 
self-certification process should be a low burden for exchanges, 
especially for those that already recognize non-enumerated positions 
meeting the general definition of bona fide hedging position in Sec.  
1.3(z)(1).\1013\ The Commission explained its view that allowing DCMs 
to continue to follow current practice, and extend that practice to 
exchange recognition of non-enumerated bona fide hedging positions for 
purposes of the federal position limits, would permit the Commission to 
more effectively allocate its limited resources to oversight of the 
exchanges' actions.\1014\
---------------------------------------------------------------------------

    \1013\ DCMs currently process applications for exemptions from 
exchange-set position limits for non-enumerated bona fide hedging 
positions and enumerated anticipatory bona fide hedges, as well as 
for exemptions from exchange-set position limits for spread 
positions, pursuant to CFMA-era regulatory guidance. See 2016 
Supplemental Position Limits Proposal, n. 102, and accompanying 
text. This practice continues because, among other things, the 
Commission has not finalized the rules proposed in the December 2013 
Position Limits Proposal.
    As noted above and as explained in the December 2013 Position 
Limits Proposal, while current Sec.  150.5 regarding exchange-set 
position limits pre-dates the CFMA ``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.'' 
December 2013 Position Limits Proposal, 78 FR at 75754.
    The DCM application processes for bona fide hedging position 
exemptions from exchange-set position limits generally reference or 
incorporate the general definition of bona fide hedging position 
contained in current Sec.  1.3(z)(1), and the Commission believes 
the exchange processes for approving non-enumerated bona fide 
hedging position applications are at least to some degree informed 
by the Commission process outlined in current Sec.  1.47.
    \1014\ If the Commission becomes concerned about an exchange's 
general processing of non-enumerated bona fide hedging position 
applications, the Commission may review such processes pursuant to a 
periodic rule enforcement review or a request for information 
pursuant to Sec.  37.5. Separately, under proposed Sec.  150.9(d), 
the proposal provides that the Commission may review a DCM's 
determinations in the case of any specific non-enumerated bona fide 
hedging position application.
---------------------------------------------------------------------------

    Proposed Sec.  150.9(a)(1) provided that exchange rules must 
incorporate the general definition of bona fide hedging position in 
Sec.  150.1. It also provided that, with respect to a commodity 
derivative position for which an exchange elects to process non-
enumerated bona fide hedging position applications, (i) the position 
must be in a commodity derivative contract that is a referenced 
contract; (ii) the exchange must list such commodity derivative 
contract for trading; (iii) such commodity derivative contract must be 
actively traded on such exchange; (iv) such exchange must have 
established position limits for such commodity derivative contract; and 
(v) such exchange must have at least one year of experience 
administering exchange-set position limits for such commodity 
derivative contract. The requirement for one year of experience was 
intended as a proxy for a minimum level of expertise gained in 
monitoring futures or swaps trading in a particular physical commodity.
    The Commission believed that the exchange non-enumerated bona fide 
hedging position process should be limited only to those exchanges that 
have at least one year of experience overseeing exchange-set position 
limits in an actively traded referenced contract in a particular 
commodity because an individual exchange may not be familiar enough 
with the specific needs and differing practices of the commercial 
participants in those markets for which the exchange does not list any 
actively traded referenced contract in a particular commodity. Thus, if 
a referenced contract is not actively traded on an exchange that elects 
to process non-enumerated bona fide hedging position applications for 
positions in such referenced contract, that exchange might not be 
incentivized to protect or manage the relevant commodity market, and 
its interests might not be aligned with the policy objectives of the 
Commission as expressed in CEA section 4a. The Commission expected that 
an individual exchange will describe how it will determine whether a 
particular listed referenced contract is actively traded in its rule 
submission, based on its familiarity with the specific needs and

[[Page 96817]]

differing practices of the commercial participants in the relevant 
market.\1015\
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    \1015\ For example, a DCM (``DCM A'') may list a commodity 
derivative contract (``KX,'' where ``K'' refers to contract and 
``X'' refers to the commodity) that is a referenced contract, 
actively traded, and DCM A has the requisite experience and 
expertise in administering position limits in that one contract KX. 
DCM A can therefore recognize non-enumerated bona fide hedging 
positions in contract KX. But DCM A is not limited to recognition of 
just that one contract KX-DCM A can also recognize any other 
contract that falls within the meaning of referenced contract for 
commodity X. So a market participant could, for example, apply to 
DCM A for recognition of a position in any contract that falls 
within the meaning of referenced contract for commodity X. However, 
that market participant would still need to seek separate 
recognition from each exchange where it seeks an exemption from that 
other exchange's limit for a commodity derivative contract in the 
same commodity X.
---------------------------------------------------------------------------

    The Commission was also mindful that some market participants, such 
as commercial end users in some circumstances, may not be required to 
trade on an exchange, but may nevertheless desire to have a particular 
derivative position recognized as a non-enumerated bona fide hedging 
position. The Commission noted its belief that commercial end users 
should be able to avail themselves of an exchange's non-enumerated bona 
fide hedging position application process in lieu of requesting a staff 
interpretive letter under Sec.  140.99 or seeking CEA section 4a(a)(7) 
exemptive relief. This is because the Commission believed that 
exchanges that list particular referenced contracts would have enough 
information about the markets in which such contracts trade and would 
be sufficiently familiar with the specific needs and differing 
practices of the commercial participants in such markets in order to 
knowledgeably recognize non-enumerated bona fide hedging positions for 
derivatives positions in commodity derivative contracts included within 
a particular referenced contract. The Commission also viewed this to be 
consistent with the efficient allocation of Commission resources.
    Consistent with the restrictions regarding the offset of risks 
arising from a swap position in CEA section 4a(c)(2)(B), proposed Sec.  
150.9(a)(1) would not permit an exchange to recognize a non-enumerated 
bona fide hedging position involving a commodity index contract and one 
or more referenced contracts. That is, an exchange may not recognize a 
non-enumerated bona fide hedging position where a bona fide hedging 
position could not be recognized for a pass through swap offset of a 
commodity index contract.\1016\
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    \1016\ This is consistent with the Commission's interpretation 
in the December 2013 Position Limits Proposal that CEA section 
4a(c)(2)(b) is a direction from Congress to narrow the scope of what 
constitutes a bona fide hedge in the context of index trading 
activities. ``Financial products are not substitutes for positions 
taken or to be taken in a physical marketing channel. Thus, the 
offset of financial risks from financial products is inconsistent 
with the proposed definition of bona fide hedging for physical 
commodities.'' December 2013 Position Limits Proposal, 78 FR at 
75740. See also the discussion of the temporary substitute test in 
the December 2013 Position Limits Proposal, 78 FR at 75708-9.
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Comments on Proposed Sec.  150.9(a)(1)
Requirement That Exchanges Recognize Non-Enumerated Bona Fide Hedging 
Positions Consistent With the General Bona Fide Hedging Definition
    In connection with the requirement under Sec.  150.9 to apply the 
bona fide hedging definition to recognitions, two commenters requested 
that the Commission specifically allow exchanges to recognize 
anticipatory merchandising as a non-enumerated bona fide hedging 
positions should the facts and circumstances warrant including those 
rejected strategies [transactions or positions that fail to meet the 
`change in value' requirement or the `economically appropriate 
test'].\1017\
---------------------------------------------------------------------------

    \1017\ CL-ICE-60929 at 12; CL-Working Group-60947 at 6.
---------------------------------------------------------------------------

    Another commenter expressed the view that the Commission should 
extend the process proposed in the 2016 Supplemental Position Limits 
Proposal to include risk management exemptions.\1018\ The commenter 
acknowledged but disagrees with the Commission's view that such risk 
management exemptions would not be allowed under the statutory 
standards for a bona fide hedging position, and suggests that the 
Commission could use CEA section 4a(a)(7) authority to provide 
exemptions for risk management positions.
---------------------------------------------------------------------------

    \1018\ CL-AMG-60946 at 6-7.
---------------------------------------------------------------------------

    A commenter recommended that the rules clarify that the Exchanges 
may recognize and grant exemptions on the basis of a strategy, or 
hedging need, or a combination of strategies or hedging requirements 
associated with managing an ongoing business.\1019\
---------------------------------------------------------------------------

    \1019\ CL-CCI-60935 at 5.
---------------------------------------------------------------------------

    Separately, one commenter recommended that ``the Commission should 
confirm that exchanges may continue to adopt their own rules for 
exemptions from speculative position limits for futures contracts that 
are subject to DCM limits, but not to federal limits,'' \1020\ while 
two others stated that the Commission should confirm that the 2016 
Supplemental Position Limits Proposal's ``prescriptive procedures'' 
will not apply to exemptions involving exchange-set limits lower than 
federally-set levels, or where the exchanges set the limits 
themselves.\1021\
---------------------------------------------------------------------------

    \1020\ CL-FIA-60937 at 4.
    \1021\ CL-ICE-60929 at 7; CL-Working Group-60947 at 14.
---------------------------------------------------------------------------

Requests for Recognition of Non-Enumerated Bona Fide Hedging Positions 
in the Spot Month
    A commenter expressed the view that the Commission should not 
``categorically prohibit exchanges from granting non-enumerated and 
anticipatory hedge exemptions, as appropriate, during the spot month'' 
and reminded the Commission that orderly trading requirements remain 
applicable to all positions, as provided under the bona fide hedging 
position definition. The commenter further expressed the view that the 
statutory definition of bona fide hedging position allows for such 
recognition during the spot month and that a ``one-size-fits-all'' 
prohibition will ``unnecessarily restrict commercially reasonable 
hedging activity during the spot month.'' \1022\
---------------------------------------------------------------------------

    \1022\ CL-ICE-60929 at 9.
---------------------------------------------------------------------------

    Several commenters were generally against the application of the 
five-day rule to non-enumerated bona fide hedging position exemptions, 
and recommended that the Commission authorize the exchanges to grant 
non-enumerated hedge and spread exemptions during the last five days of 
trading or the spot period, and other alternatives and proposed 
regulation text.\1023\
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    \1023\ CL-ICE-60929 at 22; CL-NCGA-NGSA-60919 at 13; CL-CME-
60926 at 6 and 8; CL-API-60939 at 3; CL-FIA-60937 at 3 and 12; CL-
Working Group-60947 at 7-9; CL-NCC-ACSA-60972 at 2; CL-CMC-60950 at 
9-11; CL-ISDA-60931 at 3 and 10; CL-CCI-60935 at 8-9; CL-MGEX-60936 
at 11; CL-FIA-60937 at 10, 11; CL-MGEX-60936 at 11.
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Standards Exchanges Must Meet To Provide Recognitions
    Several commenters recommended that the Commission not adopt the 
proposed ``active trading'' and ``one year experience'' requirements 
regarding a DCM's qualification to administer exemptions from federal 
position limits.\1024\ One commenter requested removal of the 
``actively traded'' requirement, expressing concerns that, based on its 
understanding, the requirement would impose an ``absolute prohibition'' 
on exchange-administered exemptions for new contracts of at least one 
year.\1025\ Similarly, a commenter stated that the standard ``would 
arbitrarily limit competition and operate

[[Page 96818]]

as a bar to the establishment of new exchanges and new contracts.'' 
\1026\
---------------------------------------------------------------------------

    \1024\ CL-CCI-60935 at 3-4; CL-CME-60926 at 13; CL-FIA-60937 at 
9; CL-CMC-60950 at 3; CL-Working Group-60947 at 10; CL-IECAssn-60949 
at 12-13.
    \1025\ CL-CMC-60950 at 3.
    \1026\ CL-IECAssn-60949 at 12-13.
---------------------------------------------------------------------------

    In the alternative, one commenter argues that one year of 
experience in administering position limits in similar contracts within 
a particular ``asset class'' would be a more reasonable 
requirement.\1027\ In addition, a commenter expressed the view that the 
Commission should not define ``actively traded'' in terms of minimum 
monthly volume.\1028\
---------------------------------------------------------------------------

    \1027\ CL-CME-60926 at 14.
    \1028\ CL-IECAssn-60949 at 13.
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Previously Granted Hedge Exemptions
    One commenter expressed the view that since the exchanges have been 
working with commercial end user for several decades and currently have 
a process under Sec.  1.3(z) that may contain specific scenarios that 
work well and are not listed in the 2016 Position Limits Proposal, the 
Commission should deem every currently recognized hedge strategy by any 
exchange as a non-enumerated bona fide hedging position which would 
eliminate disruption and encourage the autonomy of the exchanges.\1029\
---------------------------------------------------------------------------

    \1029\ CL-IECAssn-60949 at 11-12.
---------------------------------------------------------------------------

    The commenter also expressed the view that, with respect to the 
status of previously exchange-recognized non-enumerated bona fide 
hedging positions for which such exchange no longer provides an annual 
review, the non-enumerated bona fide hedging positions should remain a 
non-enumerated bona fide hedging position and the participants 
utilizing that strategy should have ample notice that the exchange will 
no longer provide the annual review in order to allow time for the 
individual entity to apply to the CFTC directly for a non-enumerated 
bona fide hedging position exemption.\1030\
---------------------------------------------------------------------------

    \1030\ Id. at 12.
---------------------------------------------------------------------------

Recognition of OTC Positions as Bona Fide Hedges
    Another commenter requested Commission clarification regarding an 
exchange's obligation with respect to recognizing and monitoring non-
enumerated bona fide hedging position determinations for OTC positions. 
The commenter cited to preamble language to support the possibility of 
an obligation, but argued that the text of proposed Sec.  150.9 does 
not mention or contemplate such requests for OTC positions. The 
commenter also questioned whether such recognition is feasible given 
the exchanges' lack of visibility into OTC markets.\1031\
---------------------------------------------------------------------------

    \1031\ CL-CME-60926 at 11-12.
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Commission Reproposal Regarding Sec.  150.9(a)(1) \1032\
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    \1032\ See the 2016 Supplemental Position Limits Proposal, 81 FR 
at 38469-71 (providing further explanation of proposed Sec.  
150.9(a)(1)).
---------------------------------------------------------------------------

    The Commission is reproposing the rule, as originally proposed, 
subject to the amendments described below.
Requirement That Exchanges Recognize Non-Enumerated Bona Fide Hedging 
Positions Consistent With the General Bona Fide Hedging Position 
Definition
    Regarding comments that the Commission should permit the 
recognition of anticipatory merchandising as non-enumerated bona fide 
hedging strategies, as noted above, while exchanges' recognition of 
non-enumerated bona fide hedging positions must be consistent with the 
Commission's bona fide hedging position definition, the Commission 
agrees that exchanges should, in each case, make a facts-and-
circumstances determination as to whether to recognize an anticipatory 
hedge as a non-enumerated bona fide hedging position, consistent with 
the Commission's recognition ``that there can be a gradation of 
probabilities that an anticipated transaction will occur.'' \1033\
---------------------------------------------------------------------------

    \1033\ December 2013 Position Limits Proposal, 78 FR at 75719.
---------------------------------------------------------------------------

    In response to the request that the Commission expand the proposed 
bona fide hedging position recognition process to include risk 
management exemptions, the Commission notes that this suggestion is 
contrary to the intent of Congress (to narrow the bona fide hedging 
position definition to preclude commodity index hedging, a.k.a. risk 
management exemptions).
    Regarding comments requesting clarification on exchange authority 
to recognize as bona fide hedging positions multiple hedging 
strategies, the Commission clarifies that a single application to an 
exchange can specify and apply to multiple hedging strategies or needs.
    As to comments requesting clarification regarding whether the 
proposed application process applies to exchange-set limits, the 
Commission notes that the requirements of reproposed Sec.  150.9(a) 
addresses processes for recognition of bona fide hedge positions for 
purposes of federal limits and not exemption processes such as those 
exchanges currently implement and oversee for any exchange-set limits. 
In addition, such processes for exchange-set limits that are lower than 
the federal limit could differ as long as the exemption provided by the 
exchange is capped at the level of the applicable federal limit in 
Sec.  150.2.\1034\
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    \1034\ Similarly, as noted above, reproposed Sec.  
150.5(a)(2)(i) provides that any exchange may grant exemptions from 
any speculative position limits it sets under paragraph Sec.  
150.5(a)(1), provided that such exemptions conform to the 
requirements specified in Sec.  150.3, and provided further that any 
exemptions to exchange-set limits not conforming to Sec.  150.3 are 
capped at the level of the applicable federal limit in Sec.  150.2.
---------------------------------------------------------------------------

Requests for Recognition of Non-Enumerated Bona Fide Hedging Positions 
in the Spot Month
    The Commission considered the recommendations that the Commission: 
Allow exchanges to recognize a position as a bona fide hedging position 
for up to a five-day retroactive period in circumstances where market 
participants need to exceed limits to address a sudden and unforeseen 
hedging need; specifically authorize exchanges to recognize positions 
as bona fide hedging positions and grant spread exemptions during the 
last five days of trading or less, and/or delegate to the exchanges for 
their consideration the decision whether to apply the five-day rule to 
a particular contract after their evaluation of the particular facts 
and circumstances. As the Commission clarified above, the reproposed 
rules do not apply the prudential condition of the five-day rule to 
non-enumerated hedging positions other than to pass through swap 
offsets.\1035\ Therefore, as reproposed, the five-day rule would only 
apply to certain positions (pass-through swap offsets, anticipatory and 
cross-commodity hedges).\1036\ However, to provide exchanges with 
flexibility, in regards to exchange process under Sec.  150.9, the 
Commission will allow exchanges to waive the five-day rule on a case-
by-case basis.\1037\ As the Commission noted above, it expects that 
exchanges will carefully consider whether allowing retroactive 
recognition of a positions as a non-enumerated bona fide hedge would, 
as raised by one commenter, diminish the overall integrity of the 
process. In

[[Page 96819]]

addition, the Commission also points out that exchanges should 
carefully consider whether to adopt in those rules the two safeguards 
noted by commenters: (i) Requiring market participants making use of 
the retroactive application to demonstrate that the applied-for hedge 
was required to address a sudden and unforeseen hedging need; and (ii) 
providing that if the emergency hedge recognition was not granted, 
exchange rules would continue to require the applicant to unwind its 
position in an orderly manner and also would deem the applicant to have 
been in violation for any period in which its position exceeded the 
applicable limits.
---------------------------------------------------------------------------

    \1035\ See the discussion regarding the five-day rule in 
connection with the definition of bona fide hedging position and in 
the discussion of 150.9 (Process for recognition of positions as 
non-enumerated bona fide hedging positions).
    \1036\ See Sec.  150.1 definition of bona fide hedging position 
sections (2)(ii)(A), (3)(iii), (4), and (5) (Other enumerated 
hedging position). To provide greater clarity as to which bona fide 
hedging positions the five-day rule applies, the reproposed rules 
reorganize the definition.
    \1037\ In addition, reproposed Sec.  150.5(a)(2)(ii) 
(Application for exemption) permits exchanges to adopt rules that 
allow a trader to file an application for an enumerated bona fide 
hedging exemption within five business days after the trader assumed 
the position that exceeded a position limit, and adopted a similar 
modification to 150.5(b)(5)(i).
---------------------------------------------------------------------------

Standards Exchanges Must Meet To Provide Recognitions
    Regarding comments on the ``active trading'' and ``one year of 
experience'' requirements under proposed Sec.  150.9(a)(1)(v), as noted 
in the 2016 Supplemental Position Limits Proposal preamble \1038\ and 
above, the Commission is not persuaded that an exchange with no active 
trading and no experience would have their interests aligned with the 
Commission's policy objectives in CEA section 4a. However, it is clear 
from the comments that some interpreted the requirement as a narrower 
standard than intended.
---------------------------------------------------------------------------

    \1038\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38471.
---------------------------------------------------------------------------

    The Commission is, therefore, amending Sec.  150.9(a)(1)(v) to 
clarify that the active one-year of experience requirement can be met 
by any contract listed in the particular referenced contract.\1039\ As 
such, the Commission is reproposing Sec.  150.9(a)(1)(v) to provide 
that the exchange has at least one year of experience and expertise 
administering position limits for ``a particular commodity'' rather 
than for ``such commodity derivative contract.'' Further, in response 
to concerns that the standard would limit competition and operate as a 
bar to the establishment of new exchanges and new contracts, the 
Commission notes that experience manifests in the people carrying out 
surveillance in a commodity rather than in an institutional structure. 
An exchange's experience could be demonstrated through the relevant 
experience of the surveillance staff regarding the particular 
commodity. In fact, the Commission has historically reviewed the 
experience and qualifications of exchange regulatory divisions when 
considering whether to designate a new exchange as a contract market or 
to recognize a facility as a SEF; as such exchanges are new, staff 
experience has clearly been gained at other exchanges.\1040\
---------------------------------------------------------------------------

    \1039\ Regarding the comment that the Commission should not 
define ``actively traded,'' the Commission concurs, and notes that, 
as proposed in the 2016 Supplemental Position Limits Proposal, this 
interpretation will be left to the exchanges' reasonable discretion.
    \1040\ For example, the Commission reviews the experience of 
chief compliance officers when reviewing SEF applications. See Sec.  
37.1501(b)(2) (``Qualifications of chief compliance officer. The 
individual designated to serve as chief compliance officer shall 
have the background and skills appropriate for fulfilling the 
responsibilities of the position.'').
---------------------------------------------------------------------------

    In addition, regarding the Commission's authority to adopt this 
standard, the Commission notes that CEA section 4a(c) provides that the 
Commission ``shall'' define what constitutes a bona fide hedging 
transaction or position. In light of this responsibility, the 
Commission believes it is important that exchanges authorized to 
recognize non-enumerated bona fide hedging positions have experience 
(as indicated by their one year of experience regulating a particular 
contract) and interests (as indicated by their actively traded 
contract) that are aligned with the Commission's interests. The 
commenter provides no alternatives to the one-year experience in the 
actively traded contract as proxies for an exchange's interests being 
aligned with that of the Commission.
    The Commission clarifies, however, that an exchange can petition 
the Commission, pursuant to Sec.  140.99, for a waiver of the one-year 
experience requirement if such exchange believes that their experience 
and interests are aligned with the Commission's interests with respect 
to recognizing non-enumerated bona fide hedging positions.
Previously Granted Hedge Exemptions
    With respect to comments regarding currently recognized exchange-
granted non-enumerated bona fide hedging position exemptions, as noted 
above, the Commission believes the statutory directive to define bona 
fide hedging position narrows the current Sec.  1.3(z)(1) definition. 
As a result, currently recognized bona fide hedging strategies may not 
meet the new narrower bona fide hedging position standards. While 
certain strategies may not meet the definition of bona fide hedging 
position reproposed in this rulemaking, to reduce the potential for 
market disruption by forced liquidations, the Commission proposes, as 
discussed above, to clarify and expand the relief in Sec.  150.3(f) 
(previously granted exemptions) to grandfather previously granted risk-
management strategies applicable to previously established derivative 
positions in commodity index contract.\1041\
---------------------------------------------------------------------------

    \1041\ As stated above, Sec.  150.3(f) provides (1) recognition 
of the offset of the risk of a pre-existing financial instrument as 
bona fide using a derivative position, including a deferred 
derivative contract month entered after the effective date of a 
final rule, provided a nearby derivative contract month is 
liquidated (such recognition will not extend such relief to an 
increase in positions after the effective date of a limit); (2) 
possible application of previously granted exemptions to pre-
existing financial instruments that are within the scope of existing 
Sec.  1.47 exemptions, rather than only to pre-existing swaps; and 
(3) recognition of exchange-granted non-enumerated exemptions in 
non-legacy commodity derivatives outside of the spot month 
(consistent with the Commission's recognition of risk management 
exemptions outside of the spot month), provided such exemptions are 
granted prior to the compliance date of a final rule, and apply only 
to pre-existing financial instruments as of the effective date of a 
final rule. These last two were proposed to reduce the potential for 
market disruption, since a market intermediary would continue to be 
able to offset risks of pre-effective-date financial instruments, 
pursuant to previously-granted federal or exchange risk management 
exemptions. See supra discussion of the Commission's reproposed 
definition for bona fide hedging position; see also the discussion 
regarding the reproposed Sec.  150.3(f). In response to the comment 
requesting that the Commission use its authority under CEA section 
4a(a)(7) to provide exemptions for risk management positions, as 
noted above, that appears contrary to Congressional intent to narrow 
the definition of a bona fide hedging position.
---------------------------------------------------------------------------

    Regarding comments that exchanges should be required to provide 
additional notice or phase-out time for any bona fide hedging position 
recognitions that may expire, the Commission notes that, under 
reproposed Sec.  150.5, exchanges may issue recognition determinations 
for one year only. As such a market participant is provided a one-year 
notice for the potential expiration of the recognition of their 
position as a non-enumerated bona fide hedging position, and may seek 
recognition of the position from another (or the same) DCM, or from the 
CFTC directly prior to the expiration of the one-year period. The 
Commission is not proposing to authorize exchanges to provide an 
unlimited recognition of positions as non-enumerated bona fide hedging 
positions, and is not proposing to require exchanges to provide further 
notice to market participants prior to the expiration of previous 
determinations.
Recognition of OTC Positions as Bona Fide Hedging Positions
    Regarding comments requesting a clarification with respect to OTC 
positions, the Commission clarifies that exchanges do not have an 
obligation to monitor for compliance with OTC-only positions.

[[Page 96820]]

b. Proposed Sec.  150.9(a)(2); Sec.  150.9(a)(3); and Sec.  
150.9(a)(4)--Application Process
    Proposed Rules. As proposed, Sec.  150.9(a)(2) would permit an 
exchange to establish a less expansive application process for non-
enumerated bona fide hedging positions previously recognized and 
published on such exchange's Web site than for non-enumerated bona fide 
hedging positions based on novel facts and circumstances. This is 
because the Commission believed that some lesser degree of scrutiny may 
be adequate for applications involving recurring fact patterns, so long 
as the applicants are similarly situated. However, the Commission 
understood that DCMs currently use a single-track application process 
to recognize non-enumerated positions, for purposes of exchange limits, 
as within the meaning of the general bona fide hedging position 
definition in Sec.  1.3(z)(1).\1042\ The Commission did not know 
whether any exchange would elect to establish a separate application 
process for non-enumerated bona fide hedging positions based on novel 
versus non-novel facts and circumstances, or what the salient 
differences between the two processes might be, or whether a dual-track 
application process might be more likely to produce inaccurate results, 
e.g., inappropriate recognition of positions that are not bona fide 
hedging positions within the parameters set forth by Congress in CEA 
section 4a(c).\1043\ In proposing to permit separate application 
processes for novel and non-novel non-enumerated bona fide hedging 
positions, the Commission sought to provide flexibility for exchanges, 
but will insist on fair and open access for market participants to seek 
recognition of compliant positions as non-enumerated bona fide hedging 
positions.
---------------------------------------------------------------------------

    \1042\ 17 CFR 1.3(z)(1).
    \1043\ 7 U.S.C. 6a(c). The Commission noted that it could, under 
the proposal, review determinations made by a particular exchange, 
for example, that recognizes an unusually large number of bona fide 
hedging positions, relative to those of other exchanges.
---------------------------------------------------------------------------

    The Commission believed that there is a core set of information and 
materials necessary to enable an exchange to determine, and the 
Commission to verify, whether the facts and circumstances attendant to 
a position satisfy the requirements of CEA section 4a(c). Accordingly, 
the Commission proposed to require in Sec.  150.9(a)(3)(i), (iii) and 
(iv) that all applicants submit certain factual statements and 
representations. Proposed Sec.  150.9(a)(3)(i) required a description 
of the position in the commodity derivative contract for which the 
application is submitted and the offsetting cash positions.\1044\ 
Proposed Sec.  150.9(a)(3)(iii) required a statement concerning the 
maximum size of all gross positions in derivative contracts to be 
acquired during the year after the application is submitted.\1045\ 
Proposed Sec.  150.9(a)(3)(iv) required detailed information regarding 
the applicant's activity in the cash markets for the commodity 
underlying the position for which the application is submitted during 
the past three years.\1046\ These proposed application requirements are 
similar to existing requirements for recognition under current Sec.  
1.48 of a non-enumerated bona fide hedge.
---------------------------------------------------------------------------

    \1044\ See Sec.  1.47(b)(1), 17 CFR 1.47(b)(1), requiring a 
description of the futures positions and the offsetting cash 
positions.
    \1045\ See Sec.  1.47(b)(4), 17 CFR 1.47(b)(4), requiring the 
maximum size of gross futures positions which will be acquired 
during the following year.
    \1046\ See Sec. Sec.  1.47(b)(6), 1.48(b)(1)(i) and (2)(i), 17 
CFR 1.47(b)(6), 1.48(b)(1)(i) and 2(i), requiring three years of 
history of production or usage.
---------------------------------------------------------------------------

    The Commission also proposed to require in Sec.  150.9(a)(3)(ii) 
and (v) that all applicants submit detailed information to demonstrate 
why the position satisfies the requirements of CEA section 4a(c) \1047\ 
and any other information necessary to enable the exchange to 
determine, and the Commission to verify, whether it is appropriate to 
recognize such a position as a non-enumerated bona fide hedge.\1048\ 
The Commission anticipated that such detailed information may include 
both a factual and legal analysis indicating why recognition is 
justified for such applicant's position. The Commission expected that 
if the materials submitted in response to proposed Sec.  
150.9(a)(3)(ii) are relatively comprehensive, requests for additional 
information pursuant to proposed Sec.  150.9(a)(3)(v) would be 
relatively infrequent. Nevertheless, the Commission believed that it is 
important to include the requirement in proposed Sec.  150.9(a)(3)(v) 
that applicants submit any other information necessary to enable the 
exchange to determine, and the Commission to verify, that it is 
appropriate to recognize a position as a non-enumerated bona fide 
hedging position so that DCMs can protect and manage their markets.
---------------------------------------------------------------------------

    \1047\ Although many commenters have requested that the 
Commission retain the pre-Dodd Frank Act standard contained in 
current Sec.  1.3(z), 17 CFR 1.3(z), there is explicit and implicit 
support in the comments on the December 2013 Position Limits 
Proposal for pegging what applicants must demonstrate to the current 
statutory provision as amended by the Dodd-Frank Act. One commenter 
requested that the Commission ``publicly clarify that hedge 
positions are bona fide when they satisfy the hedge definition 
codified by Congress in section 4a(c)(2) of the Act, as added by the 
Dodd-Frank Act.'' CL-CME-59718 at 46. Another commenter supported a 
``process for Commission approval of a `non-enumerated' hedge that . 
. . complies with the statutory definition of the term `bona fide 
hedge.' '' CL-NGSA-59673 at 2. CEA section 4a(c)(2) contains 
standards for positions that constitute bona fide hedging positions. 
The Commission expects that exchanges would consider the 
Commission's relevant regulations and interpretations, when 
determining whether a position satisfies the requirements of CEA 
section 4a(c)(2). However, exchanges may confront novel facts and 
circumstances with respect to a particular applicant's position, 
dissimilar to facts and circumstances previously considered by the 
Commission. In these cases, an exchange may request assistance from 
the Commission; see the discussion of proposed Sec.  150.9(a)(8) in 
the 2016 Position Limits Supplemental Proposal.
    \1048\ See Sec.  1.47(b)(2), 17 CFR 1.47(b)(2), requiring 
detailed information to demonstrate that the futures positions are 
economically appropriate to the reduction of risk in the conduct and 
management of a commercial enterprise. See also Sec.  1.47(b)(3), 17 
CFR 1.47(b)(3), requiring, upon request, such other information 
necessary to enable the Commission to determine whether a particular 
futures position meets the requirements of the general definition of 
bona fide hedging. Under current application processes, market 
participants provide similar information to DCMs, make various 
representations required by DCMs and agree to certain terms imposed 
by DCMs with respect to exemptions granted. The Commission has 
recognized that DCMs already consider any information they deem 
relevant to requests for exemptions from position limits. See, e.g., 
Rule Enforcement Review of ICE Futures U.S., July 22, 2014, p. 41.
---------------------------------------------------------------------------

    Under the proposal, the Commission would permit an exchange to 
recognize a smaller than requested position for purposes of exchange-
set limits. For instance, an exchange might recognize a smaller than 
requested position that otherwise satisfies the requirements of CEA 
section 4a(c) if the exchange determines that recognizing a larger 
position would be disruptive to the exchange's markets. This is 
consistent with current exchange practice. This is also consistent with 
DCM and SEF core principles. DCM core principle 5(A) provides that, 
``[t]o reduce the potential threat of market manipulation or congestion 
(especially during trading during the delivery month), the board of 
trade shall adopt for each contract of the board of trade, as is 
necessary and appropriate, position limitations or position 
accountability for speculators.'' \1049\ SEF core principle 6(A) 
contains a similar provision.\1050\
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    \1049\ CEA section 5(d)(5)(A), 7 U.S.C. 7(d)(5)(A); Sec.  
38.300, 17 CFR 38.300. The Commission proposed, consistent with 
previous Commission determinations, a preliminary finding that 
speculative position limits are necessary in the December 2013 
Position Limits Proposal. December 2013 Position Limits Proposal, 78 
FR at 75685.
    \1050\ CEA Section 5h(f)(6)(A), 7 U.S.C. 7b-3(f)(6)(A); Sec.  
38.300, 17 CFR 38.300.
---------------------------------------------------------------------------

    By requiring in proposed Sec.  150.9(a)(3) that all applicants 
submit a core set of information and materials, the Commission 
anticipated that all exchanges would develop similar non-

[[Page 96821]]

enumerated bona fide hedging position application processes. However, 
the Commission intended that exchanges have sufficient discretion to 
accommodate the needs of their market participants. The Commission also 
intended to promote fair and open access for market participants to 
obtain recognition of compliant derivative positions as non-enumerated 
bona fide hedges.
    Proposed Sec.  150.9(a)(4) set forth certain timing requirements 
that an exchange must include in its rules for the non-enumerated bona 
fide hedge application process. A person intending to rely on an 
exchange's recognition of a position as a non-enumerated bona fide 
hedging position would be required to submit an application in advance 
and to reapply at least on an annual basis. This is consistent with 
commenters' views and DCMs' current annual exemption review 
process.\1051\ Proposed Sec.  150.9(a)(4) would require an exchange to 
notify an applicant in a timely manner whether the position was 
recognized as a non-enumerated bona fide hedging position or rejected, 
including the reasons for any rejection.\1052\ On the other hand, and 
consistent with the status quo, proposed Sec.  150.9(a)(4) would allow 
the exchange to revoke, at any time, any recognition previously issued 
pursuant to proposed Sec.  150.9 if the exchange determined the 
recognition is no longer in accord with section 4a(c) of the Act.\1053\
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    \1051\ See, e.g., statement of Ron Oppenheimer on behalf of the 
Working Group (supporting an annual non-enumerated bona fide hedge 
application), statement of Erik Haas, Director, Market Regulation, 
ICE Futures U.S. (describing the DCM's annual exemption review 
process), and statement of Tom LaSala, Chief Regulatory Officer, CME 
Group (envisioning market participants applying for non-enumerated 
bona fide hedge on a yearly basis), transcript of the EEMAC open 
meeting, July 29, 2015, at 40, 53, and 58, available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript072915.pdf.
    \1052\ See, e.g., statement of Ron Oppenheimer on behalf of the 
Working Group (noting that exchanges retain the ability to revoke an 
exemption if market circumstances warrant), transcript of the EEMAC 
open meeting, July 29, 2015, at 57, available at http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/emactranscript072915.pdf.
    \1053\ As noted above, the 2016 Supplemental Position Limits 
Proposal did not impair the ability of any market participant to 
request an interpretation under Sec.  140.99 for recognition of a 
position as a bona fide hedging position if an exchange rejects 
their recognition application or revokes recognition previously 
issued. See 2016 Position Limits Supplemental Proposal, n. 78 and 
accompanying text.
---------------------------------------------------------------------------

    The Commission did not propose to prescribe time-limited periods 
(e.g., a specific number of days) for submission or review of non-
enumerated bona fide hedge applications. The Commission proposed only 
to require that an applicant must have received recognition for a non-
enumerated bona fide hedging position before such applicant exceeds any 
limit then in effect, and that the exchange administer the process, and 
the various steps in the process, in a timely manner. This means that 
an exchange must, in a timely manner, notify an applicant if a 
submission is incomplete, determine whether a position is a non-
enumerated bona fide hedging position, and notify an applicant whether 
a position will be recognized, or the application rejected. The 
Commission anticipated that rules of an exchange may nevertheless set 
deadlines for various parts of the application process. The Commission 
does not believe that reasonable deadlines or minimum review periods 
are inconsistent with the general principle of timely administration of 
the application process. An exchange could also establish different 
deadlines for a dual-track application process. The Commission believed 
that the individual exchanges themselves are in the best position to 
evaluate how quickly each can administer the application process, in 
order best to accommodate the needs of market participants. In addition 
to review of an exchange's timeline when it submits its rules for its 
application process under part 40, the Commission would review the 
exchange's timeliness in the context of a rule enforcement review.
Comments Received
    One commenter expressed the view that it does not support different 
application processes for novel and non-novel hedges.\1054\
---------------------------------------------------------------------------

    \1054\ CL-IECAssn-60949 at 14.
---------------------------------------------------------------------------

    Two commenters expressed the view that the 2016 Supplemental 
Position Limits Proposal should be revised to eliminate, to the maximum 
extent possible, the ``overly prescriptive rules'' governing what 
exchanges must collect from non-enumerated bona fide hedging position 
applicants and instead give the exchanges more discretion and 
flexibility to fashion non-enumerated bona fide hedging position rules 
that are more closely aligned with current hedge approval 
processes.\1055\ Conversely, another commenter recommended that the 
Commission require a standardized and harmonized process across all 
participating exchanges for non-enumerated bona fide hedging position 
applications.\1056\
---------------------------------------------------------------------------

    \1055\ CL-ETP-60915 at 1; CL-MGEX-60936 at 5-6.
    \1056\ CL-EDF-60944 at 1-3.
---------------------------------------------------------------------------

    One commenter recommended that the Commission, to the greatest 
extent possible, allow the exchanges to administer exemptions for non-
enumerated bona fide hedging positions, enumerated bona fide hedging 
positions, and spread positions in the same manner as they have been to 
date.\1057\
---------------------------------------------------------------------------

    \1057\ CL-NCGA-NGSA-60919 at 9.
---------------------------------------------------------------------------

    Several commenters recommended that the Commission not require 
exchanges to demand and collect three years of cash market information 
in order to process an entity's application for a non-enumerated bona 
fide hedging exemption. According to the commenters, it would be 
burdensome on both the applicant and the exchange, as well as 
unnecessary and not authorized by the CEA.\1058\ As an alternative, 
commenters cited practices currently authorized for, and practiced by, 
the exchanges, and that typically only require applicants to provide 
such data from the preceding year, though the market participant 
requesting the hedge exemption must stand ready to provide further 
supporting documentation for the requested exemption on request.\1059\
---------------------------------------------------------------------------

    \1058\ CL-NCGA-NGSA-60919 at 10; CL-EEI-EPSA-60925 at 4; CL-ICE-
60929 at 8; 16, CL-COPE-60932 at 9; CL-CCI-60935 at 7; CL-COPE-60932 
at 9; CL-FIA-60937 at 3; 12, CL-AGA-60943 at 6; CL-AMG-60946 at 3-4; 
CL-Working Group-60947 at 11; CL-NCGA-NGSA-60919 at 10; CL-CCI-60935 
at 7; CL-CME-60926 at 9; CL-FIA-60937 at 3, 12; CL-Working Group-
60947 at 11 (footnotes omitted); and CL-ICE-60929 at 8, 16 (noting 
that in many cases exchanges already have access to this data, or 
can easily obtain it).
    \1059\ CL-NCGA-NGSA-60919 at 10; CL-CCI-60935 at 7; CL-CME-60926 
at 9; CL-Working Group-60947 at 11 (footnotes omitted); CL-FIA-60937 
at 3, 12; CL-Working Group-60947 at 11; CL-NCGA-NGSA-60919 at 10; 
CL-CCI-60935 at 7; CL-CME-60926 at 9; CL-AGA-60943 at 6; and CL-AMG-
60946 at 3-4 (recommending that exchanges have authority to, but not 
be required to, collect up to 3 years of data).
---------------------------------------------------------------------------

    One commenter expressed the view that exchanges do not need the 
``detailed information'' that the 2016 Supplemental Position Limits 
Proposal requires of market participants seeking an exchange-
administered hedge exemption. The commenter believes that requiring an 
exemption applicant to perform its own legal and economic analysis 
would be cost prohibitive and impractical. Further, the commenter 
asserted that it is unclear whether an exchange could still grant an 
exemption even if it disagrees with an applicant's analysis.\1060\
---------------------------------------------------------------------------

    \1060\ CL-CME-60926 at 9. See also CL-AMG-60946 at 4 (requesting 
a clarification that that this demonstration (of how the position 
meets the definition of a bona fide hedging position does not 
require submission of legal opinion from counsel which would be 
``unduly burdensome'' for market participants).
---------------------------------------------------------------------------

    Some commenters requested clarification regarding the proposed 
Sec.  150.9(a)(3) requirement with respect to

[[Page 96822]]

the compilation of gross positions for every commodity derivative 
contact that the applicant holds, and whether the proposed regulations 
are intended to apply to an applicant's maximum size of all gross 
positions for each and every commodity derivative contract the 
applicant holds (as opposed to the maximum gross positions in the 
commodity derivative contract(s) for which the exemption is 
sought).\1061\ In addition, one commenter suggested that ``the 
Commission should clarify that an application for a non-enumerated 
hedge or spread exemption only must include derivative positions 
related to the requested exemption.'' \1062\
---------------------------------------------------------------------------

    \1061\ CL-CCI-60935 at 6-7; and (CL-Working Group-60947 at 10).
    \1062\ CL-FIA-60937 at 4, 13.
---------------------------------------------------------------------------

    One commenter expressed the view that it is concerned regarding how 
exchanges should coordinate the granting of exemptions with respect to 
contracts on the same underlying commodities that trade on different 
exchanges, and requests guidance from the Commission on that 
matter.\1063\
---------------------------------------------------------------------------

    \1063\ CL-ISDA-60931 at 6-7.
---------------------------------------------------------------------------

    In connection with proposed Sec.  150.9(a)(4), several commenters 
expressed the view that the Commission should allow exchanges to 
recognize an enumerated or non-enumerated bona fide hedging position 
exemption retroactively in circumstances where market participants need 
to exceed limits to address a sudden and unforeseen hedging need.\1064\
---------------------------------------------------------------------------

    \1064\ See, e.g., CL-NCGA-NGSA-60919 at 10-11; CL-EEI-EPSA-60925 
at 4; CL-ICE-60929 at 11; CL-ISDA-60931 at 13; CL-FIA-60937 at 13; 
CL-Working Group-60947 at 13-14; and CL-CME-60926 at 12.
---------------------------------------------------------------------------

Commission Reproposal
    The Commission has determined to repropose the rule, largely as 
originally proposed, except that the Commission has revised the 
regulatory text to: (i) Clarify what the statement must address under 
Sec.  150.9(a)(3)(iii) and 150.9(a)(3)(iv); and (ii) require only one 
year of history rather than three years in Sec.  150.9(a)(3)(iv), each 
as described further below.
    Regarding comments that the Commission should not have different 
application processes for novel vs. non-novel products, (pursuant to 
proposed Sec.  150.9(a)(2)) the Commission is clarifying that exchanges 
are authorized but not required to have a different application process 
for novel and non-novel hedge applications. Further, Sec.  150.9 does 
not prevent industry from working together to adopt a universal 
application for novel and non-novel hedges.
    Regarding comments on current exchange processes for administering 
exemptions, and comments regarding the information required in the 
application process, reproposed Sec.  150.9 would require that 
exchanges collect a minimum amount of information, and exchanges would 
have discretion to require additional information. That is, Sec.  150.9 
provides parameters for a basic application and processing process for 
the recognition of non-enumerated bona fide hedging positions; the 
parameters allow exchanges flexibility, while also facilitating 
Commission review. Also, the Commission reiterates that reproposed 
Sec.  150.9 addresses federal limits and not exchange exemption 
processes, such as those exchanges currently implement and oversee for 
any exchange-set limits. Such processes for exchange-set limits that 
are lower than the federal limit could differ as long as the exemption 
provided by the exchange is capped at the level of the applicable 
federal limit in Sec.  150.2.
    Regarding concerns that Sec.  150.9(a)(3)(ii), as proposed, 
required an application to include a legal opinion or analysis for 
exchange recognition of a position as a non-enumerated bona fide 
hedging position, the Commission clarifies that the regulation does not 
require applicants to obtain a legal opinion or analysis. Rather, under 
Sec.  150.9(a)(3), it is the exchange's duty to make a determination 
regarding whether a contract meets the application requirements; it may 
ask for additional information than the minimum required if it 
determines that further information is necessary to make its 
determination. To further clarify this point, the Commission is 
proposing the following change to Sec.  150.9(a)(3)(ii) to provide that 
the exchange require at a minimum ``information to demonstrate why the 
position satisfies the requirements of section 4a(c) of the Act and the 
general definition of bona fide hedging position in Sec.  150.1,'' 
rather than ``detailed information.'' The same change is also being 
proposed for Sec.  150.9(a)(3(iv) for the same reasons.
    Regarding interpreting Sec.  150.9(a)(3)(iii) as requiring the 
inclusion in a non-enumerated bona fide hedging position application of 
a statement regarding the maximum gross positions to be acquired by the 
applicant during the year after the application is submitted, the 
Commission clarifies that the provision requires only information 
related to the contract for which the application is submitted; 
consequently, the Commission is reproposing Sec.  150.9(a)(3)(iii) to 
require a ``statement concerning the maximum size of all gross 
positions in derivative contracts for which the application is 
submitted.'' The Commission further clarifies that the statement should 
be based on a good faith estimate.
    In addition, the Commission notes that the minimum information to 
be required by the exchange under Sec.  150.9(a)(3)(iii), would be for 
the gross position for the following year, since the applicant will 
need to reapply each year for exchange recognition of its position as a 
bona fide hedging position.
    With respect to the condition that exchanges require applicants to 
provide three years of data supporting their application, the 
Commission is reproposing Sec.  150.9(a)(3)(iv) to require only one 
year of data.
    Regarding commenter concerns about whether or how exchanges should 
coordinate in granting exemptions consistently across exchanges, the 
reproposed rules would allow each exchange to use their own expertise 
to decide which positions should be recognized as bona fide hedging 
positions and what limit levels to impose for their venue. The 
Commission notes that it serves in an oversight role to monitor 
exchange determinations and position limits across exchanges. The 
Reproposal does not require exchanges to coordinate with respect to 
making such determinations; however, neither does reproposed Sec.  
150.9 prohibit coordination.
    Regarding application of the five-day rule to non-enumerated bona 
fide hedging positions, as the Commission discussed above, the 
Reproposal does not apply the prudential condition of the five-day rule 
to non-enumerated bona fide hedging positions. As discussed in 
connection with the definition of bona fide hedging position and in the 
context of Sec.  150.5(a),\1065\ the five-day rule would only apply to 
certain positions (pass-through swap offsets, anticipatory and cross-
commodity hedges).\1066\ However, in regards to exchange processes 
under Sec.  150.9 (and Sec.  150.10, and Sec.  150.11), the Commission 
is allowing exchanges to waive the five-day rule on a case-by-case 
basis.
---------------------------------------------------------------------------

    \1065\ See 2016 Position Limits Supplemental Proposal for the 
discussion regarding the five-day rule in connection with the 
definition of bona fide hedging position and in the discussion of 
Sec.  150.5 (Exchange-set speculative position limits).
    \1066\ See Sec.  150.1 definition of bona fide hedging position 
sections (2)(ii)(A), (3)(iii), (4), and (5) (Other enumerated 
hedging position). As noted above, to provide greater clarity as to 
which bona fide hedge positions the five-day rule applies, the 
reproposed rules reorganize the definition.
---------------------------------------------------------------------------

    Regarding exchanges' authority to retroactively recognize positions 
as bona

[[Page 96823]]

fide hedging positions, reproposed Sec.  150.9(a)(5) would require an 
applicant to receive exchange recognition in advance of the date that a 
position would otherwise be in excess of a position limit. Thus, the 
Reproposal would not permit retroactive recognition of a non-enumerated 
bona fide hedging position. The Commission preliminarily does not 
believe that it should authorize an exchange to recognize a non-
enumerated bona fide hedging position retroactively, as this may 
diminish the ability of the Commission to review timely such an 
exchange determination, potentially diminishing the utility of position 
limits in preventing unwarranted price fluctuations.\1067\ By way of 
contrast with regard to enumerated bona fide hedging positions, the 
Commission expects that exchanges will carefully consider whether 
allowing retroactive recognition of an enumerated bona fide hedging 
exemption, under reproposed Sec.  150.5, would, as noted by one 
commenter, diminish the overall integrity of the process. And the 
exchanges should also consider whether to adopt in those rules the two 
safeguards noted: (i) Requiring market participants making use of the 
retroactive application to demonstrate that the applied-for hedge was 
required to address a sudden and unforeseen hedging need; and (ii) 
providing that if the emergency hedge recognition was not granted, 
exchange rules would continue to require the applicant to unwind its 
position in an orderly manner and also would deem the applicant to have 
been in violation for any period in which its position exceeded the 
applicable limits.\1068\
---------------------------------------------------------------------------

    \1067\ Current Sec.  1.47 requires a filing in advance for 
Commission recognition of a position as a non-enumerated bona fide 
hedging position.
    \1068\ See 2016 Position Limits Supplemental Proposal discussion 
regarding proposed Sec.  150.5.
---------------------------------------------------------------------------

c. Proposed 150.9(a)(5) and Commission Reproposal
    Proposed Sec.  150.9(a)(5) made it clear that the position will be 
deemed to be recognized as a non-enumerated bona fide hedging position 
when an exchange recognizes it; proposed Sec.  150.9(d) provided the 
process through which the exchange's recognition would be subject to 
review by the Commission.\1069\ As noted above, DCMs currently exercise 
discretion with regard to exchange-set limits to approve exemptions 
meeting the general definition of bona fide hedging position. The 
Commission works cooperatively with DCMs to enforce compliance with 
exchange-set speculative position limits. In the 2016 Position Limits 
Supplemental Proposal, the Commission believed that a continuation of 
this cooperative process, and an extension to the proposed federal 
position limits, would be consistent with the policy objectives in CEA 
section 4a(3)(B).\1070\ The Commission is reproposing Sec.  
150.9(a)(5), as originally proposed.
---------------------------------------------------------------------------

    \1069\ See 2016 Position Limits Supplemental Proposal, nn. 121-
123 and accompanying text; see also the 2016 Position Limits 
Supplemental Proposal discussion of proposed Sec.  150.9(d), review 
of applications by the Commission. Exchange recognition of a 
position as a non-enumerated bona fide hedging position would allow 
the market participant to exceed the federal position limit until 
such time that the Commission notified the market participant to the 
contrary, pursuant to the proposed review procedure that the 
exchange action was dismissed. That is, if a party were to hold 
positions pursuant to a non-enumerated bona fide hedging position 
recognition granted by the exchange, such positions would not be 
subject to federal position limits, unless or until the Commission 
were to determine that such non-enumerated bona fide hedging 
position recognition is inconsistent with the CEA or CFTC 
regulations thereunder. Under this framework, the Commission would 
continue to exercise its authority in this regard by reviewing an 
exchange's determination and verifying whether the facts and 
circumstances in respect of a derivative position satisfy the 
requirements of the Commission's general definition of bona fide 
hedging position in Sec.  150.1. If the Commission determines that 
the exchange-granted recognition is inconsistent with section 4a(c) 
of the Act and the Commission's general definition of bona fide 
hedging position in Sec.  150.1, a market participant would be 
required to reduce the derivative position or otherwise come into 
compliance with position limits within a commercially reasonable 
amount of time.
    \1070\ 7 U.S.C. 6a(3)(B).
---------------------------------------------------------------------------

d. Proposed Sec.  150.9(a)(6)
    Proposed Rule: Proposed Sec.  150.9(a)(6) required exchanges that 
elect to process non-enumerated bona fide hedging position applications 
to promulgate reporting rules for applicants who own, hold or control 
positions recognized as non-enumerated bona fide hedging positions. The 
Commission expected that the exchanges would promulgate enhanced 
reporting rules in order to obtain sufficient information to conduct an 
adequate surveillance program to detect and potentially deter 
excessively large positions that may disrupt the price discovery 
process. At a minimum, these rules should require applicants to report 
when an non-enumerated bona fide hedging position has been established, 
and to update and maintain the accuracy of such reports. These rules 
should also elicit information from applicants that will assist 
exchanges in complying with proposed Sec.  150.9(c) regarding exchange 
reports to the Commission.
    Comments Received: Several commenters did not support a Commission 
requirement for additional filings with respect to non-enumerated bona 
fide hedging positions to be held in the five day/spot month 
period.\1071\ Commenters also requested that the Commission remove the 
proposed requirement that an exchange must adopt enhanced reporting 
rules for market participants that rely on exchange recognitions of 
positions as non-enumerated bona fide hedging positions.\1072\ 
Generally, commenters suggested that any additional reporting 
requirements be kept simple, streamlined and minimally 
burdensome.\1073\ One commenter expressed the view that the Commission 
should clarify certain aspects relating to the mechanics and content of 
proposed reporting requirements for those seeking an exchange-
administered hedge exemption.\1074\
---------------------------------------------------------------------------

    \1071\ CL-IECAssn-60949 at 13; CL-NMPF-60956 at 2; CL-NCFC-60930 
at 4-5; CL-ICE-60929 at 22; CL-ICE-60929 at 22; and CL-FIA-60937 at 
18, 19.
    \1072\ See, e.g., CL-FIA-60937 at 15; CL-CMC-60950 at 12-13; CL-
CCI-60935 at 7-8; CL-NCGA-NGSA-60919 at 12-13; CL-MGEX-60936 at 6; 
CL-ISDA-60931 at 10; CL-NGFA-60941 at 4; CL-Working Group-60947 at 
12 (footnotes omitted); CL-AMG-60946 at 4-5; CL-CCI-60935 at 7-8; 
CL-AGA-60943 at 6; CL-CMC-60950 at 12-13; and CL-NCGA-NGSA-60919 at 
12-13 (expressing the view that, reporting of positions for non-
enumerated bona fide hedges should mirror the mechanism for 
reporting EBFHs recognized by exchanges that utilize the process 
where reports of such positions are made to the Commission with an 
identical copy to be filed with the applicable exchange(s). See also 
CL-MGEX-60936 at 5-6 (requesting that reporting and recordkeeping 
requirements be removed or at least reduced unless there is a 
demonstrated need for them and b) only exemptions granted in excess 
of federal limits should require reporting to the Commission.); and 
CL-AGA-60943 at 7 (commenting that ``because Exchanges may, at any 
time, request records of hedgers' cash market and derivative 
positions or other details and explanations concerning the 
commercial risks being hedged, any Exchange surveillance function 
can be met by exchange data inquiries, rather than by an affirmative 
reporting obligation by a commercial hedger.'').
    \1073\ CL-NFP-60942 at 6-8); and CL-FIA-60937 at 4, 15.
    \1074\ CL-CME-60926 at 10.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission has determined to amend and 
clarify the proposal as follows. First, the Commission clarifies that 
it does not require additional filings under Sec.  150.9(a)(6); rather, 
it is in the exchanges' discretion to determine whether there is a 
reporting requirement for a non-enumerated bona fide hedging position. 
Consequently, the Commission is amending the regulation text to clarify 
that exchanges are authorized to, rather than required to, determine 
whether to require enhanced reporting, providing only that exchanges 
that determine to process non-enumerated bona fide hedging position 
applications shall have rules, submitted to the Commission under part 
40, that require applicants ``to file reports pertaining to the use of

[[Page 96824]]

any such exemption that has been granted in the manner, form, and 
frequency, as determined by the designated contract market or swap 
execution facility.''
e. Proposed 150.9(a)(7)--Transparency to Market Participants
    Proposed Rule: Proposed Sec.  150.9(a)(7) required an exchange to 
publish on its Web site, no less frequently than quarterly, a 
description of each new type of derivative position that it recognizes 
as a non-enumerated bona fide hedge. The Commission envisioned that 
each description would be an executive summary. The 2016 Position 
Limits Supplemental Proposal required that the description include a 
summary describing the type of derivative position and an explanation 
of why it qualifies as a non-enumerated bona fide hedging position. The 
Commission believed that the exchanges are in the best position when 
quickly crafting these descriptions to accommodate an applicant's 
desire for trading anonymity while promoting fair and open access for 
market participants to information regarding which positions might be 
recognized as non-enumerated bona fide hedging positions. The 
Commission proposed to spot check these summaries pursuant to proposed 
Sec.  150.9(e).
i. Comments Received
    Several commenters proposed that the Commission clarify or confirm 
that exchanges are not required to divulge confidential information 
(such as trade secrets, intellectual property, the market participant's 
identity or position) when providing the summary description of non-
enumerated bona fide hedge positions.\1075\ One commenter requested 
``that the Commission explicitly provide in Rule 150.9(a)(7) that the 
summaries must be published `in a manner that preserves the anonymity 
of the applicant' and provide additional guidance regarding the types 
of sensitive items that should be omitted from any summary, such as the 
size of the position(s) taken or to be taken by the applicant or the 
delivery point(s) or other information that might identify the 
applicant.'' \1076\ Another commenter expressed the view that an 
exchange should not be required to disclose its own internal analyses 
when explaining its decision to grant an exemption for a derivative 
position recognized as a non-enumerated bona fide hedging 
position.\1077\
---------------------------------------------------------------------------

    \1075\ See, e.g., CL-ICE-60929 at 23; CL-NCGA-NGSA-60919 at 14 
(footnote omitted); CL-DFA-60927 at 6; CL-NCFC-60930 at 5; CL-IATP-
60951 at 6; CL-EEI-EPSA-60925 at 9; CL-COPE-60932 at 9; CL-DFA-60927 
at 6; and CL-NCFC-60930 at 5.
    \1076\ CL-NCGA-NGSA-60919 at 14 (footnote omitted).
    \1077\ CL-CME-60926 at 11.
---------------------------------------------------------------------------

    Commission Reproposal: While the Commission is reproposing the 
rule, as originally proposed, it clarifies that that any data published 
pursuant to Sec.  150.9(a)(7) should not disclose the identity of, or 
confidential information about, the applicant. Rather, any published 
summaries are expected to be general (generic facts and circumstances) 
and not include detail that would disclose trade secrets or 
intellectual property.
f. Proposed Sec.  150.9(a)(8) and Commission Reproposal
    Under proposed Sec.  150.9(a)(8), an exchange could elect to 
request the Commission review a non-enumerated bona fide hedging 
position application that raises novel or complex issues using the 
process set forth in proposed Sec.  150.9(d).\1078\ If an exchange 
makes a request pursuant to proposed Sec.  150.9(a)(8), the Commission, 
as would be the case for an exchange, would not be bound by a time 
limitation. This is because the Commission proposed only that non-
enumerated bona fide hedging position applications be processed in a 
timely manner.\1079\ Essentially, this proposed provision largely 
preserved the Commission's review process under current Sec.  
1.47,\1080\ except that a market participant first seeks recognition of 
a non-enumerated bona fide hedging position from an exchange.
---------------------------------------------------------------------------

    \1078\ Under proposed Sec.  150.9(a)(8), if the exchange 
determines to request that the Commission consider the application, 
the exchange must, under proposed Sec.  150.9(a)(4)(v)(C), notify an 
applicant in a timely manner that the exchange has requested that 
the Commission review the application. This provision provides the 
exchanges with the ability to request Commission review early in the 
review process, rather than requiring the exchanges to process the 
request, make a determination and only then begin the process of 
Commission review provided for under proposed Sec.  150.9(d). The 
Commission noted that although most of its reviews would occur after 
the exchange makes its determination, the Commission could, as 
provided for in proposed Sec.  150.9(d)(1), initiate its review, in 
its discretion, at any time.
    \1079\ Novel facts and circumstances may present particularly 
complex issues that could benefit from extended consideration, given 
the Commission's current resource constraints.
    \1080\ 17 CFR 1.47.
---------------------------------------------------------------------------

    The Commission is reproposing Sec.  150.9(a)(8), as originally 
proposed.
4. Proposed Sec.  150.9(b)--Recordkeeping Requirements
    Proposed Rule: Proposed Sec.  150.9(b) outlined the recordkeeping 
requirements for exchanges that elected to process non-enumerated bona 
fide hedging position applications under proposed Sec.  150.9(a).\1081\ 
The proposal required that exchanges maintain complete books and 
records of all activities relating to the processing and disposition of 
applications in a manner consistent with the Commission's existing 
general regulations regarding recordkeeping.\1082\ In consideration of 
the fact that DCMs currently recognize non-enumerated bona fide hedging 
positions which must be updated annually and that the proposal would 
require annual updates, the Commission proposed that exchanges keep 
books and records until the termination, maturity, or expiration date 
of any recognition of a non-enumerated bona fide hedging position and 
for a period of five years after such date. The Commission stated that 
five years should provide an adequate time period for Commission 
reviews, whether that be a review of an exchange's rule enforcement or 
a review of a market participant's representations.
---------------------------------------------------------------------------

    \1081\ Id. Proposed Sec.  150.10(b) and Sec.  150.11(b) contain 
substantially similar recordkeeping requirements regarding spread 
exemptions and anticipatory hedge exemptions.
    \1082\ Requirements regarding the keeping and inspection of all 
books and records required to be kept by the Act or the Commission's 
regulations are found at Sec.  1.31, 17 CFR 1.31. DCMs and SEFs are 
already required to maintain records of their business activities in 
accordance with the requirements of Sec.  1.31 and 17 CFR 38.951. 
See 2016 Supplemental Position Limits Proposal, 81 FR at 38474 
(providing a more comprehensive discussion of proposed Sec.  
150.9(b)).
---------------------------------------------------------------------------

    Exchanges would be required to store and produce records pursuant 
to current Sec.  1.31 of the Commission's regulations, and would be 
subject to requests for information pursuant to other applicable 
Commission regulations including, for example, Sec.  38.5. Consistent 
with current Sec.  1.31, the Commission clarified its expectation that 
the records would be readily accessible until the termination, 
maturity, or expiration date of the recognition and during the first 
two years of the subsequent five year period. In addition, the 
Commission did not intend in proposed Sec.  150.9(b)(1) to create any 
new obligation for an exchange to record conversations with applicants, 
which includes their representatives; however, the Commission expected 
that an exchange would preserve any written or electronic notes of 
verbal interactions with such parties.
    Finally, the Commission emphasized that parties who avail 
themselves of exemptions under Sec.  150.3(a), as proposed in the 2016 
Supplemental Position Limits Proposal, would be subject to the 
recordkeeping requirements of Sec.  150.3(g), as well as

[[Page 96825]]

requests from the Commission for additional information under Sec.  
150.3(h), as each was proposed in the December 2013 Position Limits 
Proposal. The Commission noted that it might request additional 
information, for example, in connection with review of an 
application.\1083\
---------------------------------------------------------------------------

    \1083\ The Commission pointed out that in the December 2013 
Position Limits Proposal, persons claiming exemptions under proposed 
Sec.  150.3 must still ``maintain complete books and records 
concerning all details of their related cash, forward, futures, 
options and swap positions and transactions. 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 17 CFR 150.3(b).'' 78 FR 
75741 (footnote omitted).
---------------------------------------------------------------------------

    Commission Reproposal: The Commission did not receive comments on 
Sec.  150.9(b) (nor on Sec.  150.10(b) or Sec.  150.11(b)), and is 
reproposing Sec.  150.9(b), as originally proposed, for the reasons 
explained in the 2016 Supplemental Position Limits Proposal.\1084\
---------------------------------------------------------------------------

    \1084\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38474.
---------------------------------------------------------------------------

5. Proposed Sec.  150.9(c)--Exchange Reporting
    Proposed Rule: Proposed Sec.  150.9(c)(1) required an exchange that 
elected to process non-enumerated bona fide hedge applications to 
submit a weekly report to the Commission.\1085\ The proposed report 
would provide information regarding each commodity derivative position 
recognized by the exchange as a non-enumerated bona fide hedging 
position during the course of the week. Information provided in the 
report would include the identity of the applicant seeking such an 
exemption, the maximum size of the derivative position that was 
recognized by the exchange as a non-enumerated bona fide hedging 
position,\1086\ and, to the extent that the exchange determined to 
limit the size of such bona fide hedging position under the exchange's 
own speculative position limits program, the size of any limit 
established by the exchange.
---------------------------------------------------------------------------

    \1085\ Id.
    \1086\ The Commission noted that an exchange could determine to 
recognize all, or a portion, of the commodity derivative position in 
respect of which an application for recognition had been submitted, 
as a non-enumerated bona fide hedging position, provided that such 
determination was made in accordance with the requirements of 
proposed Sec.  150.9 and was consistent with the Act and the 
Commission's regulations. Id.
---------------------------------------------------------------------------

    The Commission envisioned that the proposed report would specify 
the maximum size and/or size limitations by contract month and/or type 
of limit (e.g., spot month, single month, or all-months-combined), as 
applicable.\1087\ The proposed report would also provide information 
regarding any revocation of, or modification to the terms and 
conditions of, a prior determination by the exchange to recognize a 
commodity derivative position as a non-enumerated bona fide hedge. In 
addition, the report would include any summary of a type of recognized 
non-enumerated bona fide hedge that was, during the course of the week, 
published or revised on the exchange's Web site pursuant to proposed 
Sec.  150.9(a)(7).
---------------------------------------------------------------------------

    \1087\ Under the proposal, an exchange could determine to 
recognize all, or a portion, of the commodity derivative position in 
respect of which an application for recognition has been submitted, 
as an non-enumerated bona fide hedge, for different contract months 
or different types of limits (e.g., a separate limit level for the 
spot month). See 2016 Supplemental Position Limits Proposal, 81 FR 
at 38474.
---------------------------------------------------------------------------

    The Commission noted that the proposed weekly report would support 
its surveillance program by facilitating the tracking of non-enumerated 
bona fide hedges recognized by exchanges,\1088\ keeping the Commission 
informed of the manner in which an exchange was administering its 
procedures for recognizing such positions. For example, the report 
would make available to the Commission, on a regular basis, the 
summaries of types of recognized non-enumerated bona fide hedges that 
an exchange posts to its Web site pursuant to proposed Sec.  
150.9(a)(7). This would facilitate any review by the Commission of such 
summaries, pursuant to proposed Sec.  150.9(e), and would help to 
ensure, if the Commission determines that revisions to a summary are 
necessary, that such revisions were carried out in a timely manner by 
the exchange.
---------------------------------------------------------------------------

    \1088\ The Commission stated that the exchange's assignment of a 
unique identifier to each of the non-enumerated bona fide hedge 
applications that the exchange received, and, separately, the 
exchange's assignment of a unique identifier to each type of 
commodity derivative position that the exchange recognized as a non-
enumerated bona fide hedge, would assist the Commission's tracking 
process. Accordingly, the Commission suggested that, as a ``best 
practice,'' the exchange's procedures for processing non-enumerated 
bona fide hedge applications contemplate the assignment of such 
unique identifiers. The Commission noted that under proposed Sec.  
150.9(c)(1)(i), an exchange that assigned such unique identifiers 
would be required to include the identifiers in the exchange's 
weekly report to the Commission.
---------------------------------------------------------------------------

    The Commission noted that in certain instances, information 
included in the proposed weekly report could prompt the Commission to 
request records required to be maintained by an exchange pursuant to 
proposed Sec.  150.9(b).\1089\ The 2016 Supplemental Position Limit 
Proposal clarified that it was the Commission's expectation that the 
summary would focus on the facts and circumstances upon which an 
exchange based its determination to recognize a commodity derivative 
position as a non-enumerated bona fide hedging position, or to revoke 
or modify such recognition. The Commission also noted that it might 
decide, in light of the information provided in the summary, or any 
other information included in the proposed weekly report regarding the 
position, that it should request the exchange's complete record of the 
application for recognition of the position as an non-enumerated bona 
fide hedge--in order to determine, for example, whether the application 
presents novel or complex issues that merit additional analysis 
pursuant to proposed Sec.  150.9(d)(2), or to evaluate whether the 
disposition of the application by the exchange was consistent with 
section 4a(c) of the Act and the general definition of bona fide 
hedging position in Sec.  150.1.
---------------------------------------------------------------------------

    \1089\ For example, as proposed, for each derivative position 
recognized by the exchange as a non-enumerated bona fide hedge, or 
any revocation or modification of such recognition, the report would 
include a concise summary of the applicant's activity in the cash 
markets for the commodity underlying the position.
---------------------------------------------------------------------------

    In addition, proposed 150.9(c)(2) required an exchange to submit to 
the Commission any report made to the exchange by an applicant, 
pursuant to proposed Sec.  150.9(a)(6), that notified the exchange that 
the applicant owned or controlled a commodity derivative position that 
the exchange had recognized as an non-enumerated bona fide hedging 
position, at least monthly,\1090\ unless otherwise instructed by the 
Commission.\1091\ The exchange's submission of these reports would 
notify the Commission that an applicant had taken a commodity 
derivative position recognized by the exchange as a non-enumerated bona 
fide hedging position, and would also show the applicant's offsetting 
positions in the cash markets. Requiring an exchange to submit these 
reports to the Commission would therefore support

[[Page 96826]]

the Commission's surveillance program, by facilitating the tracking of 
non-enumerated bona fide hedging positions recognized by the exchange, 
and helping the Commission to ensure that an applicant's activities 
conform to the terms of recognition that the exchange had established.
---------------------------------------------------------------------------

    \1090\ As proposed, the timeframe within which an applicant 
would be required to report to the exchange would be established by 
the exchange in its rules, as appropriate and in accordance with 
proposed Sec.  150.9(a)(6). The Commission also pointed out that an 
exchange could decide to require such reports from its participants 
more frequently than monthly.
    \1091\ As proposed, under Sec.  150.9(f)(1)(ii), the Commission 
would delegate to the Director of the Commission's Division of 
Market Oversight, or such other employee or employees as the 
Director designated from time to time, the authority to provide 
instructions regarding the submission to the Commission of 
information required to be reported by an exchange pursuant to 
proposed Sec.  150.9(c). See 2016 Supplemental Position Limits 
Proposal, 81 FR at 38475.
---------------------------------------------------------------------------

    Proposed Sec.  150.9(c)(3)(i) and (ii) would require an exchange, 
unless instructed otherwise by the Commission, to submit weekly reports 
under proposed Sec.  150.9(c)(1), and applicant reports under proposed 
Sec.  150.9(c)(2). Proposed Sec.  150.9(c)(3)(i) and (ii) contemplated 
that, in order to facilitate the processing of such reports, and the 
analysis of the information contained therein, the Commission would 
establish reporting and transmission standards, and that it may require 
reports to be submitted to the Commission using an electronic data 
format, coding structure and electronic data transmission procedures 
approved in writing by the Commission, as specified on the Forms and 
Submissions page at www.cftc.gov.\1092\ Proposed Sec.  150.9(c)(3)(iii) 
would require such reports to be submitted to the Commission no later 
than 9:00 a.m. Eastern time on the third business day following the 
report date, unless the exchange was otherwise instructed by the 
Commission.\1093\
---------------------------------------------------------------------------

    \1092\ The delegation proposed in Sec.  150.9(f)(1)(ii) would 
also, in connection with proposed Sec.  150.9(c)(3), delegate to the 
Director of the Commission's Division of Market Oversight, or such 
other employee or employees as the Director designated from time to 
time, the authority: (i) To provide instructions for the proposed 
submissions; and (ii) to specify on the Forms and Submissions page 
at www.cftc.gov the manner for submitting to the Commission 
information required to be reported by an exchange pursuant to 
proposed Sec.  150.9(c), and to determine the format, coding 
structure and electronic data transmission procedures for submitting 
such information. See 2016 Supplemental Position Limits Proposal, 81 
FR at 38475.
    \1093\ For purposes of proposed Sec.  150.9(c)(2), the timeframe 
set forth in proposed Sec.  150.9(c)(3)(iii) would be calculated 
from the date of a exchange's submission to the Commission, and not 
from the date of an applicant's report to the exchange.
---------------------------------------------------------------------------

    Comments Received: Several commenters expressed views against the 
Sec.  150.9(c) reporting requirements, or requested that the Commission 
reduce or alter the reporting requirements for exchanges.\1094\ One 
commenter requested that the Commission clarify that proposed weekly 
reporting requirements for exchanges only require reporting of the 
``most essential information'' regarding exchange-administered hedge 
exemptions.\1095\ As an alternative to the entire proposed exchange-
administered exemption reporting requirements, one commenter proposed 
that exchanges provide a weekly report to the Commission summarizing 
newly approved hedge exemptions.\1096\
---------------------------------------------------------------------------

    \1094\ CL-AMG-60946 at 3; CL-CME-60926 at 11; CL-ICE-60929 at 8-
9 and 16; and CL-CMC-60950 at 13-14.
    \1095\ CL-CME-60926 at 11.
    \1096\ CL-ICE-60929 at 8-9 and 16.
---------------------------------------------------------------------------

    Commission Reproposal: The Commission is reproposing the rule, 
largely as originally proposed, except that the Commission has revised 
Sec. Sec.  150.9(c)(1)(i) and 150.9(c)(2) for purposes of 
clarification. In regards to Sec.  150.9(c)(1)(i), the Commission is 
clarifying that the reports required under (c)(1)(i) are those for each 
commodity derivatives position that had been recognized that week and 
for any revocation or modification of a previously granted recognition. 
As to Sec.  150.9(c)(2), in response to commenters, the Commission 
clarifies that exchanges are authorized under Sec.  150.9(c)(2), but 
are not required, to determine whether to incorporate additional 
reporting requirements in connection with its recognition of non-
enumerated bona fide hedging positions. If an exchange does determine 
to require additional reporting, Sec.  150.9(c)(2) requires that the 
exchange submit reports no less frequently than monthly.\1097\ In 
addition, the Commission believes the weekly reporting requires only 
the most essential information regarding exchange-administered 
exemptions.
---------------------------------------------------------------------------

    \1097\ As reproposed, Sec.  150.9(c)(2) also provides that 
instead of submitting any such reports monthly, the Commission could 
otherwise instruct the exchange otherwise.
---------------------------------------------------------------------------

6. Proposed Sec.  150.9(d)--Review of Applications by the Commission
    Proposed Rule: Proposed Sec.  150.9(d) provided for Commission 
review of applications to ensure that the processes administered by the 
exchange, as well as the results of such processes, were consistent 
with the requirements of section 4a(c) of the Act and the Commission's 
regulations thereunder.\1098\ The Commission proposed to review records 
required to be maintained by an exchange pursuant to proposed Sec.  
150.9(b); however, under the proposal the Commission could request 
additional information under proposed Sec.  150.9(d)(1)(ii) if, for 
example, the Commission found additional information was needed for its 
own review.
---------------------------------------------------------------------------

    \1098\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38475-76. As the proposal noted, the Commission agreed with the 
comment of one participant at the June 19, 2014 Roundtable on 
Position Limits, who said that if the Commission were to permit 
exchanges to administer a process for non-enumerated bona fide 
hedging positions, the Commission should continue to do ``a certain 
amount of de novo analysis and review.'' Id.
    The Commission noted that, under the proposal, the SRO's 
recognition was tentative, because the Commission would reserve the 
power to review the recognition, subject to the reasonably fixed 
statutory standards in CEA section 4a(c)(2) (directing the CFTC to 
define the term bona fide hedging position) that are incorporated 
into the Commission's proposed general definition of bona fide 
hedging position in Sec.  150.1. The SRO's recognition would also be 
constrained by the SRO's rules, which would be subject to CFTC 
review under the proposal. The Commission pointed out that SROs are 
parties subject to Commission authority, their rules are subject to 
Commission review and their actions are subject to Commission de 
novo review under the proposal--SRO rules and actions may be changed 
by the Commission at any time. In addition, the Commission noted 
that under the proposal, the exchange was required to make its 
determination consistent with both CEA section 4a(c) and the 
Commission's general definition of bona fide hedging position in 
Sec.  150.1. Further, the Commission noted that CEA section 4a(c)(1) 
requires a position to be shown to be bona fide as defined by the 
Commission.
---------------------------------------------------------------------------

    Under the proposal, the Commission could decide to review a pending 
application prior to disposition by an exchange, but anticipated that 
it would most likely wait to review applications until after some 
action has already been taken by an exchange. As proposed, Sec.  
150.9(d)(2) and (3) would require the Commission to notify the exchange 
and applicable applicant that they had 10 business days from the date 
of the request to provide any supplemental information. The Commission 
noted that this approach provided the exchanges and the particular 
market participant with an opportunity to respond to any issues raised 
by the Commission.
    During the period of any Commission review of an application, an 
applicant could continue to rely upon any recognition previously 
granted by the exchange. If the Commission determined that remediation 
was necessary, the Commission would provide for a commercially 
reasonable amount of time for the market participant to comply with 
limits after announcement of the Commission's decision under proposed 
Sec.  150.9(d)(4).\1099\ In determining a time, the Commission could 
consider factors such as current market conditions and the protection 
of price discovery in the market. Proposed Sec.  150.10(d) and Sec.  
150.11(d) contain substantially similar requirements regarding review 
of applications by the Commission of

[[Page 96827]]

spread exemptions and anticipatory hedge exemptions.
---------------------------------------------------------------------------

    \1099\ The Commission noted a commercially reasonable time 
period as necessary to exit the market in an orderly manner, 
generally, ``would be less than one business day.'' 2016 
Supplemental Position Limits Proposal, 81 FR at 38476, n. 168 
(citing the December 2013 Position Limits Proposal, 78 FR at 75713).
---------------------------------------------------------------------------

    Comments Received: Several commenters were concerned about the 
Commission review process and/or provided suggestions on how the 
Commission should modify or limit its authority to review exchange-
granted exemptions.\1100\
---------------------------------------------------------------------------

    \1100\ CL-CMC-60950 at 14; CL-NFP-60942 at 6-8; CL-DFA-60927 at 
1-2; CL-ICE-60929 at 5-8; CL-ISDA-60931 at 6-7; CL-AGA-60943 at 7; 
CL-FIA-60937 at 2, 6, 7; CL-COPE-60932 at 7; CL-COPE-60932 at 7-8; 
CL-EEI-EPSA-60925 at 10-11; CL-RER2-60962 at 1; CL-Public Citizen-
60940 at 2; and CL-MGEX-60936 at 7. See also CL-FIA-60937 at 7, 8; 
CL-COPE-60932 at 7; CL-NGFA-60941 at 3; CL-ICE-60929 at 18; CL-API-
60939 at 4; CL-EEI-EPSA-60925 at 10-11; CL-IECAssn-60949 at 9-10 
(recommending for an appeals process and/or notice and public 
comment feature for the Commission review process); CL-FIA-60937 at 
7, 8 (recommending that market participants have continued reliance 
on any overturned exemption for one year after the overturn or 
modification); CL-NGFA-60941 at 3 (suggesting that a vote by the 
full Commission should be required on the ``weighty decision'' to 
invalidate a hedge exemption after thorough analysis and careful 
consideration); and CL-MGEX-60936 at 7 (expressing concerns that 
there is legal uncertainty and lack of clarity in how the non-
enumerated bona fide hedging position process will work).
---------------------------------------------------------------------------

    One commenter requested that the Commission define in more detail, 
in the final rule, how this review process will work.\1101\ Another 
commenter recommended that exemptions granted by an exchange be given 
deference by the Commission upon subsequent review, with reversal 
occurring only when there is evidence of negligence or abuse, or when 
it may lead to market disruption.\1102\ Four commenters suggested that 
the Commission limit the time available for it to review a non-
enumerated bona fide hedging position exemption granted by an exchange 
in an effort to provide regulatory certainty to entities relying on 
that exemption.\1103\ Fourteen commenters expressed the view that a 
``commercially reasonable'' amount of time for an entity to unwind its 
position should not be limited to one business day or less. Instead, 
these commenters advocated that the Commission or the exchange should 
determine how long an entity has to unwind a position given the facts 
and circumstances of each situation.\1104\ Three commenters expressed 
the view that when the Commission reviews and affirms a non-enumerated 
bona fide hedging position determination, such a determination should 
result in a new enumerated bona fide hedging position.\1105\
---------------------------------------------------------------------------

    \1101\ CL-AFIA-60955 at 2.
    \1102\ CL-MGEX-60936 at 7-8.
    \1103\ CL-FIA-60937 at 3; CL-ICE-60929 at 18; CL-API-60939 at 4; 
and CL-API-60939 at 1. See also CL-API-60939 at 1 (requesting that, 
if the Commission conducts a review of an exchange granted non-
enumerated bona fide hedging position exemption, then the Commission 
should limit the time period to 180 days to issue a decision to 
overturn an exemption); CL-AGA-60943 at 8 (suggesting that the 
Commission ``should adopt a rule that follows its current approach 
under CFTC Rule 1.47); CL-IECAssn-60949 at 11-12 (recommending a 
reasonable time period to unwind positions for which an exemption 
has been overturned would help to allow the market to operate 
smoothly); and CL-FIA-60937 at 7 (noting that the Commission should 
``require an exchange to post a general description of a non-
enumerated hedge, spread, or anticipatory hedge exemption on its Web 
site within 30 days of granting the exemption,'' and thereafter, 
``the Commission should have 180 days to decide whether to review 
and overturn or modify an exemption posted on an exchange's Web 
site.'').
    \1104\ See, e.g., CL-API-60939 at 4; CL-FIA-60937 at 3, 8; CL-
MGEX-60936 at 7-8; CL-ISDA-60931 at 7; CL-NGFA-60941 at 3; CL-NFP-
60942 at 8; CL-AGA-60943 at 2; CL-AGA-60943 at 7; CL-AMG-60946 at 5; 
CL-ICE-60929 at 18; CL-CMC-60950 at 11; CL-NCGA-NGSA-60919 at 13; 
CL-EEI-EPSA-60925 at 10; and CL-ISDA-60931 at 7. See also CL-FIA-
60937 at 3, 8 (recommending the Commission consider ``(1) the size 
of, and risks associated with, the participant's cash and related 
derivative positions; (2) the risks created by the need to reduce 
what will become an un-hedged cash market exposure; and (3) the 
availability of sufficient liquidity to enable the market 
participant to reduce the hedging and the underlying positions 
without incurring losses solely as a result of being forced to 
liquidate the hedge within a constrained timeframe.'').
    \1105\ CL-COPE-60932 at 7; CL-EEI-EPSA-60925 at 11; and CL-COPE-
60932 at 7.
---------------------------------------------------------------------------

    Some commenters opined that the Commission should instead 
explicitly require Commission review and approval of all hedge 
exemption requests received by an exchange.\1106\ These commenters 
believe that the Commission should always make the final decision 
regarding whether to grant a particular hedge exemption.
---------------------------------------------------------------------------

    \1106\ CL-Public Citizen-60940 at 2; and CL-RER2-60962 at 1.
---------------------------------------------------------------------------

    Commission Reproposal: After carefully considering the comments 
received, the Commission is reproposing Sec.  150.9(d), as originally 
proposed. The Commission believes the proposed de novo review of 
exchange-granted non-enumerated bona fide hedging position exemptions 
is adequate to maintain proper exchange oversight and to verify that 
such exemptions provide fair and open access by all market 
participants. Further, the Commission notes that it must maintain de 
novo review on a case-by-case basis; otherwise, as discussed above, the 
exchange exemption process may be considered an illegal delegation of 
Commission authority to exchanges.\1107\
---------------------------------------------------------------------------

    \1107\ See also 2016 Supplemental Position Limits Proposal, 81 
FR at38464-66 (discussing the Commission's authority to permit 
certain exchanges to recognize positions as bona fide hedging 
positions for purposes of federal limits, as well as the careful 
provisions proposed in Sec.  150.9 to do so within the limitations 
on its authority).
---------------------------------------------------------------------------

    Regarding the recommendation that the Commission limit its 
available time to review exchange granted exemptions, this limitation 
may appear inconsistent with case law regarding authorizations for 
self-regulatory organizations to make determinations, subject to de 
novo agency review.\1108\ Regarding whether the Commission would expose 
exchanges to undue regulatory penalties or uncertainty for exemptions 
the Commission overturns, the Commission declines to speculate on any 
actions that it may take, beyond the notice to the applicant. Regarding 
giving entities a ``commercially reasonable'' time for an entity to 
unwind their positions, the Commission has not proposed a fixed time 
period, but would consider the facts and circumstances of each 
situation.
---------------------------------------------------------------------------

    \1108\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38465, n. 83. The recommendation might also unduly constrain agency 
resources.
---------------------------------------------------------------------------

    In response to comments that the Commission should create a new 
enumerated hedge for any non-enumerated bona fide hedging position 
determination the Commission reviews and affirms, the Commission 
clarifies that under the de novo review standard, no deference is 
provided to a prior determination; rather, the Commission will review 
as if no decision has been previously made. This is the same as a 
``hearing de novo.'' \1109\ The Commission also notes that, as 
previously discussed, an exchange can petition under Sec.  13.2 for 
Commission recognition of a generic position as an enumerated bona fide 
hedging position, and that market participants have the flexibility of 
two processes for recognition of a position as an enumerated bona fide 
hedging position: (i) Request an exemptive, no-action or interpretative 
letter under Sec.  140.99; and/or (ii) petition under Sec.  13.2 for 
changes to Appendix B to part 150.
---------------------------------------------------------------------------

    \1109\ See Black's Law Dictionary 837 (10th ed. 2014) (defining 
``hearing de novo'' as ``[a] reviewing court's decision of a matter 
anew, giving no deference to a lower court's findings. A new hearing 
of a matter, conducted as if the original hearing had not taken 
place.'').
---------------------------------------------------------------------------

    The reproposed rule is confined to federal limits and does not 
interfere with existing exemption processes that exchanges currently 
implement and oversee with regard to exchange-set limits. Exchanges 
remain bound by the bona fide hedging position definition in this part 
for any recognition for purposes of federal limits. But, as noted 
above, in regards to reproposed Sec.  150.9(a), exchange processes for 
exchange-set limits that are lower than the federal limit could differ 
as long as

[[Page 96828]]

the exemption provided by the exchange is capped at the level of the 
applicable federal limit in Sec.  150.2.
    Regarding requests to revise the Commission's review process (i.e., 
include an appeals process, provide notice and public comment 
opportunity, require a vote by the Commission to overturn an exchange-
granted exemption, provide more detail on the review process), the 
Commission notes that it has not proposed to delegate authority to 
staff to overturn an exchange determination.
7. Proposed Sec.  150.9(e)--Review of summaries by the Commission
    Proposed Rule: In connection with proposed Sec.  150.9(a)(7), for 
the Commission to rely on the expertise of the exchanges to summarize 
and post executive summaries of non-enumerated bona fide hedging 
positions to their respective Web sites, the Commission proposed, in 
Sec.  150.9(e), to review such executive summaries to ensure the 
summaries provided adequate disclosure to market participants of the 
potential availability of relief from speculative position limits. The 
Commission stated that it believed an adequate disclosure would include 
generic facts and circumstances sufficient to alert similarly situated 
market participants to the possibility of receiving recognition of a 
non-enumerated bona fide hedging position. Such market participants 
could then use that information to help evaluate whether to apply for 
recognition of a non-enumerated bona fide hedging position. Thus, the 
Commission noted, adequate disclosure should help ensure fair and open 
access to the application process. Due to resource constraints, the 
Commission pointed out that it might not be able to preclear each 
summary, so it proposed to spot check executive summaries after the 
fact.
Commission Reproposal
    The Commission did not receive comments on Sec.  150.9(e) (nor on 
Sec.  150.10(e)), and is reproposing Sec.  150.9(e), as originally 
proposed, for the reasons explained in the 2016 Supplemental Position 
Limits Proposal.\1110\
---------------------------------------------------------------------------

    \1110\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38476.
---------------------------------------------------------------------------

8. Proposed Sec.  150.9(f)--Delegation of Authority
Proposed Rule
    The Commission proposed to delegate certain of its authorities 
under proposed Sec.  150.9 (and Sec.  150.10 and Sec.  150.11), to the 
Director of the Commission's Division of Market Oversight, or such 
other employee or employees as the Director designated from time to 
time. In Sec.  150.9(f), the Commission proposed to delegate, until it 
ordered otherwise, to the Director of the Division of Market Oversight 
or such other employee or employees as the Director designated from 
time to time, the authorities under certain parts of Sec. Sec.  
150.9(a); 150.9(c); 150.9(d); and 150.9(e). As noted, similar 
delegations were contained in proposed Sec.  150.10(f) and Sec.  
150.11(e) for spread exemptions and enumerated anticipatory hedge 
exemptions, respectively.
    Proposed Sec.  150.9(f)(1)(i), Sec.  150.10(f)(1)(i) and Sec.  
150.11(e)(1)(i) delegated the Commission's authority to the Division of 
Market Oversight to provide instructions regarding the submission of 
information required to be reported to the Commission by an exchange, 
and to specify the manner and determine the format, coding structure, 
and electronic data transmission procedures for submitting such 
information. Proposed Sec.  150.9(f)(1)(v) and Sec.  150.10(f)(1)(v) 
delegated the Commission's review authority under proposed Sec.  
150.9(e) and Sec.  150.10(e), respectively, to DMO with respect to 
summaries of types of recognized non-enumerated bona fide hedging 
positions, and types of spread exemptions, that were required to be 
posted on an exchange's Web site pursuant to proposed Sec.  150.9(a)(7) 
and Sec.  150.10(a)(7), respectively.
    Proposed Sec.  150.9(f)(1)(i), Sec.  150.10(f)(1)(i) and Sec.  
150.11(e)(1)(i) delegated the Commission's authority to the Division of 
Market Oversight to agree to or reject a request by an exchange to 
consider an application for recognition of an non-enumerated bona fide 
hedging position or enumerated anticipatory bona fide hedging position, 
or an application for a spread exemption. Proposed Sec.  
150.9(f)(1)(iii), Sec.  150.10(f)(1)(iii) and Sec.  150.11(e)(1)(iii) 
delegated the Commission's authority to review any application for 
recognition of a non-enumerated bona fide hedging position or 
enumerated anticipatory bona fide hedging position, or application for 
a spread exemption, and all records required to be maintained by an 
exchange in connection with such application. Proposed Sec.  
150.9(f)(1)(iii), Sec.  150.10(f)(1)(iii) and Sec.  150.11(e)(1)(iii) 
also delegated the Commission's authority to request such records, and 
to request additional information in connection with such application 
from the exchange or from the applicant.
    Proposed Sec.  150.9(f)(1)(iv) and Sec.  150.10(f)(1)(iv) delegated 
the Commission's authority, under proposed Sec.  150.9(d)(2) and Sec.  
150.10(d)(2), respectively, to determine that an application for 
recognition of an non-enumerated bona fide hedging position, or an 
application for a spread exemption, required additional analysis or 
review, and to provide notice to the exchange and the particular 
applicant that they had 10 days to supplement such application.
    The Commission did not propose to delegate its authority under 
proposed Sec.  150.9(d)(3) or Sec.  150.10(d)(3) to make a final 
determination as to the exchange's disposition. The Commission stated 
that if an exchange's disposition raised concerns regarding consistency 
with the Act or presents novel or complex issues, then the Commission 
should make the final determination, after taking into consideration 
any supplemental information provided by the exchange or the 
applicant.\1111\
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    \1111\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38482.
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Comments Received
    One commenter recommended that the Commission clarify the 
delegation provisions referenced in RFC 31 by expressly stating that 
``the Commission, not DMO, now and always will retain the ultimate 
authority to grant or deny Exemption applications.'' \1112\
---------------------------------------------------------------------------

    \1112\ CL-Working Group-60947 at 22.
---------------------------------------------------------------------------

Commission Reproposal
    The Commission is reproposing the delegation provisions, as 
originally proposed. With regard to the comment received, the 
Commission notes that, as provided in both proposed and reproposed 
Sec.  150.9(f)(3), it retains the authority to make the final 
determination to grant or deny hedge exemption applications submitted 
pursuant to this rulemaking. However, the Commission also points out 
that any decisions of an existing Commission under this rulemaking 
cannot effectively bind a future commission, since such future 
Commission could amend or revoke such a rule.

H. Sec.  150.10--Process for Designated Contract Market or Swap 
Execution Facility Exemption From Position Limits for Certain Spread 
Positions

1. Background 150.10
    In the 2016 Supplemental Position Limits Proposal, the Commission 
proposed to permit exchanges, by rule, to exempt from federal position 
limits certain spread transactions, as authorized by CEA section 
4a(a)(1),\1113\

[[Page 96829]]

and in light of the provisions of CEA section 4a(a)(3)(B) and CEA 
section 4a(c)(2)(B).\1114\ In particular, CEA section 4a(a)(1) provides 
the Commission with authority to exempt from position limits 
transactions normally known to the trade as ``spreads'' or 
``straddles'' or ``arbitrage'' or to fix limits for such transactions 
or positions different from limits fixed for other transactions or 
positions. The Commission noted that the Dodd-Frank Act amended the CEA 
by adding section 4a(a)(3)(B), which now directs the Commission, in 
establishing position limits, to ensure, to the maximum extent 
practicable and in its discretion, ``sufficient market liquidity for 
bona fide hedgers.'' \1115\ The Commission also noted that the Dodd-
Frank Act amendments to the CEA in section 4a(c)(2)(B) limited the 
definition of a bona fide hedging position regarding positions (in 
addition to those included under CEA section 4a(c)(2)(A)) \1116\ 
resulting from a swap that was executed opposite a counterparty for 
which the transaction would qualify as a bona fide hedging transaction, 
in the event the party to the swap is not itself using the swap as a 
bona fide hedging transaction. In this regard, the Commission 
interpreted this statutory definition to preclude spread exemptions for 
a swap position that was executed opposite a counterparty for which the 
transaction would not qualify as a bona fide hedging transaction.
---------------------------------------------------------------------------

    \1113\ 7 U.S.C. 6a(a)(1) (authorizing the Commission to exempt 
transactions normally known to the trade as ``spreads''). DCMs 
currently process applications for exemptions from exchange-set 
position limits for certain spread positions pursuant to CFMA-era 
regulatory parameters. See 2016 Supplemental Position Limits 
Proposal, 81 FR at 38467, n. 101.
    The Commission pointed out that, in current Sec.  150.3(a)(3), 
the Commission exempts spread positions ``between single months of a 
futures contract and/or, on a futures-equivalent basis, options 
thereon, outside of the spread month, in the same crop year,'' 
subject to certain limitations. 17 CFR 150.3(a)(3).
    \1114\ 7 U.S.C. 6a(a)(3)(B) and 7 U.S.C. 6a(c)(2)(B), 
respectively.
    \1115\ CEA section 4a(a)(3)(B) also directs the Commission, in 
establishing position limits, to diminish, eliminate, or prevent 
excessive speculation; to deter and prevent market manipulation, 
squeezes, and corners; and to ensure that the price discovery 
function of the underlying market is not disrupted.
    \1116\ 7 U.S.C. 6a(c)(2)(A). As explained in the 2016 
Supplemental Position Limits Proposal, 81 FR at 38464, n. 66, CEA 
section 4a(c)(2) generally requires the Commission to define a bona 
fide hedging position as a position that in CEA section 4a(c)(2)(A): 
Meets three tests (a position (1) is a substitute for activity in 
the physical marketing channel, (2) is economically appropriate to 
the reduction of risk, and (3) arises from the potential change in 
value of current or anticipated assets, liabilities or services); 
or, in CEA section 4a(c)(2)(B), reduces the risk of a swap that was 
executed opposite a counterparty for which such swap would meet the 
three tests.
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    As noted in the 2016 Supplemental Position Limits Proposal, prior 
to the passage of the Dodd-Frank Act, the Commission exercised its 
exemptive authority pertaining to spread transactions in promulgating 
current Sec.  150.3. Current Sec.  150.3 provides that the position 
limits set in Sec.  150.2 may be exceeded to the extent such positions 
are spread 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. In addition, the Commission has permitted 
DCMs, in setting their own position limits under the terms of current 
Sec.  150.5(a), to exempt spread, straddle or arbitrage positions or to 
fix limits that apply to such positions that are different from limits 
fixed for other positions.\1117\
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    \1117\ Current Sec.  150.5 applies as non-exclusive guidance and 
acceptable practices for compliance with DCM core principle 5. See 
December 2013 Position Limits Proposal, 78 FR at 75750-2; see also 
2016 Supplemental Position Limits Proposal, 81 FR at 38477, n. 173.
---------------------------------------------------------------------------

    Under the December 2013 Position Limits Proposal, 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 would be deleted. As the Commission noted, the proposal 
would instead maintain the current practice in Sec.  150.2 of setting 
single-month limits at the same levels as all-months limits, which 
would render the ``spread'' exemption unnecessary.\1118\ In particular, 
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. Because the Commission, in current Sec.  150.2 and as 
proposed in the December 2013 Position Limits Proposal, sets single 
month limits at the same level as all months limits, the existing 
spread exemption would no longer provide useful relief.
---------------------------------------------------------------------------

    \1118\ See December 2013 Position Limits Proposal, 78 FR at 
75736; see also 2016 Supplemental Position Limits Proposal, 81 FR at 
38477.
---------------------------------------------------------------------------

    The Commission also noted that the December 2013 Position Limits 
Proposal would codify guidance in proposed Sec.  150.5(a)(2)(ii) to 
allow an exchange to grant exemptions from exchange-set position limits 
for intramarket and intermarket spread positions (as those terms were 
defined in proposed Sec.  150.1) involving commodity derivative 
contracts subject to the federal limits. To be eligible for the 
exemption in proposed Sec.  150.5(a)(2)(ii), intermarket and 
intramarket spread positions, under the December 2013 Position Limits 
Proposal, would have to be outside of the spot month for physical 
delivery contracts, and intramarket spread positions could not exceed 
the federal all-months limit when combined with any other net positions 
in the single month. As proposed in the December 2013 Position Limits 
Proposal, Sec.  150.5(a)(2)(iii) would require traders to apply to the 
exchange for any exemption, including spread exemptions, from its 
speculative position limit rules.
    Several commenters responding to the December 2013 Position Limits 
Proposal requested that the Commission provide a spread exemption to 
federal position limits.\1119\ Most of these commenters urged the 
Commission to recognize spread exemptions in the spot month as well as 
non-spot months.\1120\ Several of these commenters noted that the 
Commission's proposal would permit exchanges to grant spread exemptions 
for exchange-set limits in commodity derivative contracts subject to 
federal limits, and recommended that the Commission establish a process 
for granting such spread exemptions for purposes of Federal 
limits.\1121\
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    \1119\ See, e.g., CL-CMC-59634 at 15; CL-Olam-59658 at 7; CL-
CME-59718 at 69-71; CL-Citadel-59717 at 8, 9; CL-Armajaro-59729 at 
2; and CL-ICEUS-59645 at 8-10.
    \1120\ See CL-CMC-59634 at 15; CL-Olam-59658 at 7; CL-CME-59718 
at 71; CL-Armajaro-59729 at 2; and CL-ICEUS-59645 at 8-10.
    \1121\ See CL-Olam-59658 at 7; CL-CME-59718 at 71; CL-ICEUS-
59645 at 10.
---------------------------------------------------------------------------

    In response to these comments, the Commission proposed in its 2016 
Supplemental Position Limits Proposal \1122\ to permit exchanges to 
process and grant applications for spread exemptions from federal 
position limits. At that time, the Commission noted that most, if not 
all, DCMs already have rules in place to process and grant applications 
for spread exemptions from exchange-set position limits pursuant to 
part 38 of the Commission's regulations (in particular, current 
Sec. Sec.  38.300 and 38.301) and current Sec.  150.5. And, as noted 
above, the Commission pointed out that it has a long history of 
overseeing the performance of the DCMs in granting spread exemptions 
under current exchange rules regarding exchange-set position limits and 
believed that it would be efficient, and in the best interest of the 
markets, in light of current resource constraints, to rely on the 
exchanges to process applications for spread exemptions from federal 
position limits. In addition, the

[[Page 96830]]

Commission stated that, because many market participants may be 
familiar with current DCM practices regarding spread exemptions, 
permitting DCMs to build on current practice may lower the burden on 
market participants and reduce duplicative filings at the exchanges and 
the Commission. The 2016 Supplemental Position Limits Proposal noted 
that this plan would permit exchanges to provide market participants 
with spread exemptions, pursuant to exchange rules submitted to the 
Commission; however, the Commission also pointed out that it would 
retain the authority to review--and, if necessary, reverse--the 
exchanges' actions.\1123\
---------------------------------------------------------------------------

    \1122\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38476-80.
    \1123\ 2016 Supplemental Position Limits Proposal, 81 FR at 
38477.
---------------------------------------------------------------------------

    Proposed Sec.  150.10 and the public comments relevant to each 
proposed subsection are discussed below.
2. Discussion
    As discussed in greater detail below, the Commission is reproposing 
Sec.  150.10, largely as originally proposed. Some changes were made in 
response to concerns raised by commenters; other changes conform to 
changes made in Sec.  150.9 or Sec.  150.11. Finally, several non-
substantive changes were made in response to commenter questions to 
provide greater clarity.
a. Proposed Sec.  150.10(a)(1)
Proposed Rule
    The Commission contemplated in proposed Sec.  150.10(a)(1) that 
exchanges could voluntarily elect to process spread exemption 
applications, by filing new rules or rule amendments with the 
Commission pursuant to part 40 of the Commission's regulations.\1124\ 
The process proposed under Sec.  150.10(a) was substantially similar to 
that described above for proposed Sec.  150.9(a). For example, proposed 
Sec.  150.10(a)(1) provided that, with respect to a commodity 
derivative position for which an exchange elected to process spread 
exemption applications, (i) the exchange must list for trading at least 
one component of the spread or must list for trading at least one 
contract that is a referenced contract included in at least one 
component of the spread; and (ii) any such exchange contract must be 
actively traded and subject to position limits for at least one year on 
that exchange. As noted with respect to the process outlined above for 
proposed Sec.  150.9(a), the Commission expressed its belief that that 
an exchange should process spread exemptions only if it had at least 
one year of experience overseeing exchange-set position limits in an 
actively traded referenced contract that was in the same commodity as 
that of at least one component of the spread. The Commission stated 
that an exchange may not be familiar enough with the specific needs and 
differing practices of the participants in those markets for which an 
individual exchange did not list any actively traded referenced 
contract in a particular commodity. If a component of a spread was not 
actively traded on an exchange that elected to process spread exemption 
applications, such exchange might not be incentivized to protect or 
manage the relevant commodity market, and the interests of such 
exchange might not be aligned with the policy objectives of the 
Commission as expressed in CEA section 4a(a)(3)(B). The Commission 
expected that an individual exchange would describe how it would 
determine whether a particular component of a spread was actively 
traded in its rule submission, based on its familiarity with the 
specific needs and differing practices of the participants in the 
relevant market.
---------------------------------------------------------------------------

    \1124\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38464, n. 63, regarding Commission authority to recognize spreads 
under CEA section 4a(a)(1). Any action of the exchange to recognize 
a spread, pursuant to rules filed with the Commission, would be 
subject to review and revocation by the Commission.
---------------------------------------------------------------------------

    Consistent with the restrictions regarding the offset of risks 
arising from a swap position in CEA section 4a(c)(2)(B), proposed Sec.  
150.10(a)(1) would not permit an exchange to recognize a spread between 
a commodity index contract and one or more referenced contracts. That 
is, an exchange could not grant a spread exemption where a bona fide 
hedging position could not be recognized for a pass through swap offset 
of a commodity index contract.\1125\
---------------------------------------------------------------------------

    \1125\ The Commission's interprets CEA section 4a(c)(2)(b) is a 
mandate from Congress to narrow the scope of what constitutes a bona 
fide hedging position in the context of index trading activities. 
``Financial products are not substitutes for positions taken or to 
be taken in a physical marketing channel. Thus, the offset of 
financial risks from financial products is inconsistent with the 
proposed definition of bona fide hedging for physical commodities.'' 
See 2016 Supplemental Position Limits Proposal, 81 FR at 38471; see 
also December 2013 Position Limits Proposal, 78 FR at 75740. See 
also the discussion of the temporary substitute test. Id. at 75708-
9.
---------------------------------------------------------------------------

    The Commission noted that for inter-commodity spreads in which 
different components of the spread were traded on different exchanges, 
the exemption granted by one exchange would be recognized by the 
Commission as an exemption from federal limits for the applicable 
referenced contract(s), but would not bind the exchange(s) that listed 
the other components of the spread to recognize the exemption for 
purposes of that other exchange(s)' position limits. In such cases, a 
trader seeking such inter-commodity spread exemptions would need to 
apply separately for a spread exemption from each exchange-set position 
limit.
Comments Received
    Two commenters recommended that the Commission should, to the 
greatest extent possible, allow the exchanges to administer exemptions 
for non-enumerated bona fide hedging positions, enumerated bona fide 
hedges, and spread positions in the same manner as they have been to 
date and allow exchanges to continue to independently evaluate 
exemption applications by relying on the exchange's extensive knowledge 
of the markets.\1126\
---------------------------------------------------------------------------

    \1126\ CL-NCGA-NGSA-60919 at 9 and CL-IECAssn-60949 at 3-4.
---------------------------------------------------------------------------

    Five commenters recommended that the Commission not adopt the 
``active trading'' and ``one year experience'' requirements as proposed 
in the supplement regarding a DCM's qualification to administer 
exemptions from federal position limits.\1127\ For a more detailed 
discussion please see Sec.  150.9(a)(1) above.
---------------------------------------------------------------------------

    \1127\ See, e.g., CL-CCI-60935 at 3-4; CL-FIA-60937 at 3; CL-
Working Group-60947 at 10; CL-IECAssn-60949 at 12-13; and CL-CME-
60926 at 13 (expressing that such qualification requirements could 
have the unintended consequences of (1) harming the ability of 
market participants to effectively manage their risk by preventing 
the Exchanges from recognizing an otherwise appropriate exemption 
from federal speculative position limits, and (2) stifling future 
innovation in the development of new commodity derivative products 
created to meet evolving market needs and demands). See also CL-FIA-
60937 at 9 (citing the following example: ``For example, CME's New 
York Mercantile Exchange (``NYMEX'') recently listed the LOOP crude 
oil storage futures contract (LPS) and IFUS recently listed the 
world cotton futures contract (WCT). Assuming for purposes of 
illustration that both of these futures contracts were Referenced 
Contracts, under the Supplemental Proposal neither NYMEX nor IFUS 
would be permitted to grant non-enumerated hedge, spread, or 
anticipatory hedge exemptions during the first year of each 
contract's existence notwithstanding the extensive experience of 
these exchanges in administering limits on positions in a variety of 
similar contracts.''), CL-CME-60926 at 14 (arguing that one year of 
experience in administering position limits in similar contracts 
within a particular ``asset class'' would be a more reasonable 
requirement.), CL-FIA-60937 at 9 (expressing the view that ``the CEA 
precludes the Commission from establishing limits that apply to 
``bona fide hedge positions,'' and the ``definition of bona fide 
hedging in CEA Section 4a(c)(2) does not include as relevant 
criteria whether an exchange contract is actively traded or an 
exchange has one year of prior experience administering limits on 
positions in that contract.'' Thus, the CEA does not permit the one 
year prerequisite.)
---------------------------------------------------------------------------

    Alternatively, several commenters expressed views against the

[[Page 96831]]

Commission authorizing exchanges to grant hedge and spread exemptions, 
and cited concerns with respect to what they believe to be a conflict 
of interest that could arise between for-profit exchanges and their 
exemption-seeking customers. The commenters proposed, instead, that the 
Commission make any final hedge and spread exemption 
determinations.\1128\
---------------------------------------------------------------------------

    \1128\ See, e.g., CL-Public Citizen-60940 at 3; CL-PMAA-NEFI-
60952 at 2; CL-RER2-60962 at 1; CL-AFR-60953 at 2; CL-RER1-60961 at 
1; CL-PMAA-NEFI-60952 at 2; CL-RER2-60962 at 1; CL-AFR-60953 at 2 
and CL-Better Markets-60928 at 1-5.
---------------------------------------------------------------------------

Commission Reproposal
    The Commission is reproposing Sec.  150.10(a)(1), as originally 
proposed with one clarification explained below. In reproposing Sec.  
150.10(a)(1), the Commission provides a basic application process for 
exchanges that elect to process spread exemption applications to 
federal limits. This process allows exchanges flexibility while also 
facilitating the Commission's review of exchange granted exemptions. 
The Commission notes that exchanges have authority to determine whether 
or not to apply the Sec.  150.10(a)(1) process to spread exemptions 
from exchange-set limits that are lower than federal limits.
    Regarding the comment that the one-year experience and active 
trading qualification requirements could harm the ability for market 
participants to effectively manage their risks because the 
qualification requirements would limit the number of exchanges that 
could grant exemptions,\1129\ the Commission clarifies that the one-
year experience and active trading requirement can be met by any 
referenced contract in the particular commodity.\1130\ This feature 
allows a broader number of exchanges to grant spread exemptions. 
Furthermore, the Commission notes that an exchange with no active 
trading and or experience in any referenced contract in the particular 
commodity may not have their interests aligned with the CEA's policy 
objectives for position limits, such as those in CEA section 
4a(a)(3)(B).\1131\
---------------------------------------------------------------------------

    \1129\ As noted above, according to the commenter, the 
qualification requirements would limit the number of exchanges that 
could grant exemptions to those that list the relevant referenced 
contract and manage position limits in that referenced contract 
based on the exchanges experience and knowledge of the underlying 
commodity market that referenced contract.
    \1130\ As noted above, experience manifests in the people 
carrying out surveillance in a commodity rather than in an 
institutional structure. An exchange's experience would be provided 
through the appropriate experience of the surveillance staff 
regarding the particular commodity. In fact, the Commission has 
historically reviewed the experience and qualifications of exchange 
regulatory divisions when considering whether to designate a new 
exchange as a contract market or to recognize a facility as a SEF; 
as such exchanges are new, staff experience has clearly been gained 
at other exchanges.
    \1131\ CEA section 4a(a)(3)(B) provides that the Commission 
shall set limits ``to the maximum extent practicable, in its 
discretion--to diminish, eliminate, or prevent excessive speculation 
as described under this section; to deter and prevent market 
manipulation, squeezes, and corners; to ensure sufficient market 
liquidity for bona fide hedgers; and to ensure that the price 
discovery function of the underlying market is not disrupted.'' In 
addition, CEA section 4a(a)(7) authorizes the Commission to exempt 
any class of transaction from any requirement it may establish with 
respect to position limits.
---------------------------------------------------------------------------

    Finally, the Commission clarifies that an exchange can petition the 
Commission for a waiver of the one-year experience requirement pursuant 
to Sec.  140.99 of the Commission's regulations if such exchange 
believes that their experience and interests are aligned with the 
Commission's interests with respect to recognizing spread positions.
    Regarding comments that the Commission should be the sole authority 
to make a final hedge or spread exemption determination, or that the 
Exchange's one-year of experience administering position limits to its 
actively traded contract and the Commission's de novo review are 
inadequate, the Commission disagrees. The Commission believes the 
exchange's one year of experience administering position limits to its 
actively traded contract,\1132\ and the Commission's de novo review of 
granted exemptions (afterwards) are adequate to guard against or remedy 
any conflicts of interest. Also, the Commission notes that Sec.  
150.10(a)(4)(vi) requires exchanges should take into account whether 
granting a spread exemption in a physical commodity derivative would, 
to the maximum extent practicable, ensure sufficient market liquidity 
for bona fide hedgers, and not unduly reduce the effectiveness of 
position limits to: Diminish, eliminate, or prevent excessive 
speculation; deter and prevent market manipulation, squeezes, and 
corners; and ensure that the price discovery function of the underlying 
market is not disrupted.\1133\
---------------------------------------------------------------------------

    \1132\ To avoid confusion, the Commission reiterates that 
experience manifests in the people carrying out surveillance in a 
commodity rather than in an institutional structure. An exchange's 
experience would be provided through the appropriate experience of 
the surveillance staff regarding the particular commodity.
    \1133\ As noted in the 2016 Supplemental Position Limits 
Proposal, the guidance is consistent with the statutory policy 
objectives for position limits on physical commodity derivatives in 
CEA section 4a(a)(3)(B). See 2016 Supplemental Position Limits 
Proposal, 81 FR at 38464. The Commission interprets the CEA as 
providing it with the statutory authority to exempt spreads that are 
consistent with the other policy objectives for position limits, 
such as those in CEA section 4a(a)(3)(B). Id.
---------------------------------------------------------------------------

b. Proposed Sec.  150.10(a)(2)
Proposed Rule
    Proposed Sec.  150.10(a)(2) specifies a non-exclusive list of the 
type of spreads that an exchange might exempt from position limits, 
including calendar spreads; quality differential spreads; processing 
spreads (such as energy ``crack'' or soybean ``crush'' spreads); and 
product or by-product differential spreads. The Commission pointed out 
that this list was not exhaustive, but reflected common types of spread 
activity that might enhance liquidity in commodity derivative markets, 
thereby facilitating the ability of bona-fide hedgers to put on and 
offset positions in those markets. For example, trading activity in 
many commodity derivative markets is concentrated in the nearby 
contract month, but a hedger might need to offset risk in deferred 
months where derivative trading activity may be less active. A calendar 
spread trader could provide such liquidity without exposing himself or 
herself to the price risk inherent in an outright position in a 
deferred month. Processing spreads can serve a similar function. For 
example, a soybean processor might seek to hedge his or her processing 
costs by entering into a ``crush'' spread, i.e., going long soybeans 
and short soybean meal and oil. A speculator could facilitate the 
hedger's ability to do such a transaction by entering into a ``reverse 
crush'' spread (i.e., going short soybeans and long soybean meal and 
oil). Quality differential spreads, and product or by-product 
differential spreads, may serve similar liquidity-enhancing functions 
when spreading a position in an actively traded commodity derivatives 
market such as CBOT Wheat against a position in another actively traded 
market, such as MGEX Wheat.
    The Commission anticipated that a spread exemption request might 
include spreads that were ``legged in,'' that is, carried out in two 
steps, or alternatively were ``combination trades,'' that is, all 
components of the spread were executed simultaneously.
    This proposal, the Commission observed, would not limit the 
granting of spread exemptions to positions outside the spot month, 
unlike the existing spread exemption provisions in current Sec.  
150.3(a)(3), or in Sec.  150.5(a)(2)(ii) as proposed in the December 
2013 Position Limits Proposal. The proposal responded to specific 
requests of commenters to permit spread exemptions in the spot month. 
The Commission pointed out

[[Page 96832]]

that the CME, for example, recommended ``the Commission reaffirm in 
DCMs the discretion to apply their knowledge of individual commodity 
markets and their judgement, as to whether allowing intermarket spread 
exemptions in the spot month for physical-delivery contracts is 
appropriate.'' \1134\
---------------------------------------------------------------------------

    \1134\ CL-CME-59718 at 71. See also 2016 Supplemental Position 
Limits Proposal, 81 FR at 38478.
---------------------------------------------------------------------------

    The Commission proposed to revise the December 2013 Position Limits 
Proposal in the manner described above because, as it noted in the 2016 
Supplemental Position Limits Proposal as well as in the examples above, 
permitting spread exemptions in the spot month may further one of the 
four policy objectives set forth in section 4a(a)(3)(b) of the Act: To 
ensure sufficient market liquidity for bona fide hedgers.\1135\ This 
policy objective, the Commission observed, was incorporated into the 
proposal in its requirements that: (i) The applicant provide detailed 
information demonstrating why the spread position should be exempted 
from position limits, including how the exemption would further the 
purposes of CEA section 4a(a)(3)(B); \1136\ and (ii) the exchange would 
determine whether the spread position (for which a market participant 
was seeking an exemption) would further the purposes of CEA section 
4a(a)(3)(B).\1137\ Moreover, the Commission pointed out that it was 
retaining the ability to review the exchange rules as well as to review 
how an exchange enforces those rules.\1138\
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    \1135\ CEA section 4a(a)(3)(B)(iii); 7 U.S.C. 6a(a)(3)(B)(iii). 
See also the discussion of proposed Sec.  150.10(a)(3)(ii), below.
    \1136\ See proposed Sec.  150.10(a)(3)(ii).
    \1137\ See proposed Sec.  150.10(a)(4)(vi); see also 2016 
Supplemental Position Limits Proposal, 81 FR at 38478.
    \1138\ The Commission pointed out that it could, for example, 
revoke or confirm exchange-granted exemptions.
---------------------------------------------------------------------------

    The Commission also discussed that it was concerned, among other 
things, about protecting the price discovery process in the core 
referenced futures contracts, particularly as those contracts approach 
expiration. Accordingly, as an alternative, the Commission considered 
whether to prohibit an exchange from granting spread exemptions that 
would be applicable during the lesser of the last five days of trading 
or the time period for the spot month.\1139\
---------------------------------------------------------------------------

    \1139\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38478.
---------------------------------------------------------------------------

Comments Received
    Several commenters expressed the view that exchanges must be 
allowed to use their experience to determine whether to grant spread 
exemptions in the spot month--including within the last five days of 
trading. Commenters expressed the view that allowing exchanges to grant 
spread exemptions in the spot months/last five days would provide 
liquidity to the market and help convergence between cash and futures 
markets.\1140\
---------------------------------------------------------------------------

    \1140\ CL-ICE-60929 at 24; CL-IECAssn-60949 at 15; and CL-ADM-
60934 at 6-7.
---------------------------------------------------------------------------

    Eight commenters expressed the view that the Commission should not 
impose the five-day rule for spread positions in the expiring spot 
month contract.\1141\ The commenters argued that to impose the five-day 
rule would adversely affect liquidity in the futures market and impair 
convergence between cash and futures markets and thus the price 
discovery function of the futures market. The commenters also expressed 
the view that the Commission's concerns about trading activity in the 
final days of an expiring futures contract can best be addressed by 
existing exchange and Commission surveillance programs and the 
Commission's ``special call'' authority to request information from 
market participants.
---------------------------------------------------------------------------

    \1141\ CL-NCGA-ASA-60917 at 1-2; CL-CME-60926 at 3; CL-ICE-60929 
at 9; and CL-AFIA-60955 at 2; CL-NGFA-60941 at 5-7; CL-ISDA-60931 at 
10; CL-NCFC-60930 at 3-4; and CL-Working Group-60947 at 7-9.
---------------------------------------------------------------------------

    One commenter expressed the view that the Commission should not 
apply the five-day rule to certain enumerated bona fide hedging 
positions under proposed Sec.  150.1(3)-(4), cross-commodity hedges 
under proposed Sec.  150.1(5), or to non-enumerated bona fide hedge, or 
spread exemptions. Instead, the Commission should permit the Exchanges 
to determine the facts and circumstances where a market participant may 
be permitted to hold a physical-delivery referenced contract in the 
spot month as part of a position that is exempt from federal 
speculative position limits.\1142\
---------------------------------------------------------------------------

    \1142\ CL-CCI-60935 at 8-9.
---------------------------------------------------------------------------

    Another commenter expressed that it ``would support the 
applicability of the spread exemption through the end of the month, 
without limiting the exemption during the current month.'' In that 
regard, the commenter (an exchange) noted that its ``futures contracts 
on electricity settle to the independent, spot market overseen by the 
ISO/RTO markets.'' The commenter argued that ``since the settlement 
prices are determined in the ISO/RTO markets, trading during the last 
five days of the spot month has no impact on final settlement prices'' 
on either the exchange or the ISO/RTO spot markets. The commenter noted 
that ``bona fide hedgers rely on the ability to hold positions through 
the end of the current month, which has very low volume traded for 
monthly power contracts. Restrictions on spread exemptions during the 
last five days of trading may force market participants to exit their 
position during a period of lower liquidity--more than 99% of trading 
volume occurs outside the current (spot) month'' on its exchange.\1143\
---------------------------------------------------------------------------

    \1143\ CL-Nodal-60948 at 3.
---------------------------------------------------------------------------

    One commenter expressed that it is concerned that the new Form 504 
would impose a series of reporting requirements to track and 
distinguish between types of hedge exemptions and requires reporting of 
all cash market holdings for each day of the spot month that would be 
difficult given the portfolio nature of commenter's business and the 
fungibility of futures contracts and the underlying cash commodity. The 
commenter expressed the view that once a hedge exemption is granted 
under the supplemental, the reporting requirements should be similar to 
the reporting requirements for existing enumerated bona fide hedging 
position exemptions.\1144\
---------------------------------------------------------------------------

    \1144\ CL-ADM-60934 at 8.
---------------------------------------------------------------------------

    Another commenter expressed the view that it is not necessary to 
condition spread exemptions on additional filings to the exchange or 
the Commission.\1145\
---------------------------------------------------------------------------

    \1145\ CL-ICE-60929 at 25.
---------------------------------------------------------------------------

    Two commenters requested that the Commission clarify that the term 
``spread position'' includes all types of spreads and the list of 
spreads referenced in proposed Sec.  150.10 is simply illustrative and 
not exhaustive.\1146\
---------------------------------------------------------------------------

    \1146\ CL-Working Group-60947 at 9-10 and CL-FIA-60937 at 14.
---------------------------------------------------------------------------

    Three commenters requested that the Commission continue to permit 
cash and carry exemptions, stating, among other reasons, such 
exemptions serve an economic purpose by helping to maintain an 
appropriate economic relationship between the nearby and the next 
successive delivery month.\1147\
---------------------------------------------------------------------------

    \1147\ CL-ICE-60929 at 11-12; CL-NCC-ACSA-60972 at 2; and CL-
CMC-60950 at 11-12.
---------------------------------------------------------------------------

Commission Reproposal
    The Commission is reproposing Sec.  150.10(a)(2), as originally 
proposed, and clarifying that the five-day rule does not apply to 
spreads. Because the Commission did not propose in the 2016 
Supplemental Position Limits Proposal to apply the five-day rule to 
``spread positions'', exchanges would have discretion to recognize such 
spread positions without regard to the five-day rule. The Commission 
cautions exchanges to carefully consider whether

[[Page 96833]]

to recognize a spread position in the last few days of trading in 
physical-delivery contracts. For a more detailed discussion please see 
Sec.  150.9(a)(1) above.
    The Commission reiterates, as proposed and discussed in the 2016 
Supplemental Position Limit Proposal, that an exchange would not be 
permitted to recognize a spread between a commodity index contract and 
one or more referenced contracts. That is, an exchange may not grant a 
spread exemption where a bona fide hedging position could not be 
recognized for a pass-through swap offset of a commodity index 
contract. For a more detailed discussion please see Sec.  150.9(a)(1) 
above.
    In response to the comment regarding spread exemptions for 
electricity contracts, the Commission notes that electricity contracts 
are not referenced contracts that will be subject to federal limits at 
this time. Thus, exchanges may elect to process spread exemptions for 
exchange-set position limits for non-referenced contracts.
    In response to the comments regarding the proposed spread exemption 
process imposing additional filing requirements on market participants 
relying on an exchange-granted spread exemption, the Commission 
clarifies that it is in the exchange's discretion to determine whether 
there are additional reporting requirements for a spread exemption. For 
a more detailed discussion please see Sec.  150.9(a)(1) above.
    In response to the comments received requesting clarification that 
the list of spreads in Sec.  150.10(a)(2) \1148\ is simply illustrative 
and not an exhaustive list of possible spread exemptions that may be 
granted by an exchange, the Commission acknowledges that the list of 
spreads in Sec.  150.10(a)(2) is not an exhaustive list and that 
exchanges may grant other spread exemptions so long as they meet the 
requirements in Sec.  150.10(a)(1), (3), and (4)(vi).
---------------------------------------------------------------------------

    \1148\ Proposed Sec.  150.10(a)(2) included the following list 
of spreads that a designated contract market or swap execution 
facility may approve under this section include: (i) Calendar 
spreads; (ii) Quality differential spreads; (iii) Processing 
spreads; and (iv) Product or by-product differential spreads.
---------------------------------------------------------------------------

    In response to the comments received that requested the Commission 
continue to permit ``cash and carry'' spread exemptions, the Commission 
has determined to allow exchanges to grant ``cash and carry'' spread 
exemptions to exchange and federal limits so long as an exchange has 
suitable safeguards in place to require a market participant relying on 
such an exemption to reduce their position below the speculative limit 
in a timely manner once current market prices no longer permit entry 
into a full carry transaction. The Commission notes that the condition 
noted above is more stringent than how ICE Futures U.S. has conditioned 
market participants relying on a cash-and-carry spread exemption. In 
that regard, ICE Futures U.S. has required a market participant to 
reduce their positions ``before the price of the nearby contract month 
rises to a premium to the second (2nd) contract month.''
c. Proposed Sec.  150.10(a)(3)
Proposed Rule
    Proposed Sec.  150.10(a)(3) set forth a core set of information and 
materials that all applicants would be required to submit to enable an 
exchange to determine, and the Commission to verify, whether the facts 
and circumstances attendant to a spread position furthered the policy 
objectives of CEA section 4a(a)(3)(B). In particular, the applicant 
would be required to demonstrate, and the exchange to determine, that 
exempting the spread position from position limits would, to the 
maximum extent practicable, ensure sufficient market liquidity for bona 
fide hedgers, but not unduly reduce the effectiveness of position 
limits to: Diminish, eliminate or prevent excessive speculation; deter 
and prevent market manipulation, squeezes, and corners; and ensure that 
the price discovery function of the underlying market is not 
disrupted.\1149\
---------------------------------------------------------------------------

    \1149\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38479, n. 192, and accompanying text (describing the DCM's 
responsibility under its application process to make this 
determination in a timely manner).
---------------------------------------------------------------------------

    The proposal pointed out that one DCM, ICE Futures U.S., currently 
grants certain types of spread exemptions that the Commission was 
concerned may not be consistent with these policy objectives.\1150\ ICE 
Futures U.S. allows ``cash-and-carry'' spread exemptions to exchange-
set limits, which permit a market participant to hold a long position 
greater than the speculative limit in the spot month and an equivalent 
short position in the following month in order to guarantee a return 
that, at minimum, covers its carrying charges, such as the cost of 
financing, insuring, and storing the physical inventory until the next 
expiration.\1151\ Market participants are able to take physical 
delivery in the nearby month and redeliver the same product in a 
deferred month, often at a profit. The Commission noted that while 
market participants are permitted to re-deliver the physical commodity, 
they are under no obligation to do so.\1152\
---------------------------------------------------------------------------

    \1150\ See ICE Futures U.S. Rule 6.29(e).
    \1151\ Carrying charges include insurance, storage fees, and 
financing costs, as well as other costs such as aging discounts that 
are specific to individual commodities. The ICE Futures U.S. rules 
require an applicant to provide: (i) Its cost of carry; (ii) the 
minimum spread at which the applicant will enter into a straddle 
position and which would result in an profit for the applicant; and 
(iii) the quantity of stocks in exchange-licensed warehouses that it 
already owns. The applicant's entire long position carried into the 
notice period must have been put on as a spread at a differential 
that covers the applicant's cost of carry. See Rule Enforcement 
Review of ICE Futures U.S., July 22, 2014 (``ICE Futures U.S. Rule 
Enforcement Review''), at 44-45, available at http://www.cftc.gov/IndustryOversight/TradingOrganizations/DCMs/dcmruleenf. See also 
2016 Supplemental Position Limits Proposal, 81 FR at 38479, n. 189.
    \1152\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38479.
---------------------------------------------------------------------------

    ICE Futures U.S.'s rules condition the cash-and-carry spread 
exemption upon the applicant's agreement that ``before the price of the 
nearby contract month rises to a premium to the second (2nd) contract 
month, it will liquidate all long positions in the nearby contract 
month.'' \1153\ The Commission noted that it understood that ICE 
Futures U.S. required traders to provide information about their 
expected cost of carry, which was used by the exchange to determine the 
levels by which the trader has to reduce the position. Those exit 
points were then communicated to the applicant when the exchange 
responded to the trader's spread exemption request.
---------------------------------------------------------------------------

    \1153\ ICE Futures U.S. Rule 6.29(e) (at the time of the target 
period of the ICE Futures U.S. Rule Enforcement Review (June 15, 
2011 to June 15, 2012), the cash-and-carry provision currently found 
in ICE Futures U.S. Rule 6.29(e) was found in ICE Futures U.S. Rule 
6.27(e)). Further, under the exchange's rules, additional conditions 
may also apply.
---------------------------------------------------------------------------

    The 2016 Supplemental Position Limits Proposal considered whether 
to impose on the exchange a requirement to ensure that exit points in 
cash-and-carry spread exemptions would facilitate an orderly 
liquidation in the expiring futures contract. The Commission stated 
that it was concerned that a large demand for delivery on cash and 
carry positions might distort the price of the expiring futures 
upwards. This would particularly be a concern in those commodity 
markets where the cash spot price was discovered in the expiring 
futures contract.
    As the Commission noted, ICE Futures U.S. opined in a recent rule 
enforcement review that such exemptions are ``beneficial for the 
market, particularly when there are plentiful warehouse stocks, which

[[Page 96834]]

typically is the only time when the opportunity exists to utilize the 
exemption,'' maintaining that the exchange's rules and procedures are 
effective in ensuring orderly liquidations.\1154\ The Commission 
observed that it remained concerned about these exemptions and their 
impact on the spot month price, and noted that it was still reviewing 
the effectiveness of the exchange's cash-and-carry spread exemptions 
and the procedure by which they were granted.
---------------------------------------------------------------------------

    \1154\ ICE Futures U.S. Rule Enforcement Review, at 45.
---------------------------------------------------------------------------

    As an alternative to providing exchanges with discretion to 
consider granting cash-and-carry spread exemptions, the Commission 
considered, in the 2016 Supplemental Position Limits Proposal, 
prohibiting cash-and-carry spread exemptions to position limits. In 
this regard, the Commission pointed out that it does not grant such 
exemptions to current federal position limits. As another alternative, 
the Commission considered permitting exchanges to grant cash-and-carry 
spread exemptions, but would require suitable safeguards be placed on 
such exemptions. For example, the Commission considered requiring that 
cash-and-carry spread exemptions be conditioned on a market participant 
reducing positions below speculative limit levels in a timely manner 
once current market prices no longer permit entry into a full carry 
transaction, rather than the less stringent condition of ICE Futures 
U.S. that a trader reduce positions ``before the price of the nearby 
contract month rises to a premium to the second (2nd) contract month.'' 
\1155\
---------------------------------------------------------------------------

    \1155\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38479.
---------------------------------------------------------------------------

Comments Received
    One commenter expressed the view that an ``exchange should not be 
required to determine whether liquidity will be increased if a 
particular Spread Exemption is granted before it is permitted to grant 
such Spread Exemption.'' According to the commenter, ``this requirement 
effectively would create an entirely new legal standard for spread 
exemptions and flip on its head the requirement under CEA section 
4a(a)(3)(b)(iii), which states that, to the maximum extent practicable, 
in establishing speculative position limits the Commission in its 
discretion should ensure sufficient market liquidity for bona fide 
hedgers. CEA section 4a(a)(3)(b)(iii) does not require (and should not 
require) that, in granting an exemption from speculative position 
limits, the exemption must add to liquidity.'' \1156\
---------------------------------------------------------------------------

    \1156\ CL-Working Group-60947 at 22. See also CL-ISDA-60931 at 1 
(expressing that under the 2016 Supplemental Position Limits 
Proposal, the exchange must certify that a spread exemption 
increases liquidity in order to grant it. The commenter expressed 
the view that the CEA requires limits that do not impair liquidity, 
as opposed to limits that specifically increase it. Furthermore, the 
commenter recommended that the Commission should remove this 
condition because the purpose of a spread exemption ``is not to 
increase liquidity but rather to recognize the more limited 
speculative opportunity created by such positions.'').
---------------------------------------------------------------------------

    Two commenters requested that the proposed application requirements 
for market participants be revised to only require ``such information 
as the relevant exchange deems necessary to determine if the requested 
exemption is consistent with the purposes of hedging.'' Furthermore one 
commenter requested that the Commission confirm that the detailed 
procedures for exchange-granted exemptions for spread and anticipatory 
hedges are not applicable to exemptions granted by exchanges for 
positions below the federal level.\1157\
---------------------------------------------------------------------------

    \1157\ CL-ICE-60929 at 8. See also CL-Nodal-60948 at 2-3 
(expressing the view that ``[t]he Proposed Rule is overly 
prescriptive as to the information that must be provided by the 
applicant, especially when the exchange may have superior 
information regarding intramarket spreads. Unlike intermarket 
spreads, the exchange, and not the applicant, is more likely to have 
direct information to determine whether an intramarket spread 
achieves the goals of CEA 4a(a)(3)(B). For example, [an exchange] 
has current deliverable supply analysis, spread and outright trading 
activity information, and market data from spot markets for the 
underlying physical commodities. In performing its pricing and 
surveillance functions, [an exchange] monitors position accumulation 
information that is not available to market participants as well as 
out-of-market pricing in real time.'' The commenter requested that 
it be allowed to determine its application process, and the 
information it needs to achieve the policy objectives of CEA 
4a(a)(3)(B), ``for which the Commission has the authority to review 
the exchange's rules and conclusions.'')
---------------------------------------------------------------------------

    One commenter expressed the view that ``if proposed Regulations 
150.9(a)(3)(iii) and 150.10(a)(3)(iii) indeed are intended to apply to 
an applicant's maximum size of all gross positions for each and every 
commodity derivative contract the applicant holds (as opposed to the 
maximum gross positions in the commodity derivative contract(s) for 
which the exemption is sought), such requirements are unnecessary and 
unduly burdensome.'' \1158\
---------------------------------------------------------------------------

    \1158\ CL-Working Group-60947 at 10. See also CL-ISDA-60931 at 
10 (expressing the view that the proposed rule 150.10(a)(3)(iii) 
requiring maximum size of all gross positions in derivative 
contracts is too broad and practically impossible as no market 
participant can predict trading activity for a year).
---------------------------------------------------------------------------

Commission Reproposal
    The Commission is reproposing Sec.  150.10(a)(3), largely as 
originally proposed with one clarifying amendment to Sec.  
150.10(a)(3)(iii), as discussed further below. The Commission believes 
that exchanges should consider the policy objectives of CEA section 
4a(a)(3)(B), which is the standard that the Commission would use to 
review a petition to exempt a spread position from position limits. 
Regarding the comment arguing that CEA section 4a(a)(3)(b)(iii) does 
not require that the granting of a spread exemption must increase 
liquidity, the Commission interprets the CEA as providing it with the 
statutory authority to exempt spreads that are consistent with the 
other policy objectives for position limits, such as those in CEA 
section 4a(a)(3)(B). CEA section 4a(a)(3)(B) provides that the 
Commission shall set limits to the maximum extent practicable, in its 
discretion--to diminish, eliminate, or prevent excessive speculation as 
described under this section; to deter and prevent market manipulation, 
squeezes, and corners; to ensure sufficient market liquidity for bona 
fide hedgers; and to ensure that the price discovery function of the 
underlying market is not disrupted. The Commission believes that 
exchanges who elect to grant spread exemptions to federal position 
limits should use the guidance in CEA section 4a(a)(3)(B) as the 
Commission would when reviewing de novo a spread exemption application.
    Regarding the comment requesting change to the requirements of 
Sec.  150.10(a)(3) to only require ``such information as the relevant 
exchange deems necessary to determine if the requested exemption is 
consistent with the purposes of hedging,'' the Commission believes that 
the proposal requires a minimum amount of information, and exchanges 
have discretion to require additional information. If (as one commenter 
represented) an exchange has market information that would supplement 
its analysis of a spread exemption application, nothing in the proposal 
would preclude an exchange from using that information in its analysis. 
However, the Commission notes that such information must be included in 
the records of that spread exemption application as required under 
Sec.  150.10(b).
    In response to the request for clarification regarding whether 
Sec.  150.10 applies to both federal and exchange-set limits, the 
Commission clarifies that, as

[[Page 96835]]

explained above in connection with Sec.  150.5, Sec.  150.10 would not 
apply if an exchange grants exemptions from speculative position limits 
it sets under paragraph Sec.  150.5(a)(1), provided that that any 
spread exemptions to exchange-set limits not conforming to Sec.  150.3 
and Sec.  150.10 were capped at the level of the applicable federal 
limit in Sec.  150.2. Further, Sec.  150.10 would not apply to 
exchanges that grant spread exemptions to exchange-set limits, in 
commodity derivative contracts not subject to a federal limit.
    Regarding the comment about whether the phrase ``maximum size of 
all gross positions'' applies to an applicant's entire book of 
derivative positions or just those positions pertaining to the 
exemption application, the Commission intended that the applicant only 
report its maximum size of all gross positions in the commodity related 
to the exemption application that it is submitting. In that regard, 
Commission is reproposing Sec.  150.10(a)(3)(iii) to clarify as such. 
For a more detailed discussion, please see Sec.  150.9(a)(2) above.
d. Proposed Sec.  150.10(a)(4)
Proposed Rule
    Proposed Sec.  150.10(a)(4) set forth certain timing requirements 
that an exchange would be required to include in its rules for the 
spread application process. Those timing requirements would 
substantially mirror those provisions proposed in Sec.  150.9(a)(4) 
\1159\ for the non-enumerated bona fide hedging position application 
process. While these timing requirements are similar to those under 
proposed Sec.  150.9(a)(4), the exchange, under proposed Sec.  
150.10(a)(4), must also determine in a timely manner whether the facts 
and circumstances attendant to a position further the policy objectives 
of CEA section 4a(a)(3)(B).\1160\
---------------------------------------------------------------------------

    \1159\ The Commission noted, for example, proposed Sec.  
150.9(a)(4) provided that: (i) A person intending to rely on a 
exchange's exemption from position limits would be required to 
submit an application in advance and to reapply at least on an 
annual basis; (ii) the exchange would be required to notify an 
applicant in a timely manner whether the position was exempted, and 
reasons for any rejection; and (iii) the exchange would be able to 
revoke, at any time, any recognition previously issued pursuant to 
proposed Sec.  150.9 if the exchange determined the recognition was 
no longer in accord with section 4a(c) of the Act. See 2016 
Supplemental Position Limits Proposal, 81 FR at 38480, n. 192.
    \1160\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38476, n. 171 and accompanying text.
---------------------------------------------------------------------------

Comments Received
    The Commission notes that it did not receive comments regarding 
Sec.  150.10(a)(4).
Commission Determination
    The Commission is reproposing Sec.  150.10(a)(4), as originally 
proposed.
e. Proposed Sec.  150.10(a)(5)
Proposed Rule
    Proposed Sec.  150.10(a)(5) clarified that an applicant's spread 
position would be deemed to be recognized as a spread position exempt 
from federal position limits at the time an exchange recognized it. The 
Commission noted that this was substantially similar to proposed Sec.  
150.9(a)(5) for non-enumerated bona fide hedging position 
exemptions.\1161\
---------------------------------------------------------------------------

    \1161\ For example, proposed Sec.  150.9(a)(5) provided that the 
position will be deemed to be recognized as a non-enumerated bona 
fide hedging position when an exchange recognized it.
---------------------------------------------------------------------------

Comments Received
    One commenter expressed the view that it is concerned regarding how 
an exchange should coordinate the granting of exemptions with respect 
to contracts on the same underlying commodities that trade on different 
exchanges, and requests guidance from the Commission on that 
matter.\1162\
---------------------------------------------------------------------------

    \1162\ CL-ISDA-60931 at 6-7.
---------------------------------------------------------------------------

Commission Reproposal
    The Commission is reproposing Sec.  150.10(a)(5), as originally 
proposed. The Commission notes that the proposal allows each exchange 
to use its own expertise to decide what exemptions and limit levels to 
employ for their venue with the Commission serving in an oversight role 
to monitor exemptions and position limits across exchanges. The 
Commission also notes that although the proposal does not address 
coordination of granting of exemptions among exchanges, there is 
nothing in the proposal that would prohibit exchanges from 
coordinating.
f. Proposed Sec.  150.10(a)(6)
Proposed Rule
    Proposed Sec.  150.10(a)(6) required exchanges that elect to 
process spread applications to promulgate reporting rules for 
applicants who owned, held or controlled positions recognized as 
spreads; the Commission noted that this is substantially similar to 
proposed Sec.  150.9(a)(6) for non-enumerated bona fide hedge 
exemptions.\1163\
---------------------------------------------------------------------------

    \1163\ For example, proposed Sec.  150.9(a)(6) provided that an 
exchange would promulgate enhanced reporting rules in order to 
obtain sufficient information to conduct an adequate surveillance 
program to detect and potentially deter excessively large positions 
that might disrupt the price discovery process.
---------------------------------------------------------------------------

Comments Received
    Several commenters \1164\ recommended, ``that the Commission remove 
the proposed requirement that an exchange must adopt enhanced reporting 
rules for market participants that rely on non-enumerated hedge 
exemptions, spread exemptions, or anticipatory exemptions'' because the 
proposal ``would force exchanges to establish rules that require market 
participants to report all referenced contract positions that they hold 
or control in reliance upon a non-enumerated hedge, spread, or 
anticipatory hedge exemption along with the underlying cash market 
exposure (e.g., cash positions or components of a spread) hedged by 
those positions.'' Many of these commenters expressed the view that 
such reporting requirements would be overly burdensome and/or 
confusing.
---------------------------------------------------------------------------

    \1164\ See, e.g., CL-FIA-60937 at 15; CL-CMC-60950 at 12-13; CL-
CCI-60935 at 7-8; CL-NCGA-NGSA-60919 at 12-13; CL-MGEX-60936 at 6; 
CL-ISDA-60931 at 10; CL-NGFA-60941 at 4; CL-Working Group-60947 at 
12 (footnotes omitted) and CL-AMG-60946 at 4-5.
---------------------------------------------------------------------------

Commission Reproposal
    The Commission is reproposing Sec.  150.10(a)(6) with one 
modification to clarify in the regulation text that exchanges are 
authorized, but not required, to determine whether to require reporting 
by the spread exemption applicant. For a more detailed discussion, 
please see the discussion of Sec.  150.9(a)(3) above.
g. Proposed Sec.  150.10(a)(7)
Proposed Rule
    Proposed Sec.  150.10(a)(7) required an exchange to publish on its 
Web site, no less frequently than quarterly, a description of each new 
type of derivative position that it recognized as a spread; the 
Commission noted that this was substantially similar to proposed Sec.  
150.9(a)(7) for non-enumerated bona fide hedging position 
exemptions.\1165\
---------------------------------------------------------------------------

    \1165\ For example, proposed Sec.  150.9(a)(7) provided that an 
exchange would publish on its Web site, no less frequently than 
quarterly, a description of each new type of derivative position 
that it recognized as a non-enumerated bona fide hedge. The 
Commission noted that it envisioned that each description would be 
an executive summary. The description would be required to include a 
summary describing the type of derivative position and an 
explanation of why it qualified as a non-enumerated bona fide hedge. 
The Commission observed that the exchanges were in the best position 
when quickly crafting these descriptions to accommodate an 
applicant's desire for trading anonymity while promoting fair and 
open access for market participants to information regarding which 
positions might be recognized as non-enumerated bona fide hedges.

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

[[Page 96836]]

Comments Received
    One commenter expressed the view that proposed Sec.  150.10 would 
have an anti-competitive effect on markets that rely on intramarket 
spread trading to enhance liquidity on less actively traded contracts. 
The commenter was concerned that the information that would be 
published in a fact pattern summary would provide details that could be 
used to identify market participants, especially in thinly traded 
specialized markets.\1166\
---------------------------------------------------------------------------

    \1166\ CL-Nodal-60948 at 4.
---------------------------------------------------------------------------

    Another commenter expressed the view that exchanges should ``not be 
required to disclose any conditions of an exemption granted due to the 
potential for such information to compromise the exemption recipient's 
position.'' \1167\
---------------------------------------------------------------------------

    \1167\ CL-CME-60926 at 11.
---------------------------------------------------------------------------

Commission Reproposal
    The Commission is reproposing Sec.  150.10(a)(6), as originally 
proposed. The Commission reiterates that the purpose of each summary is 
to provide transparency to market participants by providing fair and 
open access for market participants to information regarding which 
positions might be recognized as spreads. The summary would be an 
executive summary that does not provide details of a market participant 
who received such an exemption, but rather, a general description of 
what the position is and why it qualifies for a spread exemption. The 
commenters did not provide any proposed alternatives to provide such 
transparency to market participants.
h. Proposed Sec.  150.10(a)(8)
Proposed Rule
    Proposed Sec.  150.10(a)(8) provided options for an exchange to 
elect to request the Commission review a spread application that raised 
novel or complex issues, using the process set forth in proposed Sec.  
150.10(d), discussed below.\1168\ This was substantially similar to 
those proposed under Sec.  150.9(a)(8).\1169\
---------------------------------------------------------------------------

    \1168\ If the exchange determined to request under proposed 
Sec.  150.10(a)(8) that the Commission consider the application, the 
exchange must, under proposed Sec.  150.10(a)(4)(v)(C), notify an 
applicant in a timely manner that the exchange had requested that 
the Commission review the application. This provision provided the 
exchanges with the ability to request Commission review early in the 
review process, rather than requiring the exchanges to process the 
request, make a determination and only then begin the process of 
Commission review provided for under proposed Sec.  150.10(d). The 
Commission noted that although most of its reviews would occur after 
the exchange makes its determination, the Commission could, as 
provided for in proposed Sec.  150.10(d)(1), initiate its review, in 
its discretion, at any time.
    \1169\ For example, proposed Sec.  150.9(a)(8) provided that if 
an exchange makes a request pursuant to proposed Sec.  150.9(a)(8), 
the Commission, as would be the case for an exchange, would not be 
bound by a time limitation.
---------------------------------------------------------------------------

Comments Received
    The Commission did not receive comments regarding Sec.  
150.10(a)(8).
Commission Reproposal
    The Commission is reproposing Sec.  150.10(a)(8), as originally 
proposed.
i. Proposed Sec.  150.10(b)--Recordkeeping Requirements
Proposed Rule
    Proposed Sec.  150.10(b) outlined the recordkeeping requirements 
for exchanges that elected to process spread exemption applications 
submitted pursuant to Sec.  150.10(a). As noted above, the proposed 
processes under this rule were substantially similar to the 
corresponding provisions in Sec.  150.9(b). Hence, the Commission does 
not repeat the discussion here.
Commission Reproposal
    The Commission did not receive comments on Sec.  150.10(b), and is 
reproposing this rule, as originally proposed, for the same reasons as 
discussed in connection with Sec.  150.9(b).
j. Proposed Sec.  150.10(c) (Exchange Reporting) and Reproposal
Proposed Rule
    Proposed Sec.  150.10(c)(1) required designated contract markets 
and swap execution facilities that elected to process spread exemption 
applications to submit to the Commission a report for each week as of 
the close of business on Friday showing various information concerning 
the derivative positions that had been recognized by the designated 
contract market or swap execution facility as an exempt spread 
position, and for any revocation, modification or rejection of such 
recognition. Moreover, proposed Sec.  150.10(c)(2) required a 
designated contract market or swap execution facility that elected to 
process applications for exempt spread positions to submit to the 
Commission (i) a summary of any exempt spread position newly published 
on the designated contract market or swap execution facility's Web 
site; and (ii) no less frequently than monthly, any report submitted by 
an applicant to such designated contract market or swap execution 
facility pursuant to rules required under proposed Sec.  
150.10(a)(6).\1170\
---------------------------------------------------------------------------

    \1170\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38480; see also discussion of 150.9(c) at 38474-75.
---------------------------------------------------------------------------

    As noted above, the proposed processes under this rule were 
substantially similar to the corresponding provisions in Sec.  
150.9(c). The Commission did not receive comments on this section that 
differed from those received on Sec.  150.9(c).
Commission Reproposal
    The Commission is reproposing this rule, largely as originally 
proposed, for the reasons previously provided in the discussion 
regarding Sec.  150.9(c), with the same revision to the regulatory text 
included in reproposed Sec.  150.9(c), to clarify that exchanges have 
the discretion to determine whether to incorporate additional reporting 
requirements for spread exemption applicants. In particular, the 
Commission is proposing to amend language in Sec.  150.10(c)(2) to 
clarify that, unless otherwise instructed by the Commission, an 
exchange that elects to process applications to exempt spread positions 
from position limits shall submit to the Commission, no less frequently 
than monthly, ``any reports such [DCM or SEF] requires to be submitted 
by an applicant to such [DCM or SEF] pursuant to the rules required 
under paragraph (a)(6) of this section.''
k. Proposed Sec.  150.10(d) (Review of applications by the Commission) 
and Reproposal
Proposed Rule
    Proposed Sec.  150.10(d) provided for Commission review of 
applications to ensure that the processes administered by the exchange, 
as well as the results of such processes, were consistent with the 
purposes of section 4a(a)(3)(B) of the Act and the Commission's 
regulations thereunder. As noted previously, under the proposal, the 
Commission was not diluting its ability to grant or not grant spread 
exemptions. The Commission reserved to itself the ability to review any 
exchange action, and to review any application by a market participant 
to an exchange, whether prior to or after disposition of such 
application by an exchange. An exchange could ask the Commission to 
consider a spread exemption application (proposed Sec.  150.10(a)(8)). 
The Commission could also on its own initiative at any time--before or 
after action by an exchange--review any application submitted to an 
exchange for recognition of a spread exemption (proposed Sec.  
150.10(d)(1)). And, as noted above, market

[[Page 96837]]

participants would still be able to request a staff interpretive letter 
under Sec.  140.99 from the Commission or seek exemptive relief under 
CEA section 4a(a)(7) from the Commission, as an alternative to the 
three proposed exchange-administered processes.
    As previously indicated, the processes under the proposed rule was 
substantially similar to the corresponding provisions in proposed Sec.  
150.9(d). Hence, the Commission does not repeat the discussion here.
Commission Reproposal
    The Commission did not receive comments on this section that 
differed from those received on Sec.  150.9(d), and is reproposing this 
rule, as originally proposed, for the reasons discussed above in 
connection with Sec.  150.9(d).
l. Proposed Sec.  150.10(e) (Review of summaries by the Commission) and 
Reproposal
Proposed Rule
    The Commission proposed to rely on the expertise of the exchanges 
to summarize and post executive summaries of spread exemptions to their 
respective Web sites under proposed Sec.  150.10(a)(7). The Commission 
also proposed, in Sec.  150.10(e), to review such executive summaries 
to ensure they provided adequate disclosure to market participants of 
the potential availability of relief from speculative position limits.
Commission Reproposal
    As noted above, the proposed processes under this rule are 
substantially similar to the corresponding provisions in Sec.  
150.9(e). The Commission did not receive comments on this section that 
differed from those received on Sec.  150.9(e), and so does not repeat 
the discussion here. For all the reasons previously provided, the 
Commission is reproposing this rule, as originally proposed.
m. Proposed Sec.  150.10(f) (Delegation of Authority) and Reproposal
Proposed Rule
    The Commission proposed to delegate certain of its authorities 
under proposed Sec.  150.10 to the Director of the Commission's 
Division of Market Oversight, or such other employee or employees as 
the Director designated from time to time. Proposed Sec.  
150.10(f)(1)(i) delegated the Commission's authority to the Division of 
Market Oversight to provide instructions regarding the submission of 
information required to be reported to the Commission by an exchange, 
and to specify the manner and determine the format, coding structure, 
and electronic data transmission procedures for submitting such 
information. Proposed Sec.  150.10(f)(1)(v) delegated the Commission's 
review authority under proposed Sec.  150.10(e) to DMO with respect to 
summaries of the types of spread exemptions that were required to be 
posted on an exchange's Web site pursuant to proposed Sec.  
150.10(a)(7).
    Proposed Sec.  150.10(f)(1)(i) delegated the Commission's authority 
to the Division of Market Oversight to agree to or reject a request by 
an exchange to consider an application for recognition of an 
application for a spread exemption. Proposed Sec.  150.10(f)(1)(iii) 
delegated the Commission's authority to review any application for a 
spread exemption, and all records required to be maintained by an 
exchange in connection with such application. Proposed Sec.  
150.10(f)(1)(iii) also delegated the Commission's authority to request 
such records, and to request additional information in connection with 
such application from the exchange or from the applicant.
    Proposed Sec.  150.10(f)(1)(iv) delegated the Commission's 
authority, under proposed Sec.  150.10(d)(2) to determine when an 
application for a spread exemption required additional analysis or 
review, and to provide notice to the exchange and the particular 
applicant that they had 10 days to supplement such application.
    The Commission did not propose to delegate its authority under 
proposed Sec.  150.10(d)(3) to make a final determination as to the 
exchange's disposition. The Commission stated that if an exchange's 
disposition raised concerns regarding consistency with the Act or 
presents novel or complex issues, then the Commission should make the 
final determination, after taking into consideration any supplemental 
information provided by the exchange or the applicant.\1171\
---------------------------------------------------------------------------

    \1171\ See 2016 Supplemental Position Limits Proposal, 81 FR 
38482, Jun. 13, 2016.
---------------------------------------------------------------------------

Commission Reproposal
    As noted above, the proposed processes under this rule are 
substantially similar to the corresponding provisions in Sec.  
150.9(f); the Commission did not receive comments on this section that 
differed from those received on Sec.  150.9(f), and so does not repeat 
the discussion here. For all the reasons previously provided, the 
Commission is reproposing Sec.  150.9(f), as originally proposed.

I. Sec.  150.11--Process for Recognition of Positions As Bona Fide 
Hedging Positions for Unfilled Anticipated Requirements, Unsold 
Anticipated Production, Anticipated Royalties, Anticipated Services 
Contract Payments or Receipts, or Anticipatory Cross-Commodity Hedge 
Positions

1. Overview of the Enumerated Anticipatory Bona Fide Hedging Position 
Exemption Proposal
    After reviewing comments in response to the December 2013 Position 
Limits Proposal, the Commission proposed another method by which market 
participants may have enumerated anticipatory bona fide hedge positions 
recognized. As proposed in the December 2013 Position Limits Proposal, 
Sec.  150.7 would require market participants to file statements with 
the Commission regarding certain anticipatory hedges which would become 
effective absent Commission action or inquiry ten days after 
submission. As the Commission explained in the 2016 Supplemental 
Position Limits Proposal, the method in proposed Sec.  150.11 was an 
exchange-administered process to determine whether certain enumerated 
anticipatory bona fide hedge positions, such as unfilled anticipated 
requirements, unsold anticipated production, anticipated royalties, 
anticipated service contract payments or receipts, or anticipatory 
cross-commodity hedges should be recognized as bona fide hedge 
positions.\1172\
---------------------------------------------------------------------------

    \1172\ Id. at 38495.
---------------------------------------------------------------------------

    The Commission noted that proposed Sec.  150.11 worked in concert 
with the following three proposed rules:
     Proposed Sec.  150.3(a)(1)(i), with the effect that 
recognized anticipatory enumerated bona fide hedging positions may 
exceed federal position limits;
     proposed Sec.  150.5(a)(2), with the effect that 
recognized anticipatory enumerated bona fide hedging positions may 
exceed exchange-set position limits for contracts subject to federal 
position limits; and
     proposed Sec.  150.5(b)(5), with the effect that 
recognized anticipatory enumerated bona fide hedging positions may 
exceed exchange-set position limits for contracts not subject to 
federal position limits.\1173\
---------------------------------------------------------------------------

    \1173\ Id.
---------------------------------------------------------------------------

    The proposed Sec.  150.11 process was somewhat analogous to the 
application process for recognition of non-enumerated bona fide hedging 
positions under proposed Sec.  150.9. The process for recognition of 
enumerated anticipatory

[[Page 96838]]

bona fide hedging positions contained five paragraphs: (a) through (e). 
The first three paragraphs--Sec.  150.11(a), (b), and (c)--required 
exchanges that elected to have a process for recognizing enumerated 
anticipatory bona fide hedging positions, and market participants that 
sought position-limit relief for such positions, to carry out certain 
duties and obligations. The fourth and fifth paragraphs--Sec.  
150.11(d), and (e)--delineated the Commission's role and obligations in 
reviewing requests for recognition of enumerated anticipatory bona fide 
hedging positions.\1174\
---------------------------------------------------------------------------

    \1174\ Id.
---------------------------------------------------------------------------

    The Commission noted that there would be significant benefits 
related to the adoption of proposed Sec.  150.11. Similar to the 
benefits for recognizing positions as non-enumerated bona fide hedging 
positions under Sec.  150.9, recognizing anticipatory positions as bona 
fide hedging posiitons under Sec.  150.11 would provide market 
participants with potentially a more expeditious recognition process 
than the Commission proposal for a 10-day Commission recognition 
process under proposed Sec.  150.7. This could potentially enable 
commercial market participants to pursue trading strategies in a more 
timely fashion to advance their commercial and hedging needs to reduce 
risk. In addition, the Commission pointed out that exchanges would be 
able to use existing resources and knowledge in the administration and 
assessment of enumerated anticipatory bona fide hedging positions. The 
Commission and exchanges have evaluated these types of positions for 
years (as discussed in the December 2013 Position Limits 
Proposal).\1175\
---------------------------------------------------------------------------

    \1175\ Id. at 38496.
---------------------------------------------------------------------------

    The Commission also pointed out that proposed Sec.  150.11, similar 
to proposed Sec.  150.9 and Sec.  150.10, also would provide the 
benefit of enhanced record-retention and reporting of positions 
recognized as enumerated anticipatory bona fide hedging positions. As 
previously discussed, records retained for specified periods would 
enable exchanges to develop consistent practices and afford the 
Commission accessible information for review, surveillance, and 
enforcement efforts. Likewise, weekly reporting under Sec.  150.11 
would facilitate the Commission's tracking of such exemptions.\1176\
---------------------------------------------------------------------------

    \1176\ Id.
---------------------------------------------------------------------------

2. Proposed Sec.  150.11(a)
Proposed Rule
    As noted, proposed Sec.  150.11(a) permitted exchanges to recognize 
certain enumerated anticipatory bona fide hedging positions, such as 
unfilled anticipated requirements, unsold anticipated production, 
anticipated royalties, anticipated service contract payments or 
receipts, or anticipatory cross-commodity hedges. The proposed rule 
allowed market participants to work with exchanges to seek the 
exemption.
    The process under proposed Sec.  150.11(a) was similar to the 
process under proposed Sec.  150.9(a), described above. For example, an 
exchange with at least one year of experience and expertise 
administering position limits could elect to adopt rules to recognize 
commodity derivative positions as enumerated anticipatory bona fide 
hedges. However, the Sec.  150.11(a) process was different from the 
process under proposed Sec.  150.9(a) in that the Commission did not 
propose to permit separate processes for applications based on novel 
versus non-novel facts and circumstances.\1177\
---------------------------------------------------------------------------

    \1177\ Id. at 38481.
---------------------------------------------------------------------------

    As the Commission noted in the 2016 Supplemental Position Limits 
Proposal, it determined to define certain anticipatory positions as 
enumerated bona fide hedging positions when it adopted current Sec.  
1.3(z)(2); the Commission did not change this determination in the 
December 2013 Position Limits Proposal.\1178\ Consequently, the 
Commission did not anticipate that applications for recognition of 
enumerated anticipatory bona fide hedging positions would be based on 
novel facts and circumstances. For the same reason, proposed Sec.  
150.11(a) did not require exchanges to post summaries of any enumerated 
anticipatory bona fide hedging positions. As the Commission noted, 
other simplifications follow from this difference.\1179\
---------------------------------------------------------------------------

    \1178\ Id.
    \1179\ Id.
---------------------------------------------------------------------------

Comments Received
    Several commenters recommended that the Commission specifically 
recognize the full scope of anticipatory hedging activities such as 
anticipatory merchandising and anticipatory processing hedges, utility 
sales and cross-commodity hedges as enumerated bona fide hedging 
position exemptions.\1180\
---------------------------------------------------------------------------

    \1180\ CL- NCC-ACSA-60972 at 2; CL-AGA-60943 at 3; CL-ICE-60929 
at 12; CL-CMC-60950 at 6-9; CL-FIA-60937 at 5, 21; CL-API-60939 at 
3; and CL-EEI-EPSA-60925 at 13.
---------------------------------------------------------------------------

    In addition, several commenters recommended that the Commission not 
adopt the ``active trading'' and ``one year experience'' requirements 
as proposed regarding a DCM's qualification to administer exemptions 
from federal position limits.\1181\ These commenters stated that such 
qualification requirements could have the unintended consequences of: 
(i) harming the ability of market participants to effectively manage 
their risk by preventing the exchanges from recognizing an otherwise 
appropriate exemption from federal speculative position limits; and 
(ii) stifling future innovation in the development of new commodity 
derivative products created to meet evolving market needs and demands.
---------------------------------------------------------------------------

    \1181\ CL-CCI-60935 at 3-4; CL-FIA-60937 at 3; CL-Working Group-
60947 at 10; CL-IECAssn-60949 at 12-13 and CL-CME-60926 at 13.
---------------------------------------------------------------------------

    Certain commenters opposed the Commission delegating hedge 
exemption authority to exchanges entirely.\1182\ These commenters 
believed that such delegated authority creates an inherent conflict of 
interest for exchanges because they are incentivized to increase 
trading volume. Among other concerns, these commenters fear that hedge 
exemption applicants may develop a preference for those exchanges more 
willing to grant exemptions. Further, the exchanges may not have a full 
picture of the entire market in which they are being asked to grant the 
exemption.
---------------------------------------------------------------------------

    \1182\ CL-Public Citizen-60940 at 1-2; CL-RER1-60961 at 1; and 
CL-Better Markets-60928 at 3-5.
---------------------------------------------------------------------------

    According to other commenters, the Commission should eliminate the 
five-day rule.\1183\ Instead, these commenters stated, the Commission 
should specifically authorize exchanges to grant bona fide hedging 
position exemptions during the last five days of trading or less and 
allow exchanges to permit commercial hedging into the spot period where 
the facts and circumstances warrant.
---------------------------------------------------------------------------

    \1183\ CL-IECAssn-60949 at 7-9; CL-NCGA-NGSA-60919 at 7; CL-ICE-
60929 at 9; CL-CMC-60950 at 9-11; CL-API-60939 at 3; CL-NCC-ACSA-
60972 at 2; and CL-Working Group-60947 at 7.
---------------------------------------------------------------------------

    Lastly, several commenters advocated for removal of the proposed 
requirement that exchanges adopt enhanced reporting requirements for 
market participants that rely on exchange-administered hedge 
exemptions.\1184\ One argued that such a requirement is not authorized 
by the CEA and would have the unintended effect of preventing

[[Page 96839]]

new entrants to the relevant market.\1185\ Another further argues that 
these enhanced reporting requirements are unnecessary, impose undue 
cost burdens on commercial end-users, and the Commission can always 
request the information through its existing authority.\1186\ And two 
suggest that the Commission allow exchanges flexibility to request 
satisfactory data, but not set a fixed prerequisite time period to 
obtaining exemptions.\1187\
---------------------------------------------------------------------------

    \1184\ CL-FIA-60937 at 3; and CL-CMC-60950 at 12-13.
    \1185\ CL-FIA-60937 at 3.
    \1186\ CL-CMC-60950 at 12-13.
    \1187\ CL-AMG-60946 at 3-4; and CL-FIA-60937 at 3, 12.
---------------------------------------------------------------------------

Commission Reproposal
    After carefully considering the comments received, the Commission 
is reproposing the rule, as originally proposed. At this time the 
Commission has already proposed several enumerated bona fide hedging 
position exemption categories. At this time, the Commission believes 
that additional fact patterns for bona fide hedging position exemptions 
will require consideration of the facts and circumstances on a case-by-
case basis. The Commission is willing to explore further additions to 
the enumerated list at a later date. However, the Commission reiterates 
that, as previously discussed, an exchange can petition under Sec.  
13.2 for Commission recognition of a generic fact pattern as an 
enumerated bona fide hedging position, and that market participants 
have the flexibility of two processes for recognition of a position as 
an enumerated bona fide hedging position: (i) request an exemptive, no-
action or interpretative letter under Sec.  140.99; and/or (ii) 
petition under Sec.  13.2 for changes to Appendix B to part 150.
    Separately, as noted in the June 2016 Supplemental Position Limits 
Proposal and above, the Commission is not persuaded that an exchange 
with no active trading and no previous experience with a new product 
class would have their interests aligned with the Commission's policy 
objectives in CEA section 4a. In addition, as noted above, the 
Commission points out that the experience is manifested by the people 
carrying out surveillance rather than tied to a particular 
exchange.\1188\ Further, the Commission believes that the active 
trading requirement can be satisfied by maintaining any referenced 
contract listed in the particular commodity at issue. For example, a 
DCM may immediately begin accepting hedge exemption requests for a new 
commodity contract pursuant to Sec.  150.11(a) if the DCM already 
maintains contract(s) in the same underlying commodity class that 
satisfy the experience and active trading requirements.
---------------------------------------------------------------------------

    \1188\ As the Commission noted above when discussing the 
requirement for one year of experience in connection with Sec.  
150.9(a), experience manifests in the people carrying out 
surveillance in a commodity rather than in an institutional 
structure. An exchange's experience could be demonstrated through 
the relevant experience of the surveillance staff regarding the 
particular commodity. In fact, the Commission has historically 
reviewed the experience and qualifications of exchange regulatory 
divisions when considering whether to designate a new exchange as a 
contract market or to recognize a facility as a SEF; as such 
exchanges are new, staff experience has clearly been gained at other 
exchanges.
---------------------------------------------------------------------------

    The Commission clarifies, however, that an exchange can petition 
the Commission, pursuant to Sec.  140.99, for a waiver of the one-year 
experience requirement if such exchange believes that their experience 
and interested are aligned with the Commission's interests with respect 
to recognizing enumerated anticipatory bona fide hedging positions.
    The Commission appreciates commenter concerns regarding those 
opposed to delegating any hedge exemption authority to exchanges. 
However, the Commission reiterates that it retains full oversight 
authority over exchanges issuing hedge exemptions. Further, the 
Commission believes an exchange's required experience administering 
position limits for its actively traded contracts, and the Commission's 
de novo review of granted hedge exemptions are adequate to guard 
against or remedy any conflicts of interest that may arise. The 
Commission also notes that exchanges remain bound by the Commission's 
bona fide hedging position definition for all hedge exemption 
determinations conducted pursuant to part 150 of Commission 
Regulations.
    The Commission believes the five-day rule should be applied to 
anticipatory bona fide hedging positions. If a market participant 
wishes to secure an exemption from the five-day rule, the participant 
should submit an exemption request, pursuant to Sec.  150.9, for 
recognition of a non-enumerated bona fide hedging position.
    Further, the Commission believes that reporting requirements 
applicable to market participants seeking an exemption pursuant to 
Sec.  150.11 may remain as proposed. The Commission notes that Sec.  
150.11(a)(5) clarifies that applicants are bound by the reporting 
requirements found in Sec.  150.7(e). As noted in Sec.  150.7, 
understanding the recent history of a firm's production data is 
necessary to ensure the requested anticipated hedge exemption is 
reasonable. However, as discussed above, the Commission notes that it 
may permit a reasonable, supported estimate of, for example, 
anticipated production for less than three years of annual production 
data, in the Commission's discretion, if a market participant does not 
have three years of data. Further, the Commission is amending the 
applicable form instructions to clarify that Commission staff could 
determine that such an estimate is reasonable and would be accepted. 
The Commission is also proposing that exchange staff, on behalf of the 
Commission, also could permit a reasonable, supported estimate of, for 
example, anticipated production for less than three years of annual 
production data.
3. Proposed Sec.  150.11(b) (Recordkeeping) and Reproposal
Proposed Rule
    Proposed Sec.  150.11(b) required electing designated contract 
markets and swap execution facilities to keep full, complete, and 
systematic records of all activities relating to the processing and 
disposition of enumerated anticipatory bona fide hedging exemption 
requests submitted pursuant to Sec.  150.11(a). As previously stated, 
the Commission believes such recordkeeping requirements are essential 
to ensure adequate compliance and oversight.
Commission Reproposal
    As noted, the proposed processes under this rule are substantially 
similar to the corresponding provisions in Sec.  150.9(b) and Sec.  
150.10(b). Hence, the Commission does not repeat the discussion here. 
The Commission did not receive comments on Sec.  150.11(b), and is 
reproposing this rule, as originally proposed, for the same reasons as 
Sec.  150.9(b) and Sec.  150.10(b).
4. Proposed Sec.  150.11(c) (Exchange Reporting) and Reproposal
Proposed Rule
    Proposed Sec.  150.11(c) required designated contract markets and 
swap execution facilities that elected to process enumerated 
anticipatory bona fide hedging position applications to submit to the 
Commission a report for each week as of the close of business on Friday 
showing various information concerning the derivative positions that 
had been recognized by the designated contract market or swap execution 
facility as an enumerated anticipatory bona fide hedging position, and 
for any revocation, modification or rejection of such recognition. 
Similar to non-enumerated bona fide hedging positions

[[Page 96840]]

and spreads, this rule implemented a weekly reporting obligation for 
exchanges. Unlike the other hedge exemption application types, 
exchanges would have no monthly reporting or web-posting obligations 
related to accepting or granting enumerated anticipatory bona fide 
hedging position exemptions.
Commission Reproposal
    In consideration of these reduced reporting requirements and the 
previous discussion of this subject regarding proposed Sec. Sec.  
150.9(c) and 150.10(c), the Commission is reproposing this rule, as 
originally proposed, for the reasons discussed therein.
5. Proposed Sec.  150.11(d) (Review of applications by the Commission) 
and Reproposal
Proposed Rule
    As set forth in proposed Sec.  150.11(d), an exchange could ask the 
Commission to consider an enumerated anticipatory bona fide hedging 
position application directly. Further, the Commission could also, on 
its own initiative, at any time--before or after action by an 
exchange--review any application submitted to an exchange for 
recognition of an enumerated anticipatory bona fide hedging position. 
As noted, alternatives also remain available. Market participants would 
retain the ability to apply directly to the Commission under Sec.  
150.7, to separately request staff interpretive letters pursuant to 
Sec.  140.99 or seek exemptive relief under CEA section 4a(a)(7).
    The review process set forth in Sec.  150.11(d) was simpler than 
other hedge exemption requests because such applications are not 
anticipated to be based on novel facts and circumstances. Rather, 
Commission review would focus on whether the hedge exemption 
application satisfied the filing requirements contained in Sec.  
150.11(a). If the filing was not complete, then proposed Sec.  
150.11(d) would provide an opportunity to supplement to the applicant 
and the exchange.
Commission Reproposal
    Aside from this minor difference, the proposed processes under this 
rule were substantially similar to the corresponding provisions in 
Sec.  150.9(d) and Sec.  150.10(d). Hence, the Commission does not 
repeat the discussion here. The Commission believes the proposed de 
novo review of exchange-granted anticipatory bona fide hedging position 
exemptions is adequate to maintain proper exchange oversight. For all 
the reasons previously provided above in the discussion regarding Sec.  
150.9(d), the Commission is reproposing this rule, as originally 
proposed.
6. Proposed Sec.  150.11(e) (Delegation of Authority) and Reproposal
Proposed Rule
    As noted previously, the Commission proposed to delegate certain of 
its authorities under Sec.  150.11 to the Director of DMO, or such 
other employee or employees as the Director may designate from time to 
time. In particular, proposed Sec.  150.11(e)(1)(ii) delegated the 
Commission's authority to DMO to provide instructions regarding the 
submission of information required by an exchange, and to specify the 
manner and determine the format, coding structure, and electronic data 
transmission procedures for submitting such information. Proposed Sec.  
150.11(e)(1)(i) delegated the Commission's authority to DMO to agree to 
or reject a request by an exchange to consider an application for 
recognition of an enumerated anticipatory bona fide hedge. Proposed 
Sec.  150.11(e)(1)(iii) delegated the Commission's authority to review 
any application for recognition of an enumerated anticipatory bona fide 
hedging position and delegate the authority to request related records 
or supporting information from the exchange or from the applicant.
    Lastly, the Commission proposed in Sec.  150.11(e)(iv), to delegate 
its authority to determine, under proposed Sec.  150.11(d)(2), that it 
was not appropriate to recognize a commodity derivative position as an 
enumerated anticipatory bona fide hedging position, or that the 
disposition by an exchange of an application for such recognition is 
inconsistent with the filing requirements of proposed Sec.  
150.11(a)(2). The delegation also provided DMO with the authority, 
after any such determination was made, to grant the applicant a 
reasonable amount of time to liquidate its commodity derivative 
position or otherwise come into compliance.
    This proposed delegation took into account that applications 
processed by an exchange under proposed Sec.  150.11 would be for 
positions that should satisfy the requirements for enumerated bona fide 
hedging positions set forth in the Commission's rules, and should 
therefore be less likely to raise novel issues of interpretation, or 
novel issues with respect to consistency with the filing requirements 
of proposed Sec.  150.11(a)(2), than applications processed under 
proposed Sec.  150.9 or Sec.  150.10. Such delegation is consistent 
with the Commission's longstanding delegation to DMO of its authority 
to review applications for recognition of enumerated bona fide hedging 
positions under current Sec.  1.48, as well as consistent with the more 
streamlined approach to Commission review of enumerated anticipatory 
bona fide hedging position applications in proposed Sec.  150.7.
Commission Reproposal
    As noted above, the proposed processes under this rule are 
substantially similar to the corresponding provisions in Sec.  150.9(f) 
and Sec.  150.10(f). Hence, the Commission does not repeat the 
discussion of related comments here. The Commission is reproposing this 
rule, as originally proposed, for the reasons discussed above in 
connection with Sec.  150.9(f), with the clarification that the 
Commission retains the authority to make the final determination to 
grant or deny hedge exemption applications.

J. Miscellaneous Regulatory Amendments

1. Part 150.6--Ongoing Application of the Act and Commission 
Regulations
Proposed Rule
    The Commission proposed 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 
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.\1189\ 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

[[Page 96841]]

attempted manipulation, a perfected manipulation or deceptive conduct.
---------------------------------------------------------------------------

    \1189\ The Commission notes that amended Sec.  150.6 matches 
vacated Sec.  151.11(h).
---------------------------------------------------------------------------

Comments Received
    The Commission received no comments on the proposed amendments to 
Sec.  150.6.
Commission Reproposal
    The Commission is reproposing Sec.  150.6, with an amendment to 
clarify the application of part 150 to other provisions of the Act or 
Commission regulations. Specifically, in order to avoid any confusion 
regarding whether Sec.  150.6 applies to position limits regulations 
found outside of part 150 of the Commission's regulations (e.g., 
relevant sections of part 19), the amendment clarifies that 
recordkeeping and reporting regulations associated with speculative 
position limits are affected by part 150. The amendment also clarifies 
that regulations incorporated by reference to part 150 are also 
affected by the regulations promulgated under part 150. These changes, 
while not substantively different from the proposed rule, provide 
additional clarity regarding the application of part 150 to other 
provisions of the Act or Commission regulations.
    The Commission also notes that Sec.  150.6 applies despite the 
Commission's amendments to the appendices to parts 37 and 38 of the 
Commission's regulations regarding delayed implementation of exchange-
set limits for swaps on exchanges without sufficient swaps position 
information.
2. Part 150.8--Severability
Proposed Rule
    The Commission proposed 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.\1190\
---------------------------------------------------------------------------

    \1190\ The Commission notes that proposed Sec.  150.8 matches 
vacated Sec.  151.13.
---------------------------------------------------------------------------

Comments Received
    The Commission did not receive any comments regarding proposed 
Sec.  150.8.
Commission Reproposal
    The Commission is reproposing the severability clause in Sec.  
150.8. The Commission believes it is prudent to include a severability 
clause to avoid any further delay, as practicable, in carrying out 
Congress' mandate (underscored by the Commission's own preliminary 
finding of necessity) to impose position limits in a timely manner.
3. Part 15--Reports--General Provisions
Proposed Rule
    The Commission proposed 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 proposed amendments to Sec.  15.01(d) added language 
to reference swaps positions and updated the list of reporting forms in 
current Sec.  15.02 to account for new and updated series '04 reporting 
forms, as discussed above.\1191\
---------------------------------------------------------------------------

    \1191\ See discussion of new and amended series '04 reports 
above.
---------------------------------------------------------------------------

Comments Received
    The Commission did not receive any comments regarding the proposed 
amendments to part 15.
Commission Reproposal
    The Commission is reproposing amendments to part 15, as originally 
proposed, to update and clarify the definition of ``reportable 
position,'' add references to swaps positions, and add to the list of 
reporting forms.
4. Part 17--Reports by Reporting Markets, Futures Commission Merchants, 
Clearing Members, and Foreign Brokers
Proposed Rule
    In the December 2013 Position Limits Proposal, the Commission 
proposed to amend current Sec.  17.00(b) to delete provisions related 
to aggregation, since those provisions are duplicative of aggregation 
provisions in Sec.  150.4.\1192\ Instead, as proposed, Sec.  17.00(b) 
provides 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) 
delegates to the Director of the Division of Market Oversight or his 
designee the authority to instruct persons pursuant to proposed Sec.  
17.03.\1193\
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    \1192\ In a separate final rulemaking, the Commission is 
finalizing amendments to Sec.  150.4 regarding the aggregation of 
positions. See 2016 Final Aggregation Rule.
    \1193\ Previously, in 2013, the Commission adopted amendments to 
Sec.  17.03. Ownership and Control Reports, Forms 102/102S, 40/40S, 
and 71, 78 FR 69178 (Nov. 18, 2013). The Commission is now proposing 
to amend Sec.  17.03 further by adding Sec.  17.03(h).
---------------------------------------------------------------------------

Comments Received
    The Commission did not receive any comments regarding the proposed 
changes to part 17.
Commission Reproposal
    The Commission is reproposing amendments to part 17, as originally 
proposed, to delete duplicative aggregation provisions and delegate to 
the Division of Market Oversight the authority to instruct persons 
pursuant to proposed Sec.  17.03.
4. Removal of Commission Regulations 1.47 and 1.48, and Part 151--
Position Limits for Futures and Swaps
Proposed Rule
    As discussed above, the Commission intended, in a 2011 final rule, 
to amend several other sections as part of its then adoption on part 
151. Among the sections the Commission was then affecting was the 
removal and reservation of Sec. Sec.  1.47 and 1.48. Both sections 
permitted market participants to seek recognition of positions as bona 
fide hedges.\1194\
---------------------------------------------------------------------------

    \1194\ Sec.  1.47 pertains to requirements for classification of 
purchases or sales of contracts for future delivery as bona fide 
hedging under Sec.  1.3(z)(3 of the regulations, while Sec.  1.48 
addresses requirements for classification of sales or purchases for 
future delivery as bona fide hedging of unsold anticipated 
production or unfilled anticipated requirements under Sec.  
1.3(z)(2) (i)(B) or (i)(C) of the regulations.
---------------------------------------------------------------------------

    However, prior to the compliance date for that 2011 rulemaking, as 
noted above, a federal court vacated most provisions of that 
rulemaking, including the amendments to the definition of a bona fide 
hedging position in Sec.  1.3(z), as well as to the removal and 
reservation of Sec. Sec.  1.47 and 1.48.\1195\ Because the Commission 
did not instruct the Federal Register to roll back the 2011 changes to 
the CFR, the current CFR still shows the versions adopted in 2011, 
which shows Sec. Sec.  1.47 and 1.48 as ``reserved.'' As the Commission 
noted in the December 2013 Position Limits Proposal, in light of the 
proposed amendments to part 150, as well as the District Court vacatur 
of part 151, the

[[Page 96842]]

amendments to the definition of a bona fide hedging position in 1.3(z), 
and the removal and reservation of Sec. Sec.  1.47 and 1.48, the 
Commission again proposed to remove and reserve Sec. Sec.  1.47 and 
1.48.
---------------------------------------------------------------------------

    \1195\ International Swaps and Derivatives Association v. United 
States Commodity Futures Trading Commission, 887 F. Supp. 2d 259 
(D.D.C. 2012).
---------------------------------------------------------------------------

Commission Reproposal
    The Commission is reproposing to remove and reserve Sec.  1.47 in 
light of the Commission's proposal of new provisions in Sec.  150.9 
addressing exchange recognitions of positions as non-enumerated bona 
fide hedging positions, subject to Commission review. Similarly, in 
connection with the reproposal of Sec. Sec.  150.7 and 150.11, the 
Commission is proposing to remove and reserve, as originally proposed, 
Sec.  1.48. Finally, the Commission is reproposing that part 151 be 
removed and reserved in response to the reproposed revisions to part 
150 that conform it to the amendments made to the CEA section 4a by the 
Dodd-Frank Act.

IV. Related Matters

A. Cost-Benefit Considerations

    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its actions before promulgating a regulation 
under the CEA or issuing certain orders. 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. The Commission considers the costs and benefits 
resulting from its discretionary determinations with respect to the 
Section 15(a) factors.
    The baseline against which the Commission considers the benefits 
and costs of these reproposed rules is the statutory requirements of 
the CEA and the Commission regulations now in effect--in particular the 
Commission's Part 150 regulations and rules 1.47 and 1.48.\1196\
---------------------------------------------------------------------------

    \1196\ See December 2013 Position Limits Proposal, Table 4, at 
75712, for a list of existing regulations related to enumerated bona 
fide hedges.
---------------------------------------------------------------------------

1. Necessity Finding
    Out of an abundance of caution in light of the district court 
decision in ISDA v. CFTC,\1197\ and without prejudice to any argument 
the Commission may advance in any forum, the Commission has 
preliminarily found, as a separate and independent basis for the Rule, 
that speculative position limits are necessary to achieve the purposes 
of the CEA.
---------------------------------------------------------------------------

    \1197\ International Swaps and Derivatives Association v. United 
States Commodity Futures Trading Commission, 887 F. Supp. 2d 259 
(D.D.C. 2012).
---------------------------------------------------------------------------

a. Benefits of Speculative Position Limits Rules
    The Commission expects that the speculative position limits in the 
reproposed Rule will promote market integrity. Willingness to 
participate in the futures and swaps markets may be reduced by 
perceptions that a participant with an unusually large speculative 
position could exert unreasonable market power. A lack of participation 
in these markets may harm liquidity, and consequently, may negatively 
impact price discovery and market efficiency as well.
    Position limits may serve as a prophylactic measure that reduces 
market volatility due to large trades that impact prices. For example, 
a party who is holding large open interest may become unwilling or 
unable to meet a call for additional margin or take other steps that 
are necessary to maintain the position. In such an instance, the party 
may substantially reduce its open interest in a short time interval. In 
general, price impacts could arise from large positions as they are 
established or liquidated.
    Exchanges and the Commission may gain insight into the markets as 
market participants seek exemptions from position limits. This may 
improve the exchanges' and the Commission's ability to supervise 
markets and to deter and prevent market manipulation. Further, the 
discipline of seeking exemptions that are tied to particular situations 
may improve a market participant's risk management practices, as it 
goes through the exercise of justifying the need for an exemption.
    There are additional benefits to imposing position limits in the 
spot month. Spot month position limits are designed to deter and 
prevent corners and squeezes. Spot month position limits may also make 
it more difficult to mark the close of a futures contract to possibly 
benefit other contracts that settle on the closing futures price. 
Marking the close harms markets by spoiling convergence between futures 
prices and spot prices at expiration. Convergence is desirable, because 
it facilitates hedging of the spot price of a commodity at expiration. 
In addition, since many other contracts settle based on the futures 
price at expiration, mispricing could affect a larger scope of 
contracts.
b. Costs of Speculative Position Limits Rules
    The Commission recognizes that position limits impose compliance 
costs on market participants. Under position limits, market 
participants must monitor their positions and have safeguards in place 
to remain under a federal position limit or an exemption level. Some 
market participants will have to incur the costs of seeking exemptions 
from federal positons limits. In this Reproposal, the Commission has 
sought to reduce these costs by setting the federal position limits at 
an appropriately high level and by relying on the experience and 
expertise of exchanges to administer exemptions.
    Market participants who find position limits binding may have to 
transact in less effective instruments such as futures contracts that 
are similar but not the same as the core referenced futures contract. 
These instruments could include forward contracts, trade options, or 
futures on a foreign board of trade. Transacting in substitute 
instruments may raise transaction costs. Finally, if transactions shift 
to other instruments, futures prices might not reflect fully all the 
speculative demand to hold the futures contract, because substitute 
instruments may not influence prices in the same way that trading 
directly in the futures contract does. In these circumstances, futures 
market price discovery and efficiency might be harmed.
c. Summary of General Comments Regarding Speculative Position Limits 
Rules
i. Comments on General Aspects of the Rule
    One commenter asserted that the proposed rules have the potential 
to increase systemic risk, impair market function, and increase the 
costs and volatility of wholesale energy commodities. Moreover, the 
commenter asserted that these adverse impacts are unrelated to any 
mandates placed upon the Commission by Congress.\1198\
---------------------------------------------------------------------------

    \1198\ CL-IECAssn-59679 at 1-2.
---------------------------------------------------------------------------

    Another commenter said that position limits that are not necessary 
or appropriate increase commercial parties' compliance costs and reduce 
market liquidity, which in turn increases the cost of hedging. The 
commenter believes the Commission did not adequately consider these 
costs and the lack of corresponding benefits.\1199\
---------------------------------------------------------------------------

    \1199\ CL-EEI-EPSA-59602 at 2 and 3, CL-EEI-Sup-60386 at 3.

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

[[Page 96843]]

    One commenter requested that as the Commission enacts its final 
rule it should avoid imposing materially costly and complex rules and 
reporting requirements on hedgers unless they are manifestly necessary 
to prevent a meaningful threat to market integrity.\1200\
---------------------------------------------------------------------------

    \1200\ CL-ASR-60933 at 5.
---------------------------------------------------------------------------

    In response to 2016 Supplemental Position Limits Proposal RFC 37, a 
commenter stated that maintaining the status quo in which exchanges 
administer an established process for position limits and exemptions 
will provide legal certainty and maintain current costs instead of 
increasing them.\1201\ In response to 2016 Supplemental Position Limits 
Proposal RFC 55, this commenter said that the Commission's Division of 
Enforcement has numerous tools at its disposal, and that the Exchanges 
have position step-down and exemption revocation authorization at their 
disposal, to enforce CEA market manipulation regulations.\1202\
---------------------------------------------------------------------------

    \1201\ CL-IECAssn-60949 at 19.
    \1202\ CL-IECAssn-60949 at 23.
---------------------------------------------------------------------------

    Sen. Levin commented that the benefits of the proposed rules, while 
difficult to quantify, create a net benefit to the public and the 
markets by helping to ensure the markets' continued stability, 
fairness, and profitability.\1203\
---------------------------------------------------------------------------

    \1203\ CL-Sen. Levin-59637 at 9-10.
---------------------------------------------------------------------------

ii. Response to Comments on General Aspects of the Rule
    The Commission has interpreted the Dodd-Frank Act to mandate that 
the Commission impose federal position limits on physical-delivery 
futures contracts. In addition, the Commission is making a preliminary 
alternative finding that position limits are necessary to accomplish 
statutory objectives. The Commission believes that it has calibrated 
the levels of those limits so as to avoid harmful effects on the 
markets and, accordingly, does not believe the imposition of federal 
position limits at the reproposed levels will have the effects that 
concerned commenters. These commenter concerns are counterpoised by the 
desirable effects on markets that Sen. Levin ascribed to position 
limits.
iii. Comments on Cost Estimates
    A commenter expressed concern that the CFTC has underestimated the 
costs of compliance with the position limits rules, and the number of 
affected parties, so that the potential unintended consequences of the 
rules will outweigh their benefits. The commenter believes this would 
result because the compliance costs associated with position limits are 
high and particularly burdensome for market participants who are 
unlikely ever to come close to reaching the limits.\1204\
---------------------------------------------------------------------------

    \1204\ CL-MFA-60385 at 12-13. See also CL-COPE-59622 at 5 and 
CL-CMC-59634 at 2.
---------------------------------------------------------------------------

    Another commenter believes that the cost-benefit analysis in the 
2016 supplemental proposal features unrealistically low estimates of 
the time and costs that will be required to implement and maintain 
compliance programs.\1205\
---------------------------------------------------------------------------

    \1205\ CL-ISDA-60931 at 5.
---------------------------------------------------------------------------

    Another commenter asserted that the Commission did not adequately 
quantify the harm from position limits on liquidity for bona fide 
hedgers and the price discovery function, or the implementation and on-
going reporting and monitoring costs for market participants. The 
commenter believes that costs will arise from altering speculative 
trading strategies in response to a limited definition of bona fide 
hedging; reassessing and modifying existing trading strategies to 
comply with limits; amending DCMs' current aggregation and bona fide 
hedging policies; and creating compliant application regimes for 
SEFs.\1206\
---------------------------------------------------------------------------

    \1206\ CL-ISDA/SIFMA-59611 at 24-25.
---------------------------------------------------------------------------

    In response to 2016 Supplemental Position Limits Proposal RFC 56, 
another commenter asserted that unduly low position limits would reduce 
liquidity and discourage market participation, thereby not advancing 
regulatory goals that are already appropriately protected under the 
status quo. In response to 2016 Supplemental Position Limits Proposal 
RFC 66, this commenter said the Commission should consider public 
interest considerations relating to the particular interests of 
commercial end-users, which rely on mitigating price risk in order to 
remain in business. This commenter believes that commercial end-users 
are at risk of being squeezed out of the market, and potentially 
squeezed out of business, as a result of the difficulty of hedging 
commercial risks. The commenter urged the Commission to apply graduated 
regulatory requirements for bona fide hedging determinations that would 
account for differences between market participants.\1207\
---------------------------------------------------------------------------

    \1207\ CL-IECAssn-60949 at 23, 25-26.
---------------------------------------------------------------------------

iv. Response to Comments on Cost Estimates
    As shown in the impact analysis, the Commission seeks to reduce 
market participants' compliance costs by setting the federal position 
limits at a level sufficiently high to only affect market participants 
with very large open interest. Thus, the Commission expects minimal 
compliance costs for those with positions below these high levels. 
Small traders would be required only to monitor their open interest and 
have safeguards in place to remain below position limits. The 
Commission finds the exemption process valuable because it requires 
participants with very large open interest to provide the information 
required by the exemption application to the relevant exchange(s) and 
to the Commission. Having this information helps exchanges and the 
Commission to better understand the markets they regulate.
    As for the high costs that some commenters claimed to be required 
to implement and maintain compliance programs, the Commission presented 
and requested comment on its estimates of the costs associated with 
compliance programs. Commenters did not provide any specific cost 
estimates to support their assertions of the potential for high costs.
v. Comments on Cross-Border Aspects of the Rule
    In response to 2016 Supplemental Position Limits Proposal RFC 67, a 
commenter noted that swaps and futures markets have become more global 
and suggested that restrictive position limit regulations and added 
reporting requirements would drive global companies to jurisdictions 
that have more friendly regulatory treatment.\1208\ Another commenter 
urged the Commission to consider and assess the costs and benefits of 
applying the rules on an extraterritorial basis.\1209\
---------------------------------------------------------------------------

    \1208\ CL-IECAssn-60949 at 26.
    \1209\ CL-ISDA/SIFMA-59611 at 23.
---------------------------------------------------------------------------

vi. Response to Comments on Cross-Border Aspects of the Rule
    The Commission considers that market participants might use other 
means to engage in derivative activity besides domestic futures and 
swaps if federal position limits are set too low. For instance, price 
discovery for a futures contract might move to a foreign board of trade 
that lists a substitute contract. Further, foreign parties might elect 
to engage in foreign swaps instead of transacting in U.S. futures and 
swaps. To mitigate these risks, the Commission endeavors not to set the 
position limits at levels that are unduly low.
vii. Comments on Quantification of Costs of the Rule
    A commenter criticized the Commission's consideration of the costs 
and benefits of the proposed rules for

[[Page 96844]]

failing to consider both direct and indirect costs on commodities 
markets, market participants, and the economy generally.\1210\ The 
Commenter believes that legal precedents require that in order to adopt 
a position limit rule, the Commission must find a reasonable likelihood 
that excessive speculation will pose a problem in a particular market, 
and that position limits are likely to curtail the excessive 
speculation without imposing undue costs.\1211\ To the contrary, this 
commenter said it had not observed excessive speculation in the years 
since the financial crisis and, thus, position limits would only 
increase regulatory burdens with no corresponding benefit.\1212\ 
Moreover, the commenter thinks the Commission did not adequately 
quantify the harm that market experts predict position limits will 
impose on liquidity for bona fide hedgers, the disruption to the price 
discovery function, or the shifting of price discovery offshore. The 
commenter also pointed to a lack of quantification of implementation 
costs, initial compliance and monitoring costs, and on-going reporting 
and monitoring costs for market participants, and the lack of 
quantified costs of a limited definition of bona fide hedging which 
would require alterations to speculative trading strategies to meet the 
definition; the amendments to DCMs' current aggregation and bona fide 
hedging policies; or the creation of compliant application regimes for 
SEFs.\1213\
---------------------------------------------------------------------------

    \1210\ CL-ISDA/SIFMA-59611 at 3-4 and 22. See also CL-ISDA-60370 
at 2.
    \1211\ CL-ISDA/SIFMA-59611 at 2, 3, citing ISDA, 887 F. Supp. 2d 
at 273. The commenter said the Commission should identify marginal 
benefits of the rule and evaluate the costs and benefits 
appropriately (given limitations on available data). See also CL-
ISDA/SIFMA-59611 at 22, n. 83, citing Inv. Co. Inst. v. CFTC, 720 
F.3d 370, 378-79 (D.C. Cir. 2013). Another commenter believed that 
the Commission must find there is a problem in market pricing as a 
result of positions exceeding non-spot month position limits, or a 
benefit from prohibiting such excess positions, before adopting 
position limits. CL-Working Group-59693 at 61. The commenter is 
concerned that, as a result of non-spot month position limits, 
parties carrying positions above the limit will lose the market 
opportunity experienced in holding the positions, there could be an 
immediate reduction in liquidity if those parties must liquidate 
those positions, and a reduction in the positions of the market 
participants would reduce open interest, reducing subsequent non-
spot month limits and beginning a continuous downward cycle that 
eventually would draw liquidity from markets and impact hedgers. Id.
    \1212\ CL-ISDA/SIFMA-59611 at 30
    \1213\ CL-ISDA/SIFMA-59611 at 24-25
---------------------------------------------------------------------------

    The commenter cited papers by Craig Pirrong and Philip Verleger as 
proper evaluations of the costs and benefits of position limits for 
derivatives,\1214\ and asserted that if quantitative information is 
lacking the Commission must make guesses, even if imprecise, and 
conduct an economic analysis of the likely impact of the proposed 
rules.\1215\ In the paper cited by the commenter, Craig Pirrong 
suggested that the Commission could provide ``valuable evidence'' about 
costs and benefits by documenting for each commodity subject to limits, 
using a long period of historical data, how often limits would have 
been binding and how much large speculators would have had to reduce 
their positions in order to comply with limits.\1216\ He believes it 
would be useful to see how often sudden and unreasonable price changes 
occurred during the period the limits would have been binding, in 
comparison to costs during periods when limits have been binding and 
not associated with sudden and unreasonable price changes.\1217\ He 
said that a proper cost-benefit analysis should quantify net benefits 
relative to the status quo and identify which categories of market 
participants benefit, the sources of those benefits, and their 
magnitude, and also identify which types of participants are more 
likely to incur the costs associated with the limits, identify the 
sources of those costs, and quantify them, while providing the data and 
information necessary for replication of the analysis.\1218\ Last, Mr. 
Pirrong believes the Commission should address potential costs raised 
by commenters on the position limit rules proposed in 2011.\1219\
---------------------------------------------------------------------------

    \1214\ CL-ISDA/SIFMA-59611 at 22 fn 83
    \1215\ CL-ISDA/SIFMA-59611 at 23-24.
    \1216\ CL-ISDA/SIFMA-59611 at Annex B at 5.
    \1217\ CL-ISDA/SIFMA-59611 at Annex B at 5.
    \1218\ CL-ISDA/SIFMA-59611 at Annex B at 5-6.
    \1219\ CL-ISDA/SIFMA-59611 at Annex B at 6.
---------------------------------------------------------------------------

    Another commenter also thought that the Commission should perform a 
cost-benefit analysis to determine whether non-spot month position 
limits are justified. The commenter said that the Commission's 
statements that ``few'' participants would exceed the limits is not a 
sufficient analysis and that the Commission is obligated to do a more 
rigorous analysis before declaring 5, 7, or 11 persons as ``few.'' 
Further, the commenter pointed out that the Commission has not 
specifically stated how often those market participants would have 
exceeded those levels, how much over the limit they were, how the 
position exceedances were distributed along the price curve, or whether 
the positions were calendar spreads, and claimed that the lack of this 
information means there is no way to know whether the removal of those 
positions would have led to a significant reduction in liquidity and 
therefore market participants must assume that such a reduction in 
liquidity would have been significant.\1220\
---------------------------------------------------------------------------

    \1220\ CL-Working Group-59693 at 61. The commenter also believes 
that non-spot month position limits would create a restraint on non-
spot month liquidity due to strip positions along the curve, and 
this would create an unnecessary impact on hedgers. Id. at 61-62.
---------------------------------------------------------------------------

    Sen. Levin commented that the Commission correctly identified the 
prevention and reduction of artificial price disruptions to commodity 
markets as a positive benefit that would protect both market 
participants and the public, and that would outweigh the cost imposed 
on certain speculative traders. Sen. Levin commented that the 
Commission correctly observed that the sound risk management practices 
required by the proposed rules would benefit speculators, end users, 
and consumers.\1221\ Sen. Levin believes these benefits would include: 
The promotion of prudent risk management (with Amaranth illustrating 
the dangers of poor risk management), and broader economic efficiency, 
public welfare, and political security attributable to the availability 
and price stability of commodities such as wheat.\1222\
---------------------------------------------------------------------------

    \1221\ CL-Sen. Levin-59637 at 9.
    \1222\ CL-OSEC-59972 at 2.
---------------------------------------------------------------------------

viii. Response to Comments on Quantification of Costs of the Rule
    The Commission does not believe that the consideration of costs and 
benefits under CEA section 15(a) requires a quantification of all costs 
and benefits. Nor does the statute require the Commission to hazard a 
guess when the available information is imprecise. The statute requires 
the Commission to consider the costs and benefits of its rulemaking, 
which contemplates a qualitative discussion when quantification is 
difficult.
    The Commission addresses most of the commenter's cost and benefit 
concerns later in this consideration of costs and benefits. As for the 
identification and quantification of costs and benefits suggested by 
Mr. Pirrong, the Commission believes it would be of limited usefulness. 
For instance, the quantification would be highly uncertain and require 
many subjective interpretations and judgements on the part of 
investigators. Further, due to statutory restrictions on its release of 
confidential data, the Commission would be unable to provide data and 
other information necessary for the public to conduct an independent 
replication of the Commission's analysis.
    The Commission considered proceeding in stages by first imposing

[[Page 96845]]

position limits in the spot month before imposing then in the single 
month and all months combined. The Commission is preliminarily 
rejecting this alternative based on the impact analysis, because the 
single month and all months combined positon limits are set 
sufficiently high to impact only very few market participants. Further, 
the Commission believes that most of these participants would qualify 
for various exemptions to positions limits.
    Another commenter asserted that the CEA directs the Commission to 
balance the four factors listed in CEA section 4a(a)(3)(B) and, thus, 
the Commission should present rigorous analysis to meet this 
requirement.\1223\ In particular, the commenter pointed out that the 
Commission has not published an analysis of how the proposed position 
limits promote sound risk management and ensure that trading on foreign 
boards of trade in the same commodity will be subject to comparable 
limits so that position limits do not cause price discovery to shift to 
the foreign boards of trade.\1224\
---------------------------------------------------------------------------

    \1223\ CL-CMC-59634 at 2.
    \1224\ See,CL-CMC-59634 at 3. Cf.CEA section 15(a)(2)(D) (titled 
``Costs and Benefits''): ``The costs and benefits of the proposed 
Commission action shall be evaluated in light of . . . 
considerations of sound risk management practices;'' CEA section 
4a(a)(2)(C) (titled ``Goal''): ``In establishing the limits required 
under [CEA 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 to be 
imposed by the Commission will note cause price discovery in the 
commodity to shift to trading on the foreign boards of trade.''
---------------------------------------------------------------------------

    In response to this commenter, the Commission interprets CEA 
section 4a(a)(3)(B) as a direction to the Commission to set limits ``to 
the maximum extent practicable'' to further the four policy objectives 
in that section. The Commission believes this is a Congressional 
recognition of the impossibility of achieving an actual ``maximum'' for 
each of the four policy objectives. In any case, as part of this 
consideration of costs and benefits, the Commission considers the 
promotion of sound risk management practices and whether price 
discovery in a commodity will shift to a foreign board of trade.\1225\
---------------------------------------------------------------------------

    \1225\ See the discussion of factors 3 (risk management) and 4 
(price discovery) under section 15(a), below.
---------------------------------------------------------------------------

ix. Comments on Liquidity Effects
    Commenters addressed the effects of position limits on liquidity. 
One expressed concern that the proposed position limits may constrain 
effective risk transfer by unduly restricting hedging or limiting the 
risk-bearing capacity of large speculators, thereby causing reduced 
liquidity, wider bid-offer spreads and higher transaction costs.\1226\ 
Another thought the Commission did not consider that liquidity and 
price discovery may be diminished if speculative traders' activities 
are restricted.\1227\ In response to 2016 Supplemental Position Limits 
Proposal RFC 62, another commenter said that price discovery will 
improve if market participants are allowed to innovate and grow without 
excessive governmental interference and regulatory reporting 
costs.\1228\ And in response to 2016 Supplemental Position Limits 
Proposal RFC 59, this commenter suggested that position limits should 
be imposed in a manner that will foster innovation and growth for the 
betterment of the markets.
---------------------------------------------------------------------------

    \1226\ CL-MFA-60385 at 4.
    \1227\ See CL-ISDA/SIFMA-59611 at 25. Another commenter asserted 
that the Commission determined in 1993 that all-months-combined 
position limits are unnecessary and that the benefits of such limits 
did not outweigh the likely costs of eroding speculative volume and 
liquidity and the disruption in the efficient functioning of the 
non-storable commodity futures markets. CL-Working Group-59693 at 61 
or CL-CMC. The commenter provided no citations to Commission actions 
in 1993. Commission staff believes that the commenter may be 
referring to a proposal from CME to eliminate the all-months-
combined limits in the live cattle, live hogs, and feeder cattle 
futures and options markets in a March 4, 1993, submission. The 
Commission approved the proposal in an August 2, 1993, letter to the 
CME.
    \1228\ See CL-IECAssn-60949 at 24. Another commenter suggested 
that non-spot month position limits operate as a barrier to market 
entry for longer dated activities in the name of preventing ``a 
shallow threat'' of excessive speculation, and that costs resulting 
from position limits would be ultimately passed to the consumer, 
harming the American economy. CL-EDF-60398 at 4-5.
---------------------------------------------------------------------------

x. Response to Comments on Liquidity Effects
    Liquidity is not a factor that the Commission is required to 
consider under section 15(a) of the CEA; nevertheless, the Commission 
did consider how liquidity concerns implicate the 15(a) factors. For 
instance, the Commission's regulatory goals generally include 
protecting market liquidity, and enhancing market efficiency and 
improving price discovery through increased liquidity. The Commission 
has sought to reduce market participant burdens with the understanding 
that regulatory compliance costs increase transaction costs, which 
might reduce liquidity, all else being equal. The Commission has 
considered that liquidity, including the risk-bearing capacity of 
markets, and price discovery may be harmed if position limits are set 
too low and so has sought to avoid these adverse effects.
    The Commission preliminarily declines to treat general goals such 
as fostering innovation and growth for the betterment of markets as a 
specific public interest consideration under CEA section 15(a). While 
these are of course laudable objectives, the Commission believes they 
are difficult to accomplish through position limits. The Commission has 
not cited these general benefits as a reason for position limits. Last, 
the Commission notes that exchanges have proper incentives and a 
variety of tools with which to increase liquidity on their exchanges 
and, as a general matter, make their exchanges useful to the 
market.\1229\
---------------------------------------------------------------------------

    \1229\ CL-Working Group-59693 at 61-62.
---------------------------------------------------------------------------

xi. Comments Referring to Position Accountability
    A commenter requested that the Commission compare the costs and 
benefits of the proposed position limits regime with those of a 
position accountability regime, because the commenter believed that 
position accountability levels would serve as a less costly and 
disruptive alternative to position limits.\1230\ Another commenter 
compared a position accountability process to position limits, and 
argued that if the Commission imposes position limits for non-spot 
month contracts, the commenter would need to expend significant 
resources to ensure that its information technology systems could 
identify, gather and report bona fide hedging positions. But under 
position accountability, the commenter would be able to reply to a 
specific request for additional information using its own internal 
reports that have been designed to meet its specific commercial and 
risk-management needs. The position accountability approach would 
substantially reduce, if not eliminate, the burden of having to conform 
information technology systems to the Commission's reporting 
requirements.\1231\
---------------------------------------------------------------------------

    \1230\ CL-MFA-60385 at 13.
    \1231\ CL-Calpine-59663 at 4.
---------------------------------------------------------------------------

    A third commenter also suggested that while administering position 
accountability levels, the Commission could conduct a comprehensive 
cost-benefit analysis of the impact of spot month position limits on 
market liquidity for commercial hedgers and price discovery before 
determining whether to extend position limits outside of the spot 
months, and use the information collected to understand the trading 
activity of market participants with large speculative positions and 
determine if non-spot month

[[Page 96846]]

speculative position limits are necessary.\1232\
---------------------------------------------------------------------------

    \1232\ CL-FIA-60303 at 3-4.
---------------------------------------------------------------------------

xii. Response to Comments Referring to Position Accountability
    The Commission considered administering position accountability 
levels in the non-spot month, but has preliminarily determined that the 
adoption of position limits with an exemption process is the better 
approach, because it benefits the supervisory functions of the 
exchanges and the Commission by providing better insight into the 
markets. In addition, the Commission notes it has a lack of statutory 
authority for the Commission itself to administer position 
accountability levels. Rather, the CEA authorizes exchanges to 
administer position accountability levels. In contrast, the 
Commission's emergency authority under the CEA is limited. Further, the 
Commission notes it interprets CEA section 4a(a)(3) as a direction to 
impose, at an appropriate level, position limits on the spot month, 
each other month (i.e., single month), and the aggregate of all months.
2. DCM Core Principle 5(B) and SEF Core Principle 6(B), and new 
Appendix E to Part 150
a. Summary of Changes
    The Commission is reproposing to amend its guidance regarding DCM 
core principle 5(B) and SEF core principle 6(B), and adopting a new 
Appendix E to Part 150. The amendments have the effect of delaying the 
implementation of exchanges' obligation to adopt swap position limits 
until there is sufficient access to swap position information regarding 
market participants' swap positions.
b. Baseline
    The baselines for these changes are the Commission's current 
guidance on DCM Core Principle 5, SEF Core Principle 6, and the current 
Part 150.
c. Benefits and Costs
    Section 15(a) of the CEA requires the Commission to consider the 
costs and benefits of its discretionary actions with respect to rules 
and orders. The Commission believes it is also appropriate to consider 
the costs and benefits of changes to the appendices to parts 37, 38, 
and 150 of the Commission's regulations, even though these appendices 
constitute guidance. The Commission appreciates that the changes to 
this guidance will delay the point in time when exchanges will become 
obligated to monitor and enforce federal position limits for swaps 
(although exchanges could take voluntary steps in this regard at any 
appropriate time). As a result, this change in guidance will likely 
confer benefits and reduce costs, although it is difficult to identify 
the benefits and costs that result directly from the change in guidance 
because the exact time at which exchanges will become obligated to 
monitor and enforce federal position limits for swaps is not currently 
specified but will instead depend on the future availability of 
information. Also, given the interrelationship between the exchanges' 
enforcement of federal position limits for swaps with the exchanges' 
other actions with respect to position limits and the Commission's 
enforcement of federal position limits, it is difficult to identify the 
incremental effect that will occur when exchanges become obligated to 
enforce federal position limits for swaps.
    However, the Commission believes that because of the change in the 
Commission's guidance, exchanges and market participants will benefit 
because the delay will result in a lower requirement to invest in 
technology and personnel to assess federal position limits. In terms of 
costs, the Commission believes that there might be a cost to the market 
associated with this change in guidance because the delay may result in 
exchanges' reducing their monitoring of excessive positions in real-
time.\1233\
---------------------------------------------------------------------------

    \1233\ As stated in Section IIA, the Commission foresees various 
possibilities in remediating this current inability to monitor 
position limits in real-time in the future.
---------------------------------------------------------------------------

d. Summary of Comments
    The Commission requested comment on its consideration of the 
benefits and costs associated with the proposed amendments to guidance, 
and asked if there are additional alternatives that the Commission has 
not identified. Two commenters requested that the Commission formulate 
a plan to address the lack of data access by DCMs and SEFs.\1234\ These 
commenters did not provide a detailed alternative, however. On the 
other hand, one commenter asserted that there should be no delay in 
implementing position limits for swaps because, according to the 
commenter, the Commission has access to sufficient swap data it needs 
to implement position limits.\1235\ The Commission is considering 
various alternatives, but has not made a determination on which 
direction to take.
---------------------------------------------------------------------------

    \1234\ CL-AFR-60953 at 2; CL-RER2-60962 at 1.
    \1235\ CL-Better Markets-60928 at 6.
---------------------------------------------------------------------------

3. Section 150.1--Definitions
    The Commission is reproposing new definitions of, or amendments to 
the definitions of, several terms: Basis contract, bona fide hedge, 
calendar spread contract, commodity derivative contract, commodity 
index contract, core referenced futures contract, eligible affiliate, 
entity, excluded commodity, futures-equivalent, intercommodity spread, 
long position, short position, spot month, intermarket spread, physical 
commodity, pre-enactment swap, pre-existing position, referenced 
contract, spread contract, speculative position limit, swap, swap 
dealer, and transition period. These new definitions and amendments are 
discussed above.
a. Benefits and Costs
    A general benefit of including definitions in the regulation is 
greater clarity. In particular, having specific definitions of terms 
set out as a separate part of the regulations helps users of the 
regulation to understand how the position limit rulemaking relates, in 
general, to the concepts and terminology of CEA as amended by the Dodd-
Frank Act. Although market participants and other users of the 
regulations must take time and effort to understand and adapt to new 
definitions in the context of the rulemaking, the Commission believes 
these costs are reduced by setting out the definitions as a separate 
part of the regulations rather than incorporating the definitions in 
the substantive provisions of the rules.
    Specific benefits and costs of definitions are discussed within the 
context of specific rules where the definitions are directly 
applicable. In addition, the Commission believes that several 
definitions merit a specific consideration of costs and benefits, 
because the adoption of these definitions would represent the exercise 
of substantive discretion on the part of the Commission.
b. Bona Fide Hedging Position
i. Summary of Changes
    The Commission is reproposing a definition of bona fide hedging 
position in Sec.  150.1. The Commission believes this definition of 
bona fide hedging position is consistent with CEA section 4a(c) 
regarding physical commodities and otherwise closely conforms to the 
status quo. Commercial cash market activities are covered by the part 
of the definition that sets out an economically appropriate test. The 
Commission also notes that since CEA 4c(a)(5) separately states that 
intentional or reckless

[[Page 96847]]

disregard for orderly trading execution is unlawful and because it is 
unclear how a market participant would comply with an orderly trading 
requirement in the context of OTC transactions, the Commission is 
proposing to delete the orderly trading requirement in the definition 
of bona fide hedging position. The Commission's addition of sub-
paragraph (2)(iii)(C) to the definition of bona fide hedging position 
in Sec.  150.1 reiterates the Commission's authority to permit 
exchanges to recognize bona fide hedging positions in accordance with 
Sec.  150.9(a). Those positions are subject to CEA section 4a(c) 
standards as well as Commission review.
ii. Baseline
    The baseline for this amendment to the rule is the definition for 
``bona fide hedging transactions and positions,'' set forth in current 
Sec.  1.3(z).\1236\
---------------------------------------------------------------------------

    \1236\ 17 CFR 1.3(z) (2010). As discussed above, a district 
court generally vacated the Commission's part 151 rulemaking, that 
would have amended Sec.  1.3(z) to apply only to excluded 
commodities. However, the Commission has not instructed the Federal 
Register to roll back those vacated amendments. Thus, the current 
version of Sec.  1.3(z) is found in the 2010 or earlier version of 
the CFR.
---------------------------------------------------------------------------

iii. Benefits and Costs
    Futures contracts function to hedge price risk because they allow a 
party to fix a price for a specified quantity of a particular commodity 
at a designated point in time. Futures contracts, thereby, can be used 
by market participants to create price certainty for physically-settled 
transactions. Thus, the Commission believes that to qualify as a bona 
fide hedging position for a physical commodity, the position must 
ultimately result in hedging against some form of price risk in the 
physical marketing channel.
    The Commission is amending the five day/spot month rule so that it 
will allow exchanges to grant spread exemptions that are valid in the 
five day/spot month period. The Commission anticipates that allowing 
spread exemptions to be recognized in the spot month might improve 
liquidity and, thereby, lower costs for market participants.
    Also, the rule amendments will allow bona fide hedge exemptions to 
cover a period of more than one year of cash market exposure. The 
current definition limits to one year the hedging of anticipated 
production of, or requirements for, an agricultural commodity. Removing 
this current restriction is desirable because many commercial 
enterprises may prefer to hedge cash market exposure for more than one 
year.
    The Commission understands that some activity that may have been 
recognized by exchanges as bona fide hedging in the past may not 
satisfy the definition in the reproposed rule. The Commission has 
sought to mitigate costs arising from this transition by setting 
position limits at levels that are appropriately high (so as to limit 
the extent of positions that may require an exemption) and by not 
including any requirement that exchanges use the reproposed rule's 
definition of bona fide hedging position other than with respect to the 
federal position limits in the referenced contracts listed in 150.2(d).
    The Commission notes that an exchange is permitted to recognize 
exemptions for non-enumerated bona fide hedging positions, certain 
spread positions, and anticipatory bona fide hedging positions, under 
the processes of Sec.  150.9, 150.10 and 150.11, respectively, subject 
to assessment of the particular facts and circumstances, where price 
risk arises as a result of other fact patterns than those of the 
enumerated positions. The Commission expects to review with an open 
mind any hedging activity that exchanges choose to exempt as bona fide 
hedging positions with respect to federal position limits. The 
Commission believes, however, that it would be inappropriate to allow 
the exchanges to act with unbounded discretion in interpreting the 
meaning of the term ``economically appropriate'' when the exchanges 
determine whether to recognize an exemption for bona fide hedging. Such 
a broad delegation is not authorized by the CEA and, in the 
Commission's view, would be contrary to the reasonably certain 
statutory standards in CEA section 4a(c), such as the ``economically 
appropriate'' test. That is, if the statutory standards are reasonable 
certain, then the Commission may delegate authority to exchanges. If 
the statutory standards were not reasonably certain, then the 
Commission would be precluded from delegating authority to the 
exchanges. Further, as explained in the discussion of Sec.  150.9, 
150.10 and 150.11, exchange determinations in this regard will be 
subject to the Commission's de novo review.
iv. Summary of Comments
    Several commenters said that the rule's definition of bona fide 
hedging position should be expanded in various ways that would extend 
the scope of the definition to include the hedging of a wider variety 
of risks, in addition to price risk. For example, one commenter claimed 
that hedging some of the risks and costs associated with building 
energy infrastructure may not satisfy the bona fide hedging position 
definition, and that as a result some of these costs would likely be 
passed onto consumers.\1237\ A commenter representing asset managers 
said that the final rule should include a risk management exemption, 
including for commodity index contract positions, because the 
availability of such an exemption would reduce compliance costs and 
reduce negative consequences for liquidity and price discovery, while 
providing the same benefit in terms of preventing excessive 
speculation.\1238\ A third commenter asserted that the ``specifically 
enumerated'' criterion in the proposed definition would constrain risk 
management activities by effectively reclassifying large risk reducing 
positions as excessive speculation.\1239\ On the other hand, a fourth 
commenter believed that the definition of bona fide hedging position in 
the supplemental proposal will benefit consumers through lower prices 
enabled by an efficient hedging mechanism as existing strategies remain 
readily available.\1240\
---------------------------------------------------------------------------

    \1237\ CL-Working Group-59693at 23-26.
    \1238\ CL-AMG-60946 at 2-3.
    \1239\ CL-CME-59718 at 47.
    \1240\ CL-NGFA-60941 at 2-3
---------------------------------------------------------------------------

    Another commenter asserted that the correlation standards in the 
proposed rule would make the bona fide hedging position exemption 
unavailable for hedges related to illiquid delivery locations and 
result in higher risks for market participants and higher costs for 
consumers.\1241\ Along similar lines, another commenter said the 
Commission had not sufficiently considered the commonly accepted 
accounting practice of entering into economic hedges or sufficiently 
analyzed the costs and burdens to companies that engage in economic 
hedging of applying the 0.80 correlation for cross-commodity hedging 
required in the final rule.\1242\
---------------------------------------------------------------------------

    \1241\ See, e.g., CL-EEI-EPSA-59602 at 14. The commenter 
believes that the Commission evaluated only correlation during the 
spot month, but not the closer correlation that typically exists in 
the non-spot months. Id.
    \1242\ CL-NRG at 5
---------------------------------------------------------------------------

    The Commission believes that the definition of bona fide hedging 
position and the related exemption process in the reproposed rule will 
accommodate many existing hedging strategies that market participants 
use. As it would be impossible to enumerate every acceptable bona fide 
hedging activity, the Commission has preliminarily determined that it 
is appropriate to rely on the experience and expertise of exchanges to 
process these exemptions. The Commission believes that the exchanges 
will be better placed to

[[Page 96848]]

determine which activities qualify for bona fide hedging position 
exemptions based on the applicable facts and circumstances. The 
Commission anticipates that the exchanges' role in administering bona 
fide hedging position exemptions will help to mitigate the potential 
adverse effects that commenters attributed to an overly narrow 
application of such exemptions.\1243\
---------------------------------------------------------------------------

    \1243\ For example, the Commission believes that the exchanges' 
involvement in this process is more flexible and far superior to 
setting out regulatory safe harbors for factors such as a linear 
correlation in the spot month that may demonstrate a position 
qualifies for the exemption.
---------------------------------------------------------------------------

    Regarding commenters' suggestions that the definition of bona fide 
hedging position be expanded to encompass hedges of risks other than 
risks related to prices in physical marketing channels, the Commission 
notes that many risks come into play outside the physical marketing 
channel to which referenced contracts relate. The Commission has 
preliminarily determined that hedging of these other risks should not 
be covered by the bona fide hedging position definition, because the 
Commission views the statutory standards in CEA section 4a(c)(2), 
largely mirroring those of the general definition of a bona fide 
hedging position in Sec.  1.3(z)(1), to be reasonably certain as 
limited to hedges of price risks. Further, as explained above, the 
statutory standard of CEA section 4a(c) requires bona fide hedging 
positions to be a substitute for a transaction taken or to be taken in 
the cash market. Generally, this precludes application of the bona fide 
hedging exemption to hedging of purely financial risks that are not 
price risks related to the physical marketing channel. For example, 
commodity index contracts are not eligible for recognition as the basis 
of a bona fide hedging position exemption because these contracts are 
not used to hedge price risks in physical marketing channels, as 
required in CEA section 4a(c)(2)(A)(i), and, as well, would not meet 
the requirements for a bona fide hedging position as a pass-through 
swap offset under CEA section 4a(c)(2)(B).
    Commenters also addressed the element of the bona fide hedging 
position definition that generally requires that hedges be considered 
on a net basis in determining whether the definition is satisfied. One 
commenter argued that hedging on a net basis would be unworkable and 
require costly new technology systems to be built around more rigid, 
commercially impractical hedging protocols that prevent dynamic risk 
management in response to rapidly changing market conditions.\1244\ 
Another commenter asserted that hedging on a gross basis is 
economically appropriate in a variety of circumstances and the 
Commission's proposal would limit market participants' ability to hedge 
the risks associated with their commercial activities, potentially 
resulting in increased costs and volatility that could detrimentally 
impact the market participants and lead to higher prices for 
consumers.\1245\
---------------------------------------------------------------------------

    \1244\ See, e.g., CL-EEI-EPSA-59602 at 15, CL-EEI-Sup-60386 at 
7. See also CL-Calpine-59663 at 7.
    \1245\ CL-Olam-59946 at 1.
---------------------------------------------------------------------------

    The Commission believes that it is fundamental to the definition of 
bona fide hedging position to require that such hedging reduce the 
overall risk of the commercial enterprise. Consistent with that focus 
on overall risk, it should be noted that the Commission does recognize 
certain gross hedges, e.g., the use of a calendar month spread position 
to hedge the price risk of a soybean crush processor, because those 
gross hedges reduce overall risk. That is, in applying the definition 
one must consider whether a hedge reduces the overall risk of the 
commercial enterprise, and overall risks must be determined on a net 
basis.\1246\ In this aspect, too, the Commission believes that the 
involvement of exchanges in the bona fide hedge exemption process will 
be valuable, and the Commission would expect to consider the 
determinations of exchanges in this regard with an open mind.
---------------------------------------------------------------------------

    \1246\ See the Commission determination regarding comments on 
specific, identifiable risks, above, for an explanation of why it 
would be inappropriate to apply the bona fide hedging definition on 
an item by item basis.
---------------------------------------------------------------------------

    Four commenters expressed opposition to an aspect of the proposal 
in the supplemental notice that would not allow hedge exemptions for 
spread transactions to be applied during the last five days of trading 
of a futures contract, saying that spread exemptions should be allowed 
into the spot month to avoid negative effects on liquidity and 
potential disruptions of convergence, potentially resulting in 
additional risk for market participants which ultimately gets passed to 
consumers.\1247\
---------------------------------------------------------------------------

    \1247\ See CL-NCGA-ASA-60917 at 7; CL-IECAssn-60949 at 25; and 
CL-FIA-60937 at 18-19.
---------------------------------------------------------------------------

    The Commission agrees with commenters that allowing spread 
exemptions to be applied in the spot month might improve liquidity and 
lower risks for market participants. Thus, the Reproposal would permit 
exchanges to grant Sec.  150.10 spread exemptions into the five day/
spot period. The costs and benefits of the forms are considered in the 
discussion of Part 19 and rule 150.7.

c. Core Referenced Futures Contract and Referenced Contract

i. Summary of Changes
    The Commission proposes to define the term ``core referenced 
futures contract'' and amend the list of contracts in Sec.  150.2. The 
effect of this is that the federal positon limits in Sec.  150.2(d) 
will apply to the following additional contracts: Rough Rice, Live 
Cattle, Cocoa, Coffee, Frozen Orange Juice, U.S. Sugar No. 11, U.S. 
Sugar No. 16, Light Sweet Crude Oil, NY Harbor ULSD, RBOB Gasoline, 
Henry Hub Natural Gas, Gold, Silver, Copper, Palladium, and Platinum.
    ii. Baseline
    The baseline for the definition of the term ``core referenced 
futures contract'' is that the term encompasses the legacy agricultural 
futures contracts that are subject to existing federal position limits, 
namely: Corn (and Mini-Corn), Oats, Soybeans (and Mini-Soybeans), Wheat 
(Mini-Wheat), Soybean Oil, Hard Winter Wheat, Hard Red Spring Wheat, 
and Cotton No. 2. The baseline for the definition of the term 
``referenced contract'' is the same as that of the term ``core 
referenced futures contract.''
iii. Benefits and Costs
    The definitions of the terms ``core referenced futures contract'' 
and ``referenced contract'' set the scope of contracts to which federal 
position limits apply. As noted above, the Commission has preliminarily 
decided to proceed in stages when imposing federal position limits. 
Among other things, this will allow the Commission to observe how 
futures markets respond to an initial set of position limits before 
applying position limits more widely, including to contracts with less 
liquidity. All other things being equal, markets for contracts that are 
more illiquid tend to be more concentrated, so that a position limit on 
such contracts might significantly reduce trading interest on one side 
of the market, because a large trader would face the potential of being 
capped out by a position limit. For this reason, among others, the 
contracts to which the position limits in Sec.  150.2(d) apply include 
some of the most liquid physical-delivery futures contracts. Following 
the application of position limits to these contracts, the Commission 
would be able to study the effects of position limits more readily and, 
it is anticipated, consider how to apply position limits more broadly 
in a

[[Page 96849]]

way that would not unduly restrain liquidity in less liquid markets.
    The Commission has also preliminarily determined not to apply 
position limits to cash-settled core referenced futures contracts (that 
are not linked to physical-delivery futures contracts) at this time. 
For these contracts, the possibility of corners and squeezes is 
reduced, because there is no link to a physical-delivery futures 
contract that may be distorted, and therefore there is less of a need 
for position limits. Of course, there may be other concerns about 
manipulation of cash-settled futures contracts that are not linked to 
physical-delivery futures contracts, however. For instance, there may 
be an incentive to manipulate a commodity price index in a manner that 
would benefit particular cash-settled futures or swap positions. Such 
manipulative conduct includes cornering or squeezing the underlying 
cash market on which a cash-settlement index is based. The Commission 
notes that these manipulation concerns may be addressed, in part, 
through the Commission's authority to regulate futures and swaps 
(including the terms of these contracts set by exchanges) and take 
enforcement actions, until such time as the Commission adopts position 
limits on cash-settled core referenced futures contracts. Further, 
exchanges in their SRO function may also constrain and discipline 
traders who are trading in a disruptive fashion. Indeed, it is 
reasonable to expect that, given the exchanges' deep familiarity with 
their own markets and their ability to tailor a response to a 
particular market disruption, such exchange action is likely to be more 
effective than a position limit in such circumstances. However, the 
Commission notes the exchanges do not have authority over those persons 
who only transact in OTC swaps.
    The Commission has preliminarily determined to exclude trade 
options from the rule's definition of ``referenced contract,'' for 
several reasons. The Commission believes that many trade options would 
qualify for bona fide hedging position exemptions, since trade options 
are generally used to hedge risks. The Commission also believes that 
not including trade options in the scope of position limits will 
relieve many market participants of significant compliance costs that 
would be required to apply position limits to trade options. Last, this 
approach will allow the market to continue to innovate in the use of 
trade options to hedge a variety of risks.
    The rule's definition of the term ``referenced contract'' includes 
a swap or futures contract that is ``indirectly linked'' to a physical-
delivery futures contract. The ``indirectly linked'' contract could be 
a cash-settled swap or cash-settled futures contract that settles to 
the price of another cash-settled derivative that, in turn settles to 
the price of a physical-delivery futures contract. A contract that 
settles based on the level of a commodity price index, comprised of 
commodities that are not the same or substantially the same, would not 
be an ``indirectly linked'' contract, even if the index uses futures 
prices as components. A contract based on such a commodity price index 
is excluded because the index represents a blend of the prices of 
various commodities.
    The Reproposal's definition of the term ``referenced contract'' 
does not include a swap or futures contract that fixes its closing 
price on the prices of the same commodity at different delivery 
locations than specified in the core referenced futures contract, or on 
the prices of commodities with different commodity specifications than 
those of the core referenced futures contract. This approach is also in 
accord with market practice, in that a core referenced futures contract 
specifies location(s) and grade(s) of a commodity in the relevant 
contract specification. Thus, a contract on one grade of commodity is 
treated by the market as different from a contract on a different grade 
of the same commodity.
    A location basis contract--a contract which reflects the difference 
between two delivery locations of the same commodity--is also excluded 
from the definition of referenced contract.\1248\ A location basis 
contract may be used to hedge price risks relating to delivery at a 
location other than that of the core referenced futures contract. For 
instance, a location basis contract can be used in combination with a 
referenced contract to create a synthetic derivative contract on a 
commodity at a different delivery location, with a resulting zero net 
position in the referenced contract. However, a location basis contract 
that had a relatively small difference in location with that of the 
core referenced futures contract likely would not expose a speculator 
to significant price risk. Absent the exclusion of location basis 
contracts from the definition of referenced contract, such a speculator 
could increase exposure to a referenced contract by netting down, using 
such a location basis contract, the position that would otherwise be 
restricted by a position limit on the referenced contract.
---------------------------------------------------------------------------

    \1248\ The defined term ``location basis contract'' generally 
means a derivative that is cash-settled based on the difference in 
price, directly or indirectly, of (1) a core referenced future 
contract; and (2) the same commodity underlying a particular core 
referenced futures contract at a different delivery location than 
that of the core referenced futures contract.
---------------------------------------------------------------------------

iv. Summary of Comments
    Commenters said that trade options should not be included in the 
definition of ``referenced contract.'' One commenter said there is 
significant uncertainty about the distinction between forward contracts 
and trade options, so costs associated with imposing position limits on 
trade options would greatly exceed any benefits.\1249\ Another argued 
that because trade options have never been subject to position limits, 
commercial parties do not have any systems in place to: Distinguish 
between trade options that are referenced contracts and those that are 
not; monitor the number and quantity of referenced-contract trade 
option positions across delivery points and trading venues; and 
integrate them with other position tracking systems.\1250\
---------------------------------------------------------------------------

    \1249\ CL-FIA-59595 at 20.
    \1250\ See, e.g., CL-NGSA-59674 at 33; CL-NGSA-59900 at 9. 
Another commenter made a more general assertion that the costs of 
monitoring positions subject to a limit, including reporting costs, 
would drive commercial market participants to the spot markets and 
cause them to restrict the variability provided to customers, if 
trade options or forward contracts with optionality were subject to 
position limits. CL-Calpine-59663 at 5.
---------------------------------------------------------------------------

    The Commission took the difficulties explained by commenters in 
complying with position limits on trade options into account when 
preliminarily determining not to include trade options in the 
definition of referenced contract. To provide flexibility, the 
reproposed rule permits trade options to be taken into consideration as 
a cash position, on a futures-equivalent basis, as the basis of a bona 
fide hedging position.
    Another commenter discussed the exclusion of commodity index swaps 
from the definition of swaps that are economically equivalent to core 
referenced futures contracts. This commenter said this disparate 
treatment will shift trading activity to index swaps, drain liquidity 
from exchange-listed products, harm pre-trade transparency and the 
price discovery process, and further depress open interest (as volumes 
shift to index swap positions that do not count toward open interest 
calculations).\1251\
---------------------------------------------------------------------------

    \1251\ CL-Citadel-59933 at 1-3. The commenter also made two 
recommendations relevant to the definition of core referenced 
futures contract: That position limits for cash-settled contracts 
are not warranted and that commodity index swaps should not be 
treated differently than other cash-settled contracts: Id.

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

[[Page 96850]]

    The Commission acknowledges uncertainty about whether there will be 
a loss in liquidity due to the imposition of federal position limits. 
The Commission will monitor this issue going forward.
    Another commenter suggested that the definition of bona fide 
hedging position should include the hedging of a binding and 
irrevocable bid, because a failure to do so could increase the costs 
incurred by utilities and special entities to provide power or gas by 
forcing bidders to incorporate into their bids or offers the cost 
associated with the risk that no exemption for such a hedge would be 
permitted.\1252\ In response, the Commission points out that, under 
reproposed Sec.  150.9, a bidder may seek recognition of a non-
enumerated bona fide hedging position, under which an exchange may 
consider the facts and circumstances on a case-by-case basis.
---------------------------------------------------------------------------

    \1252\ See, e.g., CL-EEI-EPSA-59602 at 18.
---------------------------------------------------------------------------

d. Futures Equivalent
i. Summary of Changes
    The Commission is reproposing two further revisions to the 
definition of ``futures-equivalent'' in the rule. The first revision 
clarifies that the term ``futures-equivalent'' includes a futures 
contract which has been converted to an economically equivalent amount 
of an open position in a core referenced futures contract. Second, the 
Commission clarifies that, for purposes of calculating futures 
equivalents, the size of an open position represented by an option 
contract must be determined as the economically-equivalent amount of an 
open position in a core referenced futures contract.
ii. Baseline
    The baseline for this change to the rule's definition of ``futures 
equivalent'' is the current Sec.  150.1(f) definition of ``futures-
equivalent''.
iii. Benefits and Costs
    The Commission has preliminarily determined that the definition of 
``futures-equivalent'' in current Sec.  150.1(f) is too narrow in light 
of the Dodd-Frank Act amendments to CEA section 4a. To conform to the 
statutory changes and to make the definition more amenable to 
application within the broader position limits regime, the Commission 
is reproposing a more descriptive definition of the term ``futures-
equivalent'' by adding more explanatory text. The Commission continues 
to believe that, as it stated in the proposal, there are no cost or 
benefit implications to these further clarifications.
iv. Summary of Comments
    The Commission requested comment on the revisions to the definition 
of the term ``futures equivalent,'' but did not receive any substantive 
comments. Consequently, the Commission is reproposing the definition in 
the Supplemental 2016 position limit proposal.
e. Intermarket Spread Position and Intramarket Spread Position
i. Summary of Changes
    Current part 150 does not contain definitions for the terms 
``intermarket spread position'' or ``intramarket spread position.'' In 
the Supplemental 2016 Position Limits Proposal the Commission proposed 
to expand the scope of definitions of these terms that had been 
included in the December 2013 Position Limits Proposal. The expanded 
definitions of ``intermarket spread position'' or ``intramarket spread 
position'' include positions in multiple commodity derivative 
contracts. This expansion would allow market participants to establish 
an intermarket spread position or an intramarket spread position that 
would be taken into account under the position limits regime and 
exemption processes. The expanded definitions also cover spread 
positions established by taking positions in derivative contracts in 
the same commodity, in similar commodities, or in the products or by-
products of the same or similar commodities.
ii. Baseline
    Current Sec.  150.1 does not include definitions for the terms 
``intermarket spread position'' and ``intramarket spread position.'' 
Therefore, the baseline is a market where ``intermarket'' and 
``intramarket'' spread positions are not explicitly included in the 
definition of contracts that are exempt from federal position limits.
iii. Benefits and Costs
    The changes to the definitions of the terms ``intermarket spread 
position'' and ``intermarket spread positions'' broaden the scope of 
the two terms in comparison to the definitions proposed in the December 
2013 Position Limits Proposal. In the Commission's view, the changes 
are only operative in the application of Sec. Sec.  150.3, 150.5 and 
150.10, which address exemptions from position limits for certain 
spread positions. The two definitions operate in conjunction with Sec.  
150.10, which sets forth a process for exchanges to administer spread 
exemptions. The definitions and Sec.  150.10, together, will enable 
market participants to obtain relief from position limits for these 
types of spreads, among others.
iv. Summary of Comments
    Citadel recommended that cross-commodity netting should be 
permitted.\1253\ The Commission preliminarily declines to permit cross-
commodity netting within a particular referenced contract. However, the 
Commission addresses cross-commodity netting in the context of 
authorizing exchanges to recognize spread exemptions under reproposed 
Sec.  150.10.
---------------------------------------------------------------------------

    \1253\ CL-Citadel-59933 at 4.
---------------------------------------------------------------------------

4. Section 150.2--Speculative Position Limits
a. 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 
and, as a separate and independent basis for this rulemaking, has made 
a preliminary finding that position limits are necessary as a 
prophylactic measure to carry out the purposes of section 4a(a).\1254\ 
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].'' \1255\ The Commission 
proposed to amend Sec.  150.2 to expand the scope of federal position 
limits regulation in three chief ways: (1) Specify limits on 16 
contracts in addition to the nine existing legacy contracts (i.e., a 
total of 25); (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

[[Page 96851]]

underlying commodity. In addition, the Commission's proposed rule 
included methods and procedures for implementing and applying the 
expanded limits.
---------------------------------------------------------------------------

    \1254\ See supra discussion of the Commission's interpretation 
of this mandate and the alternative necessity finding.
    \1255\ 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 is reproposing amendments to Sec.  150.2 to impose 
speculative position limits as mandated by Congress in accordance with 
the statutory bounds that define the Commission's discretion in doing 
so and, as a separate and independent basis for the Reproposal, because 
the speculative position limits are necessary to achieve their 
statutory purposes.\1256\ 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 CEA section 
4a(a)(2), and for which the Commission separately finds position limits 
are necessary. Second, CEA section 4a(a)(3) requires that the 
Commission appropriately set limit levels mandated and/or found 
necessary under section 4a(a)(2) that ``to the maximum extent 
practicable, in its discretion,'' accomplish four specific 
objectives.\1257\ Third, CEA section 4a(a)(2)(C) requires that in 
setting limits mandated (or adopted as necessary) 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 reproposed rule are summarized 
below.\1258\
---------------------------------------------------------------------------

    \1256\ See supra discussion of the Commission's necessity 
finding.
    \1257\ 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).
    \1258\ For a more detailed description, see discussion above.
---------------------------------------------------------------------------

    Generally, Sec.  150.2 will limit the size of speculative 
positions,\1259\ 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 
will reach: (1) 25 ``core referenced futures contracts,'' \1260\ 
representing an expansion of 16 contracts beyond the 9 legacy 
agricultural contracts identified currently in Sec.  150.2; \1261\ (2) 
a newly defined category of ``referenced contracts'' (as defined in 
Sec.  150.1); \1262\ and (3) across all trading venues to all 
economically equivalent contracts that are based on the same underlying 
commodity.
---------------------------------------------------------------------------

    \1259\ Sec.  150.1 includes a definition of the term 
``speculative position limits.''
    \1260\ Sec.  150.1 defines the term ``core referenced futures 
contract'' by reference to ``a futures contract that is listed in 
Sec.  150.2(d).''
    \1261\ Specifically, in addition to the existing 9 legacy 
agricultural contracts now within Sec.  150.2--i.e., Chicago Board 
of Trade corn (C), oats (O), soybeans (S), soybean oil (SO), soybean 
meal (SM), and wheat (W); Minneapolis Grain Exchange hard red spring 
wheat (MWE); ICE Futures U.S. cotton No. 2 (CT); and Kansas City 
Board of Trade hard winter wheat (KW)--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 (RR); ICE Futures U.S. Cocoa (CC), 
Coffee C (KC), FCOJ-A (OJ), Sugar No. 11 (SB) and Sugar No. 16 (SF); 
Chicago Mercantile Exchange Live Cattle (LC); Commodity Exchange, 
Inc., Gold (GC), Silver (SI) and Copper (HG); and New York 
Mercantile Exchange Palladium (PA), Platinum (PL), Light Sweet Crude 
Oil (CL), NY Harbor ULSD (HO), RBOB Gasoline (RB) and Henry Hub 
Natural Gas (NG). The Commission originally proposed in its 2013 to 
set position limits on 28 core referenced contracts, including the 
25 contracts noted above plus CME Feeder Cattle, Lean Hog and Class 
III Milk. Those three contracts will not be included in the 
Reproposal for the reasons discussed above.
    \1262\ 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 25 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.
---------------------------------------------------------------------------

b. Sec.  150.2(a) Spot-Month Speculative Position Limits
i. Summary of Changes
    In order to implement CEA section 4a(a)(3)(A), reproposed rule 
Sec.  150.2(a) prohibits 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.\1263\ 
Additionally, Sec.  150.2(a) requires that a trader's positions, net 
long or net short, in the physical-delivery referenced contract and 
linked cash-settled referenced contract be 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 linked 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.
---------------------------------------------------------------------------

    \1263\ As discussed supra, the Commission is reproposing to 
adopt a streamlined, amended definition of ``spot month'' in Sec.  
150.1. The term is 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 provides 
that the spot month for cash-settled contracts is that same period 
as that of the core referenced futures contract. For more details, 
see discussion above.
---------------------------------------------------------------------------

ii. Baseline
    To the extent the Commission has correctly interpreted that CEA 
section 4a(a)(2) mandates position limits, the costs and benefits of 
whether to require position limits have been balanced by Congress and 
the Commission is not tasked with revisiting those costs and benefits 
on that specific question.\1264\ To the extent the Reproposal rests on 
the preliminary alternative necessity finding, the baseline is the 
current Sec.  150.2 of the Commission's regulations.
---------------------------------------------------------------------------

    \1264\ See Nat'l Ass'n of Mfrs. v. SEC, 748 F.3d 359, 369-70 
(D.C. Cir. 2014).
---------------------------------------------------------------------------

iii. Benefits and Costs
    As discussed above, CEA section 4a(a)(3)(A) directs the Commission, 
each time it establishes limits, to set limits on speculative positions 
during the spot-month.\1265\ It is during the spot-month period that 
concerns regarding certain manipulative behaviors, such as corners and 
squeezes, become most urgent.\1266\ The Commission has for decades 
applied guidance that spot-month position limits for physical-delivery 
futures contracts should be equal to no more than one-quarter of the 
estimated deliverable supply for that commodity. Spot-month position 
limits provide benefits to the market by restricting speculators' 
ability to amass market power, regardless of whether there is intent to 
manipulate or distort the market. In so doing, spot-month position 
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 and fostering convergence between the expiring core 
referenced futures contract and its underlying cash market. This makes 
the core referenced futures contract more useful for hedging cash 
market positions.
---------------------------------------------------------------------------

    \1265\ 7 U.S.C. 6a(a)(3)(A).
    \1266\ See discussion above.
---------------------------------------------------------------------------

    For example, as discussed above, the absence of manipulative intent 
behind excessive speculation does not preclude the risk that 
accumulation of very large positions will cause the negative

[[Page 96852]]

consequences of the types observed in the Hunt and Amaranth incidents. 
Moreover, it is often difficult to discern manipulative intent. That is 
one reason position limits are valuable as a prophylactic measure for, 
in the language of Section 4a(a)(1), ``preventing'' burdens on 
interstate commerce. The Hunt brothers and Amaranth examples illustrate 
the burdens on interstate commerce of excessive speculation that 
occurred in the absence of position limits, and position limits would 
have restricted those traders' ability to cause unwarranted price 
movement and market volatility. This would be so even had their 
motivations been innocent. Both episodes involved extraordinarily large 
speculative positions, which the Commission has historically associated 
with excessive speculation.\1267\
---------------------------------------------------------------------------

    \1267\ December 2013 Position Limits Proposal, 78 FR 75685 n. 
60.
---------------------------------------------------------------------------

    Exchanges and market participants also benefit from spot-month 
position limits because market participants who seek exemptions to the 
spot-month limit will have to justify why their positions qualify for 
the exemption, which fosters visibility into the market for the 
exchanges and fosters better risk management practices for the market 
participant seeking the exemption.
    In its determination of the appropriate spot month levels for the 
core referenced futures contracts, the Commission took into account 
exchange estimates of deliverable supply, which were verified by the 
Commission staff, and exchange spot-month limit level recommendations. 
A more detailed discussion of the costs and benefits for the actual 
limits can be found below in the discussion of 150.2(d). However, more 
generally, the Commission recognizes federal spot month position limits 
do impose costs to exchanges and market participants. Federal spot 
month limits will require hedgers to apply for exemptions if they hold 
positions in excess of the federal limits. These costs are considered 
in the discussion of 150.3. In addition, speculators who want exposure 
beyond the federal limit for a referenced contract will incur costs to 
trade in instruments that are not subject to federal limits, such as 
trade options and bespoke swaps, which typically incur more expensive 
transactions costs than exchange traded futures and swaps.
    Furthermore, as discussed above, exchanges may choose to adopt 
spot-month limits below the federal limit. Market participants who are 
hedging their cash market positions would incur costs of having to 
apply for an exemption from the exchange if their hedging positons are 
above the lower limit set by the exchange. Otherwise, a market 
participant who wants speculative exposure above the lower limit, but 
who does not qualify for an exemption, would have to take speculative 
positions in other instruments not subject to exchange or Federal 
position limits, which as noted above may involve higher transaction 
costs.
    The Commission also recognizes that there are costs to setting 
federal spot-month limits too high or too low. If the Federal spot-
month limit is too high, the exchanges and the Commission lose 
visibility into market activity because the number of exemption 
applications from market participants will be reduced because of the 
higher limit. In addition, if limits are too high, market participants 
could obtain positions that would impact the price of the commodity, 
possibly manipulating or distorting the futures price, thus impairing 
the price discovery process of the core referenced futures contract. 
Furthermore, if a market participant establishes a very large position 
and then has to unwind its position, there could be an adverse impact 
on the price of the core referenced futures contract (e.g., as occurred 
with Amaranth).
    Conversely, if the Federal spot-month limit is too low, market 
participants and exchanges would incur larger costs to apply for and 
process, respectively, more exemption applications. In addition, as 
noted above, transactions costs for market participants who are near or 
above the limit would rise as they transact in other instruments with 
higher transaction costs to obtain their desired level of speculative 
positions. Additionally, limits that are too low could incentivize 
speculators to leave the market and not be available to provide 
liquidity for hedgers, resulting in ``choppy'' prices and reduced 
market efficiency.\1268\ Further, option premiums would likely increase 
to account for the more volatile prices of the underlying core 
referenced futures contract. Moreover, if confidence in the price of 
the core referenced futures contract erodes, market participants may 
move to another DCM or FBOT.
---------------------------------------------------------------------------

    \1268\ ``Choppy'' prices often refers to illiquidity in a market 
where transacted prices bounce between the bid and the ask prices. 
Market efficiency may be harmed in the sense that transacted prices 
might need to be adjusted for bid-ask bounce to determine the 
fundamental value of the underlying contract.
---------------------------------------------------------------------------

    The Commission proposes to use 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); 
that is, to prevent or deter market manipulation, including corners and 
squeezes. For example, the Commission proposes to use its discretion 
under CEA section 4a(a)(1) to set limits that are equal in the spot-
month for physical-delivery and linked cash-settled referenced 
contracts respectively. By setting separate limits for physical-
delivery and cash-settled referenced contracts, the Reproposal 
restricts the size of the position a trader may hold or control in 
cash-settled referenced 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 referenced contract. 
Thus, the separate limits further enhance the prevention of market 
manipulation provided by spot-month position limits by reducing the 
potential for incentives to engage in manipulative action.
iv. Summary of Comments
    One commenter urged the Commission to ensure that a final rule does 
not compromise predictable convergence in the market, or risk 
threatening the utility of contracts for risk management purposes, 
noting the importance of risk management to the general health of the 
economy.\1269\ Another commenter noted the requirement that the 
Commission consider alternatives and said that the Commission should 
consider not adopting non-spot-month limits, limits that are set 
arbitrarily, or limits on financially settled contracts; consider 
recognizing cross-commodity netting; consider a plan for cross-border 
application of position limits; and consider new data sources, 
including SDRs (although such data's reliability is still in 
development).\1270\
---------------------------------------------------------------------------

    \1269\ CL-ADM-60300 at 3.
    \1270\ CL-ISDA/SIFMA-59611 at 26.
---------------------------------------------------------------------------

    The Commission agrees that the federal position limit regime should 
not unnecessarily impede convergence between the futures and cash 
markets, which would impede the price discovery process of the core 
referenced contract. As discussed below, the Commission endeavors to 
take into account how the position limit levels would impact the number 
of market participants in all of the referenced contracts to reduce 
undesirable impact on those markets.
    The Commission has preliminarily exercised its discretion in 
determining how to adopt position limits and has chosen to start with 
the 25 core referenced futures contracts which were selected on the 
basis that such contracts:

[[Page 96853]]

(1) Have high levels of open interest and significant notional value; 
or (2) serve as a reference price for a significant number of cash 
market transactions. The specific levels are not set arbitrarily. 
Rather, as discussed more below, the Commission takes into account the 
expertise of the exchanges that list the core referenced futures 
contracts. In that regard, the Commission received and verified 
estimates of deliverable supplies for core referenced futures contracts 
and considered spot-month limit levels those exchanges suggested. 
Regarding the data considered in setting the levels of non-spot month 
limits, Commission staff has worked with industry to improve the 
reliability of swap data collected pursuant to part 20 of Commission 
regulations. As discussed below in more detail, the Commission's 
confidence in the data has improved such that it relied on part 20 swap 
position data, to propose initial levels of federal non-spot month 
limits on futures and swaps in the Reproposal. The Commission addresses 
cross-commodity netting in the spread exemptions covered in reproposed 
Sec.  150.10.
    A commenter was concerned that the proposed position limits will 
cause market participants to transact in less-transparent and non-
cleared markets due to a lack of liquidity on futures markets, and 
undermine efforts to encourage market transparency and reduce systemic 
risks through centralized clearing.\1271\ Another commenter pointed out 
that constraining speculation would constrain hedging, and that more 
financial involvement in commodity markets has lowered risk premia and 
made hedging cheaper, making it economical to hold larger inventories 
that help reduce the frequency and severity of large price 
increases.\1272\ A third commenter questioned whether the Supplemental 
Proposal's cost-benefit analysis includes the costs of processing bona 
fide hedging and spread exemptions for contracts subject only to 
exchange-set speculative position limits and not federal speculative 
position limits.\1273\
---------------------------------------------------------------------------

    \1271\ See CL-MFA-60385 at 4. Citing testimony of Erik Haas 
(Director of Market Regulation, ICE Futures U.S.) at the EEMAC 
public meeting on February 26, 2105, the commenter asserted that the 
volume of over-the-counter transactions is already increasing 
because futures contracts have become too costly the further out the 
curve one goes. Id.
    \1272\ See CL-ISDA/SIFMA-59611 at Annex B at 5. This commenter 
referenced, but did not include, two papers as follows. James 
Hamilton and Jing Wu, Risk Premia in Crude Oil Futures Prices, NBER 
Working Paper (2013). Peter Christoffersen, Kris Jacobs, and Bingxin 
Li, Dynamic Jump Intensities and Risk Premiums in Crude Oil Futures 
and Options Markets, working paper (2013).
    \1273\ CL-Working Group-60947 at 14.
---------------------------------------------------------------------------

    The Commission has preliminarily considered how the limits would 
impact traders. In that regard the Commission sought not to impede the 
liquidity of the markets for both hedgers and speculators by setting 
the spot month position limit at a level that would not deter hedgers 
or speculators from participating in the market. The Commission is 
mindful of the beneficial effects that speculators have on the 
commodity markets. As a consequence, the Commission takes into 
consideration the risk of deterring appropriate speculation when 
setting the federal limits. The Commission also preliminarily 
considered the exchange-suggested spot-month limits when setting the 
federal spot-month limit. As discussed below, in most cases the 
exchange-suggested limit levels reproposed by the Commission are the 
federal spot-month limit. Therefore, the Commission preliminarily 
believes that the federal limits are in line with the exchanges' 
expectations and therefore the exchanges would be unlikely, at least 
initially, to adopt a smaller exchange-set spot-month limit for the 
core referenced futures contracts. The Commission will also review the 
federal limits in the future to determine if they are effective and not 
unduly restrictive.
c. Sec.  150.2(b) Single-Month and All-Months-Combined Speculative 
Position Limits
i. Summary of Changes
    Reproposed 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. In that regard, 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 person's positions for purposes of the 
proposed single-month or all-months-combined position limits 
(collectively ``non-spot-month'' position limits).\1274\
---------------------------------------------------------------------------

    \1274\ The Commission is reproposing to adopt 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.
---------------------------------------------------------------------------

ii. Baseline
    The baseline is the current Sec.  150.2 of the Commission's 
regulations.
iii. Benefits and Costs
    CEA section 4a(a)(3)(A) directs the Commission, each time it 
establishes limits, to set limits on speculative positions for months 
other than the spot-month.\1275\ 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 outside the spot-month. 
Accordingly, the Reproposal requires netting of physical-delivery and 
cash-settled referenced contracts for purposes of determining 
compliance with non-spot-month limits. The Commission has preliminarily 
determined it is appropriate to permit the additional flexibility in 
complying with the non-spot-months limits that netting allows, given 
the decreased risk of corners and squeezes outside the spot-month. 
Because this additional flexibility means market participants are able 
to retain offsetting positions outside of the spot-month, liquidity 
should not be significantly impaired and disruptions to price discovery 
should be reduced.
---------------------------------------------------------------------------

    \1275\ 7 U.S.C. 6a(a)(3)(A).
---------------------------------------------------------------------------

    However, more generally, the Commission recognizes that federal 
non-spot month position limits do impose costs to exchanges and market 
participants. These costs are generally the same as discussed above 
with respect to Sec.  150.2(a). The consideration of the costs to 
exchanges and market participants of Sec.  150.2(a) is also applicable 
to Sec.  150.2(b).
iv. Summary of Comments
    Comments on this section are addressed in the discussion of 
150.2(e) below.
d. Sec.  150.2(c) Purpose of This Part
i. Summary of Changes
    Reproposed Sec.  150.2(c)(1) and (2) specify that for purposes of 
part 150, the spot month and any single month shall be those of the 
core referenced futures contract and that an eligible affiliate is not 
required to comply separately with speculative position limits.
ii. Baseline
    The baseline is the current Sec.  150.2 of the Commission's 
regulations.
iii. Benefits and Costs
    The Commission believes these are conforming amendments to 
effectuate the rule and do not have cost or benefit implications.

[[Page 96854]]

iv. Summary of Comments
    No commenter addressed any cost or benefit considerations relating 
to proposed rules Sec.  150.2(c)(1) or (2).
e. Sec.  150.2(d) Core Referenced Futures Contracts
i. Summary of Changes
    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.\1276\
---------------------------------------------------------------------------

    \1276\ As discussed above, the definition of referenced contract 
excludes any guarantee of a swap, location basis contracts, 
commodity index contracts and trade option that meets the 
requirements of Sec.  32.3 of this chapter.
---------------------------------------------------------------------------

    New rule Sec.  150.2(d) lists the 25 core referenced futures 
contracts on which the Commission has preliminarily determined to 
establish federal speculative position limits. The list reflects a 
significant expansion of federal speculative position limits from the 
list of nine agricultural contracts under current part 150.\1277\ 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 reproposing position limits on these contracts 
in order to commence the expansion of its federal position limit regime 
with those commodity derivative contracts that it believes have the 
greatest impact on interstate commerce. The Commission will be 
reviewing other contracts going forward.
---------------------------------------------------------------------------

    \1277\ 17 CFR 150.2.
---------------------------------------------------------------------------

    As discussed in the 2013 Position Limit Proposal,\1278\ 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 as part of its 
selection of the 25 core referenced futures contracts in 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 contract for which position limits would be 
established. Reproposed Sec.  150.2(d) lists 16 core referenced futures 
contracts for agricultural commodities, four core referenced futures 
contracts for energy commodities, and five core referenced futures 
contracts for metals commodities.\1279\
---------------------------------------------------------------------------

    \1278\ December 2013 Position Limits Proposal, 78 FR 75725.
    \1279\ The Commission originally proposed in its 2013 to set 
position limits on 28 core referenced contracts, including the 25 
contracts noted above plus CME Feeder Cattle, Lean Hog and Class III 
Milk. Those three contracts will not be included in the Reproposal 
for the reasons discussed above.
---------------------------------------------------------------------------

ii. Baseline
    The baseline is the current Sec.  150.2 of the Commission's 
regulations.
iii. Benefits and Costs
    The benefits and costs are considered in the discussion of the 
definition of core referenced futures contract and referenced contract 
in Sec.  150.1.
iv. Summary of Comments
    Comments on this section are considered in the discussion of the 
definition of core referenced futures contract and referenced contract 
in Sec.  150.1.
f. Sec.  150.2(e) Levels of Speculative Position Limits
i. Summary of Changes
    The list of initial spot month, single month and all-months 
combined position limit levels adopted by the Commission for referenced 
contracts can be found in Appendix D to this part. Under reproposed 
Sec.  150.2(e)(3), the Commission will recalibrate spot month position 
limit levels no less frequently than every two calendar years, with any 
such recalibration to result in limits no greater than one-quarter (25 
percent) of the estimated spot-month deliverable supply \1280\ 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 Reproposal separately restricts 
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.
---------------------------------------------------------------------------

    \1280\ 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 Core Principles 
and Other Requirements for Designated Contract Markets, 77 FR 36612, 
36722 (Jun. 19, 2012).
---------------------------------------------------------------------------

    Accordingly, each DCM is required to supply the Commission with an 
estimated spot-month deliverable supply figure that the Commission will 
use to recalibrate spot-month position limits unless the Commission 
decides to rely on its own estimate of deliverable supply 
instead.\1281\
---------------------------------------------------------------------------

    \1281\ Sec.  150.2(e)(3)(ii)(A) 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. Sec.  150.2(e)(3)(ii)(A) would allow a 
DCM to petition the Commission no less than two calendar months 
before the due date for submission of an estimate of deliverable 
supply to recommend that the Commission not change the spot-month 
limit.
---------------------------------------------------------------------------

    In contrast to spot-month limits, which will be set as a function 
of deliverable supply, the 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 futures contract. 
In that regard, Sec.  150.2(e)(4) explains that the Commission will 
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.\1282\ As is the case with spot month limits, the Commission 
will adjust single month and all-months-combined limits no less 
frequently than every two calendar years.
---------------------------------------------------------------------------

    \1282\ 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 average open interest calculation will 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 is reproposing initial non-spot-month limits using the 
larger open interest level from two 12-month periods (July 1, 2104 to 
June 30, 2015; and July 1, 2015 to June 30, 2016), for futures 
contracts and options thereon reported under part 16, and for swaps 
reported under part 20.
    In the future, the Commission expects to use the data reported 
pursuant to parts 16, 20, and/or 45 of the Commission's regulations to 
estimate average open interest in referenced contracts.\1283\
---------------------------------------------------------------------------

    \1283\ 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.

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[[Page 96855]]

ii. Baseline
    The baseline is the current Sec.  150.2 of the Commission's 
regulations.
iii. Benefits and Costs
Method for Setting Spot-Month Position Limit Levels
    The method 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. In the December 2013 Position 
Limits Proposal, the Commission proposed to set the initial spot month 
speculative position limit levels for referenced contracts at the 
existing DCM-set levels for the core referenced futures 
contracts.\1284\ As an alternative, the Commission stated that it was 
considering using 25 percent of an exchange's estimate of deliverable 
supply if the Commission verified the estimate as reasonable.\1285\ As 
a further alternative, the Commission stated that it was considering 
setting initial spot month position limit levels at a recommended 
level, if any, submitted by a DCM (if lower than 25 percent of 
estimated deliverable supply).\1286\
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    \1284\ December 2013 Position Limit Proposal, 78 FR 75727. One 
commenter urged the Commission to retain the legacy speculative 
limits for enumerated agricultural products. 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. This commenter stated, ``There is no appreciable support 
within our industry or, as far as we know, from the relevant 
exchanges to move beyond current levels. . . . Changing current 
limits, as proposed in the rule, will have a negative impact on 
futures-cash market convergence and will compromise contract 
performance.'' CL-American Farm Bureau Federation-59730 at 3). 
Contra CL-ISDA and SIFMA-59611 at 32 (setting initial spot-month 
limits at the existing exchange-set levels would be arbitrary 
because the exchange-set levels have not been calibrated to apply as 
``a ceiling on the spot-month positions that a trader can hold 
across all exchanges for futures, options and swaps''); CL-ICE-59966 
at 6 (``the Proposed Rule . . . effectively halves the present 
position limit in the spot month by aggregating across trading 
venues and uncleared OTC swaps''). See also CL-ISDA and SIFMA-59611 
at 3 (the spot month limit methodology is ``both arbitrary and 
unjustified'').
    \1285\ December 2013 Position Limit Proposal, 78 FR 75727. The 
Commission also stated that if the Commission could not verify an 
exchange's estimate of deliverable supply for any commodity as 
reasonable, the Commission might adopt the existing DCM-set level or 
a higher level based on the Commission's own estimate, but not 
greater than would result from the exchange's estimated deliverable 
supply for a commodity.
    One commenter was unconvinced that estimated deliverable supply 
is ``the appropriate metric for determining spot month position 
limits'' and opined that the ``real test'' should be whether limits 
``allow convergence of cash and futures so that futures markets can 
still perform their price discovery and risk management functions.'' 
CL-NGFA-60941 at 2. Another commenter stated, ``While 25% may be a 
reasonable threshold, it is based on historical practice rather than 
contemporary analysis, and it should only be used as a guideline, 
rather than formally adopted as a hard rule. Deliverable supply is 
subject to numerous environmental and economic factors, and is 
inherently not susceptible to formulaic calculation on a yearly 
basis.'' CL-MGEX-60301 at 1. Another commenter expressed the view 
that the 25 percent formula is not ``appropriately calibrated to 
achieve the statutory objective'' set forth in section 
4a(a)(3)(B)(i) of the CEA, 7 U.S.C. 6a(a)(3)(B)(i). CL-CME-60926 at 
3. Another commenter opined that because the Commission ``has not 
established a relationship between `estimated deliverable supply' 
and spot-month potential for manipulation or excessive 
speculation,'' the 25 percent formula is arbitrary. CL-ISDA and 
SIFMA-59611 at 31.
    Several commenters opined that a limit at 25 percent of 
deliverable supply is too high. E.g., CL-Americans for Financial 
Reform-59685 at 2; CL-Tri-State Coalition for Responsible 
Investment-59682 at 1; CL-CMOC-59720 at 3; CL-WEED-59628 (``Only a 
lower limit would ensure market stability and prevent market 
manipulation.''); CL-Public Citizen-60313 at 1 (``There is no good 
reason for a single firm to take 25% of a market.''); CL-IECA-59964 
at 3 (25 percent of deliverable supply ``is a lot of market power in 
the hands of speculators''). One commenter stated that ``position 
limits should be set low enough to restore a commercial hedger 
majority in open interest in each core referenced contract,'' CL-
Institute for Agriculture and Trade Policy (``IATP'')-60323 at 5, 
suggesting in a later submission that position limits at 5-10 
percent of estimated deliverable supply in each covered contract 
applied on an aggregated basis might ``enable commercial hedgers to 
regain for all covered contracts their pre-2000 average share of 70 
percent of agricultural contracts,'' CL-IATP-60394 at 2. One 
commenter supported expanding position limits ``to ensure rough or 
approximate convergence of futures and underlying cash at 
expiration.'' CL-Pamela D. Thornton (``Thornton'')-59702 at 1.
    Several commenters supported setting limits based on updated 
estimates of deliverable supply which reflect current market 
conditions. E.g., CL-ICE-59966 at 5; CL-FIA-59595 at 8; CL-EEI-EPSA-
59602 at 9; CL-MFA-59606 at 5; CL-CMC-59634 at 14; CL-Olam-59658 at 
3; CL-CCMC-59684 at 6-7.
    \1286\ December 2013 Position Limits Proposal, 78 FR at 75728.
---------------------------------------------------------------------------

    In preliminarily determining the levels at which to set the initial 
speculative position limits, the Commission considered, among other 
things, the recommendations of the exchanges as well as data to which 
the exchanges do not have access. In considering these and other 
factors, a significant concern of the Commission became the effect of 
alternative limit levels on traders in the cash-settled referenced 
contracts. A DCM has reasonable discretion in establishing the manner 
in which it complies with core principle 5 regarding position 
limits.\1287\ As the Commission observed in the December 2013 Position 
Limits Proposal, ``there may be a range of spot month limits, including 
limits set below 25 percent of deliverable supply, which may serve as 
practicable to maximize . . . [the] policy objectives [set forth in 
section 4a(a)(3)(B) of the CEA].'' \1288\ The Commission must also 
consider the competitiveness of futures markets.\1289\ Thus, the 
Commission preliminarily determined to accept the recommendations of 
the exchanges to set federal limits below 25 percent of deliverable 
supply, where setting a limit level at less than 25 percent of 
deliverable supply did not appear to restrict unduly positions in the 
cash-settled referenced contracts. The exchanges retain the ability to 
adopt lower exchange-set limit levels than the initial speculative 
position limit levels set by the Commission in this rulemaking.
---------------------------------------------------------------------------

    \1287\ CEA section 5(d)(1)(B), 7 U.S.C. 7(d)(1)(B).
    \1288\ December 2013 Position Limits Proposal, 78 FR at 75729.
    \1289\ CEA section 15(a)(2)(B), 7 U.S.C. 19(a)(2)(B).
---------------------------------------------------------------------------

    As discussed in more detail above, the process of determining 
appropriate spot-month limit levels included the Commission receiving 
updated estimates of deliverable supply from the DCMs listing the 25 
core referenced contracts, which Commission staff verified as 
reasonable after conducting its own independent review of estimated 
deliverable supply for the subject core referenced contracts. 
Furthermore, the DCMs provided recommended spot-month limit levels for 
some of the 25 core referenced contracts which the Commission 
considered while determining the appropriate level of spot-month limits 
for the 25 core referenced futures contracts.\1290\ In addition, the 
Commission then conducted an impact analysis of different spot-month 
limit levels to discern how many market participants would be affected 
by the different limit levels.
---------------------------------------------------------------------------

    \1290\ The Commission notes that the CME did not provide a 
recommended spot month limit for its Live Cattle Contract. The 
Commission ultimately kept the current spot month limit of 450 
contracts in place for the Live Cattle contract.
---------------------------------------------------------------------------

    As part of reproposing Sec.  150.2(e)(3)(i), the Commission has 
considered scenarios where exchanges may or may not update deliverable 
supply. This may result in the Commission reviewing and re-establishing 
position limits in the spot month. Exchanges may elect not to undertake 
this expense of re-estimating the deliverable supply of the underlying

[[Page 96856]]

commodity. Among many reasons, this might be because the deliverable 
supply has not changed much during the time that the last estimate was 
made. In these cases, the Commission has the option to maintain the 
current spot month position limit level or use the formula based on the 
outdated deliverable supply estimate if different, or use the 
exchange's recommendation for the level of the spot month position 
limit. Sparing the exchanges of the cost of re-estimating the 
deliverable supply may be beneficial if the estimation costs are high 
or if the anticipated difference in the estimates is small. The 
Commission must also be mindful that exchanges might want the federal 
position limit to be set lower, because a lower limit might prevent 
liquidity in the exchange's core reference contract from developing on 
another exchange. Exchanges may elect to re-estimate deliverable 
supply. This would allow the Commission to maintain the current spot 
month level, replace it with the formula based on 25% of updated 
deliverable supply, or accept the exchange's recommendation for a 
different level. It is prudent to revise the spot month position limit 
if the deliverable supply has changed appreciably, because setting the 
limit too low might harm liquidity or setting it too high might make it 
easier for someone to engage in market manipulation such as perfecting 
a corner and squeeze.
iv. Summary of Comments
    One commenter cautioned the Commission not to rely on inaccurate or 
unreliable data or apply a one-size-fits-all approach in setting the 
levels of position limits, in order to avoid potential harms to market 
liquidity and increased costs.\1291\ Another commenter suggested that, 
in light of the complexities and costs of implementing federal and 
exchange-set limits, the Commission should not implement final rules 
until at least nine months after the final rule is issued.\1292\
---------------------------------------------------------------------------

    \1291\ CL-Chamber-59684 at 4 and 5-6.
    \1292\ CL-FIA at 6 and 44.
---------------------------------------------------------------------------

    The Commission has preliminarily determined to ease the transition 
to the initial speculative position limits by setting a compliance date 
of January 3, 2018 in Sec.  150.3(e)(1). As for the process of 
determining appropriate spot-month position limit levels, the 
Commission endeavored to use accurate and reliable data. For example, 
the Commission looked to updated estimates of deliverable supply from 
the DCMs listing the 25 core referenced contracts, which Commission 
staff verified as reasonable after conducting its own independent 
review of estimated deliverable supply for the subject core referenced 
futures contracts.\1293\ In addition, the Commission then conducted an 
impact analysis of different spot-month limit levels to discern how 
many market participants would be affected by the different limit 
levels. To determine the non-spot month position limits, the Commission 
used futures daily open interest data. In addition, it worked with 
market participants to improve the swap data collected pursuant to part 
20 of the Commission's regulations, so that data could be used in 
determining open interest levels in the swap markets for referenced 
contracts. The Commission deems both the estimated deliverable supply 
data and exchange recommended spot-month limits along with the open 
interest data to be current and reliable for basing federal spot month 
and non-spot month limits, respectively.
---------------------------------------------------------------------------

    \1293\ The Commission notes that the CME did not provide a 
recommended spot month limit for its Live Cattle Contract. The 
Commission ultimately kept the current spot month limit of 450 
contracts in place for the Live Cattle contract.
---------------------------------------------------------------------------

g. Initial Speculative Spot Month Position Limit Levels
i. CME and MGEX Agricultural Contracts
    For the CME and MGEX Agricultural (Legacy) contracts, which were 
previously subject to federal position limits, the Commission has 
preliminarily determined to set the initial speculative spot month 
position limit levels for C, O, RR, S, SM, SO, W and KW at the 
recommended levels submitted by CME,\1294\ all of which are lower than 
25 percent of estimated deliverable supply.\1295\ As is evident from 
the table set forth in the discussion above, this also means that the 
Commission is reproposing the initial speculative position limit levels 
for these eight contracts as proposed. These initial levels track the 
existing DCM-set levels for the core referenced futures contracts; 
\1296\ therefore, as noted in the December 2013 Position Limits 
Proposal, many market participants are already used to these levels and 
conform their practices accordingly.\1297\ The Commission continues to 
believe this approach is consistent with the regulatory objectives of 
the Dodd-Frank Act amendments to the CEA.
---------------------------------------------------------------------------

    \1294\ CL-CME-61007 at 5.
    \1295\ The Commission noted in the December 2013 Position Limits 
Proposal ``that DCMs historically have set or maintained exchange 
spot month limits at levels below 25 percent of deliverable 
supply.'' December 2013 Position Limits Proposal, 78 FR 75729.
    \1296\ See CL-CME-61007 (specifying lower exchange-set limit 
levels for W and RR in certain circumstances).
    \1297\ December 2013 Position Limit Proposal, 78 FR 75727.
---------------------------------------------------------------------------

    The Commission has also preliminarily determined to set the initial 
speculative spot month position limit level for MWE at 1,000 contracts, 
which is the level requested by MGEX \1298\ and approximately equal to 
25 percent of estimated deliverable supply. This is an increase from 
the proposed level of 600 contracts and is greater than the initial 
speculative spot month position limit levels for W and KW.\1299\ As 
stated in the December 2013 Position Limits Proposal, the 25 percent 
formula is consistent with the longstanding acceptable practices for 
DCM core principle 5.\1300\ The Commission continues to believe, based 
on its experience and expertise, that the 25 percent formula is a 
reasonable ``prophylactic tool to reduce the threat of corners and 
squeezes, and promote convergence without compromising market 
liquidity.'' \1301\
---------------------------------------------------------------------------

    \1298\ CL-MGEX-60938 at 2.
    \1299\ Most commenters who supported establishing the same level 
of speculative limits for each of the three wheat core referenced 
futures contracts focused on parity in the non-spot months. However, 
some commenters did support wheat party in the spot month, e.g., CL-
CMC-59634 at 15; CL-NCFC-59942 at 6.
    \1300\ December 2013 Position Limits Proposal, 78 FR 75729.
    \1301\ Id.
---------------------------------------------------------------------------

    The Commission's impact analysis reveals no traders in cash settled 
contracts in any of C, O, S, SM, SO, W, MWE, KW, or RR, and no traders 
in physical delivery contracts for O and RR, above the initial 
speculative limit levels for those contracts. The Commission found 
varying numbers of traders in the C, S, SM, SO, W, MWE, KW physical 
delivery contracts over the initial levels, but the numbers were very 
small for MWE and KW. Because the levels that the Commission is 
adopting for C, O, S, SM, SO, W, KW, and RR maintain the status quo for 
those contracts, the Commission assumes that some or possibly all of 
such traders over the initial levels are hedgers. Hedgers may have to 
file for an applicable exemption, but hedgers with bona fide hedging 
positions should not have to reduce their positions as a result of 
speculative position limits per se. Thus, the number of traders in the 
C, S, SM, SO, W and KW physical delivery contracts who would need to 
reduce speculative positions below the initial limit levels should be 
lower than the numbers indicated by the impact

[[Page 96857]]

analysis. And, while setting initial speculative levels at 25 percent 
of deliverable supply would, based upon logic and the Commission's 
impact analysis, affect fewer traders in the C, S, SM, SO, W and KW 
physical delivery contracts, consistent with its statement in the 
December 2013 Position Limits Proposal, the Commission believes that 
setting these lower levels of initial spot month limits will serve the 
objectives of preventing excessive speculation, manipulation, squeezes 
and corners,\1302\ while ensuring sufficient (in the view of the 
listing DCM) market liquidity for bona fide hedgers and ensuring that 
the price discovery function of the market is not disrupted.\1303\
---------------------------------------------------------------------------

    \1302\ Contra CL-ISDA and SIFMA-59611 at 55 (proposed spot month 
limits ``are almost certainly far smaller than necessary to prevent 
corners or squeezes'').
    \1303\ December 2013 Position Limits Proposal, 78 FR 75729, Dec. 
12, 2013.
---------------------------------------------------------------------------

Summary of Comments
    MGEX contended that the proposed wheat position limit disparity 
(particularly in non-spot months) may inject significant instability 
into the market, as market participants will be unable to utilize time-
tested risk management practices equally across the three contracts and 
have unintended negative market consequences resulting from hedgers and 
speculators limiting their activity (particularly spread trading) in 
markets with the lowest limits--or ceasing to trade in the lower-limit 
markets altogether.\1304\
---------------------------------------------------------------------------

    \1304\ CL-MGEX-59932 at 2.
---------------------------------------------------------------------------

    MGEX was concerned that the proposed method inhibits growth in 
rapidly changing and expanding derivatives markets and will limit 
growth in the HRSW contract at a time when participation is 
increasing.\1305\ MGEX asserted that the Proposed Rule has a 
disproportionate impact on HRSW market participants, given that MGEX 
HRSW has more large traders approaching the single month and all months 
combined limits than CBOT Wheat and KCBT Hard Winter Wheat despite the 
fact that the number of large traders approaching the Proposed Rule 
single month and all months combined limit levels stayed relatively 
constant among the three U.S. wheat contracts; MGEX also contended that 
price volatility or concentration in one contract may unduly affect the 
price of the others.\1306\
---------------------------------------------------------------------------

    \1305\ CL-MGEX-60380 at 5.
    \1306\ CL-MGEX-59932 at 2. MGEX asserted that ``[w]ithout wheat 
contract parity--proven historically effective and efficient--
inequities would be introduced into the marketplace that could well 
result in artificial market disruption through a lack of 
convergence, distorting the market and bringing no value to the 
price discovery process.'' Id.
---------------------------------------------------------------------------

    The Commission took concerns about wheat contract parity into 
account when preliminarily setting the spot month and non-spot month 
levels for the CBOT Wheat, KCBT Hard Winter Wheat and MGEX Hard Red 
Spring Wheat contracts. In that regard, as discussed below, the 
Commission is reproposing to maintaining the status quo for the non-
spot month position limit levels for the KW and MWE core referenced 
futures contracts so that there will be partial wheat parity.\1307\ The 
Commission has preliminarily determined not to raise the limit levels 
for KW and MWE to the limit level for W, as 32,800 contracts appears to 
be extraordinarily large in comparison to open interest in the KW and 
MWE markets, and the limit level for KW and MWE is already larger than 
a limit level based on the ``10, 2.5 percent'' formula. Even when 
relying on a single criterion, such as percentage of open interest, the 
Commission has historically recognized that there can ``result . . . a 
range of acceptable position limit levels.'' \1308\
---------------------------------------------------------------------------

    \1307\ Several commenters supported adopting equivalent non-spot 
month position limits for the three existing wheat referenced 
contracts traders. E.g., CL-FIA-59595 at 4, 15; CL-CMC-60391 at 8; 
CL-CMC-60950 at 11; CL-CME-59718 at 44; CL-American Farm Bureau-
59730 at 4; CL-MGEX-59932 at 2; CL-MGEX-60301 at 1; CL-MGEX-59610 at 
2-3; CL-MGEX-60936 at 2-3; CL-NCFC-59942 at 6; CL-NGFA-59956 at 3.
    \1308\ Revision of Speculative Position Limits, 57 FR 12766, 
12770 (Apr. 13, 1992). See also Revision of Speculative Position 
Limits and Associated Rules, 63 FR 38525, 38527 (July 17, 1998). Cf. 
December 2013 Position Limits Proposal, 78 FR 75729, Dec. 12, 2013 
(there may be range of spot month limits that maximize policy 
objectives).
---------------------------------------------------------------------------

ii. Softs
    For the ``Softs''--agricultural contracts on cocoa, coffee, cotton, 
orange juice, sugar and live cattle--the Commission has preliminarily 
determined to set the initial speculative spot month position limit 
levels for the CC, KC, CT, OJ, SB, and SF \1309\ core referenced 
futures contracts, based on the estimates of deliverable supply 
submitted by ICE,\1310\ at 25 percent of estimated deliverable 
supply.\1311\ As is evident from the table set forth in the discussion 
above, this also means that the Commission is reproposing initial 
speculative position limit levels that are significantly higher than 
the levels for these six contracts as proposed. As stated in the 
December 2013 Position Limits Proposal, the 25 percent formula is 
consistent with the longstanding acceptable practices for DCM core 
principle 5.\1312\ The Commission continues to believe, based on its 
experience and expertise, that the 25 percent formula is a reasonable 
``prophylactic tool to reduce the threat of corners and squeezes, and 
promote convergence without compromising market liquidity.'' \1313\
---------------------------------------------------------------------------

    \1309\ One commenter supported considering ``tropicals (sugar/
coffee/cocoa) . . . separately from those agricultural crops 
produced in the US domestic market.'' CL-Thornton-59702 at 1; see 
also CL-Armajaro Asset Management-59729 at 1.
    \1310\ CL-CME-61007 at 5.
    \1311\ The Commission noted in the December 2013 Position Limits 
Proposal ``that DCMs historically have set or maintained exchange 
spot month limits at levels below 25 percent of deliverable 
supply.'' December 2013 Position Limits Proposal, 78 FR 75729, Dec. 
12, 2013.
    \1312\ Id.
    \1313\ Id.
---------------------------------------------------------------------------

    The Commission did not receive any estimate of deliverable supply 
for the CME (LC) core referenced futures contract from CME, nor did CME 
recommend any change in the limit level for LC. In the absence of any 
such update, the Commission is reproposing the initial speculative 
position limit level of 450 contracts as proposed. Of 616 reportable 
persons, the Commission's impact analysis did not reveal any unique 
person trading cash settled or physical delivery spot month contracts 
who would have held positions above this level for LC.
    With respect to the IFUS CC, KC, CT, OJ, SB, and SF core referenced 
futures contracts, the Commission's impact analysis did not reveal any 
unique person trading cash settled spot month contracts who would have 
held positions above the initial levels that the Commission is 
adopting; as illustrated above. Rather, adopting lower levels would 
mostly have affected small numbers of traders in physical delivery 
contracts. Therefore, the Commission has preliminarily determined to 
accept ICE's recommendations.
iii. Metals
    For the metals contracts, the Commission has preliminarily 
determined to set the initial speculative spot month position limit 
levels for GC, SI, and HG at the recommended levels submitted by 
CME,\1314\ all of which are lower than 25 percent of estimated 
deliverable supply.\1315\ In the case of GC and SI, this is a doubling 
of the current exchange-set limit levels.\1316\ In the case

[[Page 96858]]

of HG, the initial level is the same as the existing DCM-set level for 
the core referenced futures contract, and lower than the level 
proposed. The Commission has also preliminarily determined to set the 
initial speculative spot month position limit level for PL at 100 
contracts and PA at 500 contracts, which are the levels recommended by 
CME. In the case of PL and PA, the initial level is the same as the 
existing DCM-set level for the core referenced futures contract, and a 
decrease from the proposed levels of 500 and 650 contracts, 
respectively.
---------------------------------------------------------------------------

    \1314\ CL-CME-61007 at 5.
    \1315\ The Commission noted in the December 2013 Position Limits 
Proposal ``that DCMs historically have set or maintained exchange 
spot month limits at levels below 25 percent of deliverable 
supply.'' December 2013 Position Limits Proposal, 78 FR 75729, Dec. 
12, 2013.
    \1316\ One commenter cautioned against raising limit levels for 
GC to 25 percent of deliverable supply, and expressed concern that 
higher federal limits would incentivize exchanges to raise their own 
limits. CL-WGC-59558 at 2-4.
---------------------------------------------------------------------------

    The Commission found varying numbers of traders in the GC, SI, PL, 
PA, and HG physical delivery contracts over the initial levels, but the 
numbers were very small except for PA. Because the levels that the 
Commission is adopting for PL, PA, and HG maintain the status quo for 
those contracts, the Commission assumes that some or possibly all of 
such traders over the initial levels are hedgers. The Commission 
reiterates the discussion above regarding agricultural contracts: 
hedgers may have to file for an applicable exemption, but hedgers with 
bona fide hedging positions should not have to reduce their positions 
as a result of speculative position limits per se. Thus, the number of 
traders in the metals physical delivery contracts who would need to 
reduce speculative positions below the initial limit levels should be 
lower than the numbers indicated by the impact analysis. And, while 
setting initial speculative levels at 25 percent of deliverable supply 
would, based upon logic and the Commission's impact analysis, affect 
fewer traders in the metals physical delivery contracts, consistent 
with its statement in the December 2013 Position Limits Proposal, the 
Commission believes that setting these lower levels of initial spot 
month limits will serve the objectives of preventing excessive 
speculation, manipulation, squeezes and corners,\1317\ while ensuring 
sufficient market liquidity for bona fide hedgers in the view of the 
listing DCM and ensuring that the price discovery function of the 
market is not disrupted.
---------------------------------------------------------------------------

    \1317\ Contra CL-ISDA and SIFMA-59611 at 55 (proposed spot month 
limits ``are almost certainly far smaller than necessary to prevent 
corners or squeezes'').
---------------------------------------------------------------------------

    The Commission's impact analysis reveals no unique persons in the 
SI and HG cash settled referenced contracts, and very few unique 
persons in the cash settled GC referenced contract, whose positions 
would have exceeded the initial limit levels for those contracts. Based 
on the Commission's impact analysis, preliminarily setting the initial 
federal spot month limit levels for PL and PA at the lower levels 
recommended by CME impact a few traders in PL and PA cash settled 
contracts.
    The Commission has considered the numbers of unique persons that 
would have been impacted by each of the cash-settled and physical-
delivery spot month limits in the PL and PA referenced contracts. The 
Commission notes those limits would have impacted more traders in the 
physical-delivery PA contract than in the cash-settled PA contract, 
while fewer traders would have been impacted in the physical-delivery 
PL contract than in the cash-settled PL contract, albeit in any event 
few traders would have been impacted.\1318\ The Commission also 
considered the distribution of those cash-settled traders over time; as 
reflected in the open interest table discussed above regarding setting 
non-spot month limits, it can be readily observed that open interest in 
each of the cash-settled PL and PA referenced contracts was markedly 
lower in the second 12-month period (year 2) than in the prior 12-month 
period (year 1). Accordingly, the Commission preliminarily concludes 
that the CME recommended levels in PL and PA referenced contracts are 
acceptable.
---------------------------------------------------------------------------

    \1318\ In this regard, the Commission notes that CME did not 
have access to the Commission's impact analysis when CME recommended 
levels for its physical-delivery core referenced futures contracts.
---------------------------------------------------------------------------

iv. Energy
    For the energy contracts, the Commission has preliminarily 
determined to set the initial speculative spot month position limit 
levels for the NG, CL, HO, and RB core referenced futures contracts at 
25 percent of estimated deliverable supply which, in the case of CL, 
HO, and RB is higher than the levels recommended by CME.\1319\ As is 
evident from the table set forth above, this also means that the 
Commission is adopting initial speculative position limit levels that 
are significantly higher than the proposed levels for these four 
contracts. As stated in the December 2013 Position Limits Proposal, the 
25 percent formula is consistent with the longstanding acceptable 
practices for DCM core principle 5.\1320\ The Commission continues to 
believe, based on its experience and expertise, that the 25 percent 
formula is a reasonable ``prophylactic tool to reduce the threat of 
corners and squeezes, and promote convergence without compromising 
market liquidity.'' \1321\
---------------------------------------------------------------------------

    \1319\ CL-CME-61007 at 5. One commenter opined that 25 percent 
of deliverable supply would result in a limit level that is too high 
for natural gas, and suggest 5 percent as an alternative that 
``would provide ample liquidity and significantly reduce the 
potential for excessive speculation.'' CL-IECA-59964 at 3.
    \1320\ December 2013 Position Limits Proposal, 78 FR at 75729.
    \1321\ Id.
---------------------------------------------------------------------------

    The levels that CME recommended for NG, CL, HO, and RB are twice 
the existing exchange-set spot month limit levels. Nevertheless, the 
Commission is proposing to set the initial speculative spot month limit 
levels at 25 percent of deliverable supply for CL, HO, and RB because 
the higher levels will lessen the impact on a number of traders in both 
cash settled and physical delivery contracts. For NG, the Commission is 
proposing to set the physical delivery limit at 25 percent of 
deliverable supply, as recommended by CME; the Commission is also 
proposing to set a conditional spot month limit exemption of 10,000 for 
NG only.\1322\ This exemption would to some degree maintain the status 
quo in natural gas because each of the NYMEX and ICE cash settled 
natural gas contracts, which settle to the final settlement price of 
the physical delivery contract, include a conditional spot month limit 
exemption of 5,000 contracts (for a total of 10,000 contracts).\1323\ 
However, neither

[[Page 96859]]

NYMEX and ICE penultimate contracts, which settle to the daily 
settlement price on the next to last trading day of the physical 
delivery contract, nor OTC swaps, are currently subject to any spot 
month position limit. In addition, the Commission's impact analysis 
suggests that a conditional spot month limit exemption greater than 25 
percent of deliverable supply for cash settled contracts in CL, HO, and 
RB would potentially benefit only a few traders, while a conditional 
spot month limit exemption for cash settled contracts in NG would 
potentially benefit many traders.
---------------------------------------------------------------------------

    \1322\ This exemption for up to 10,000 contracts would be five 
times the spot month limit of 2,000 contracts, consistent with the 
December 2013 Position Limits Proposal. See December 2013 Position 
Limits Proposal, 78 FR at 75736-8. 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. See Position Limits for Futures and Swaps, 76 FR 71626, 
71687 (Nov. 18, 2011).
    \1323\ Some commenters supported retaining a conditional spot 
month limit in natural gas. E.g., CL-ICE-60929 at 12 (``Any changes 
to the current terms of the Conditional Limit would disrupt present 
market practice for no apparent reason. Furthermore, changing the 
limits for cash-settled contracts would be a significant departure 
from current rules, which have wide support from the broader market 
as evidenced by multiple public comments supporting no or higher 
cash-settled limits.''). Contra CL-Levin-59637 at 7 (``The proposed 
higher limit for cash settled contracts is ill-advised. It would not 
only raise the affected position limits to levels where they would 
be effectively meaningless, it would also introduce market 
distortions favoring certain contracts and certain exchanges over 
others, and potentially disrupt important markets, including the 
U.S. natural gas market that is key to U.S. manufacturing.''); CL-
Public Citizen-59648 at 5 (``Congress, in allowing an exemption for 
bona fide hedgers but not pure speculators, could not possibly have 
intended for the Commission to implement position limits that allow 
market speculators to hold 125 percent of the estimated deliverable 
supply. Once again, while this exception for cash-settled contracts 
would avoid market manipulations such as corners and squeezes (since 
cash-settled contracts give no direct control over a commodity), it 
does not address the problem of undue speculative influence on 
futures prices.''). One commenter urged the Commission ``to 
eliminate the requirement that traders hold no physical-delivery 
position in order to qualify for the conditional spot-month limit 
exemption'' in order to maintain liquidity in the NYMEX natural gas 
futures contract. CL-BG-59656 at 6-7. See also CL-APGA at 8 (the 
Commission should condition the spot month limit exemption for cash 
settled natural gas contracts by precluding a trader from holding 
more than one quarter of the deliverable supply in physical 
inventory). Cf. CL-CME-59971 at 3 (eliminate the five times natural 
gas limit because it ``encourages participants to depart from, or 
refrain from establishing positions in, the primary physical 
delivery contract market and instead opt for the cash-settled 
derivative contract market, especially during the last three trading 
days when the five times limit applies. By encouraging departure 
from the primary contract market, the five times limit encourages a 
process of de-liquefying the benchmark physically delivered futures 
market and directly affects the determination of the final 
settlement price for the NYMEX NG contract- the very same price that 
a position representing five times the physical limit will settle 
against.'').
---------------------------------------------------------------------------

Summary of Comments
    One economist estimated, using various stated assumptions but not 
an empirical model, that position limits at the proposed level would 
cost American consumers roughly $100 billion, based on an increase of 
$15 per barrel of oil in 2013.\1324\ This economist also asserted that 
position limits (or the mere possibility that such limits may be 
tightened) would discourage passive investors from the commodity 
derivative sector and, thus, would adversely affect investment in the 
oil and gas industry by raising the cost of hedging for exploration 
firms.\1325\ This economist believes that position limits would 
increase costs whether or not the position limits actually restrict a 
market participant's trading, because compliance costs such as 
recordkeeping and reporting would modestly increase the costs of 
drilling associated with the regulations and discourage market 
entry.\1326\
---------------------------------------------------------------------------

    \1324\ CL-ISDA/SIFMA-59611 at Annex A at 3. The economist noted 
that he used a ``methodology for predicting changes in crude oil 
prices linked to global inventory levels.'' Id.
    \1325\ Id. at 9.
    \1326\ Id. at 10.
---------------------------------------------------------------------------

    The Commission believes that positon limits are unlikely to deter 
passive investors because they have the opportunity to invest in 
commodities through collective investment vehicles such as exchange 
traded funds (ETFs) or commodity pools. For example, if a position 
limit would become binding on a particular ETF, market demand would be 
expected to encourage another party to create a new ETF that could 
replicate a similar strategy to the previous one, which would allow the 
passive investment to continue.
    Regarding the forms and application process to obtain a Sec.  
150.11 exemption, the Commission believes that the requirements are not 
as onerous as the commenter fears. In this regard, an oil exploration 
firm would likely be able to qualify for an anticipatory hedge 
exemption. The Commission believes the costs of this process will have 
a negligible impact on the oil exploration firm's costs of hedging.
    Another commenter was concerned that position limits set so low as 
to diminish speculative capacity in U.S. energy markets will distort 
prices, increase volatility, increase option premiums and increase the 
cost of hedging.\1327\
---------------------------------------------------------------------------

    \1327\ CL-Vectra-60369 at 1-2. The commenter was particularly 
concerned that given the ``dearth of speculative capacity'' in many 
energy contracts, hedging costs would increase and be passed on to 
consumers. Id.
---------------------------------------------------------------------------

    The Commission agrees with the commenter that setting position 
limits too low could distort prices, increase volatility, increase 
option premiums and increase the cost of hedging. The Commission 
believes it has preliminarily set the limit levels sufficiently high so 
that they will not have a significant adverse impact on the efficiency 
and price discovery functions of the core referenced futures contracts.
    In response to 2016 Supplemental Position Limits Proposal RFC 55, a 
commenter pointed out that the Commission's Division of Enforcement has 
numerous tools at its disposal, and the exchanges have position step-
down and exemption revocation authorization at their disposal, to 
enforce market manipulation prohibitions.\1328\
---------------------------------------------------------------------------

    \1328\ CL-IECAssn-60949 at 23.
---------------------------------------------------------------------------

    The Commission agrees with the commenter, but notes that the 
Division of Enforcement's tools can be used only after market 
manipulation or other adverse consequences have already occurred. As 
for the tools at the disposal of the exchanges to reduce a market 
participant's position or deter it from attempting to manipulate the 
market, the Commission considered these points when preliminarily 
setting the federal position limits at levels that may be higher than 
the Commission would otherwise consider, and in some cases higher than 
the levels suggested by the exchanges.
h. Method for Setting Single-Month and All-Months Combined Position 
Limit Levels
    As discussed in more detail above, the Commission has preliminarily 
determined to use the futures position limits formula, 10 percent of 
the open interest for the first 25,000 contracts and 2.5 percent of the 
open interest thereafter (i.e., the ``10, 2.5 percent'' formula), to 
set non-spot month speculative position limits for referenced 
contracts. This was the method proposed in the December 2013 Position 
Limits Proposal. The Commission used a combination of data on open 
interest in physical commodity futures and options from the relevant 
exchanges and adjusted part 20 swaps data covering a total of 24 
months, rather than two calendar years of data in setting the initial 
non-spot month position limit levels.\1329\ The Commission continues to 
believe that ``the non-spot month position limits would restrict the 
market power of a speculator that could otherwise be used to cause 
unwarranted price movements.'' \1330\ In preliminarily determining the 
appropriate non-spot month limit levels the Commission considered the 
results of its impact analysis of different non-spot month limit levels 
to discern how many market participants would be affected by different 
limit levels.
---------------------------------------------------------------------------

    \1329\ Commission staff analyzed and evaluated the quality of 
part 20 data for the period from July 1, 2014 through June 30, 2015 
(``Year 1''), and the period from July 1, 2015 through June 30, 2016 
(``Year 2'').
    \1330\ December 2013 Position Limits Proposal, 78 FR 75730, Dec. 
12, 2013.
---------------------------------------------------------------------------

    In addition, the Commission believes that it is beneficial to 
update the non-spot month position limits based on recent position 
data, such as Part 20 data. The Commission also proposes to retain the 
option to maintain the existing position limit levels if it believes 
there is good reason to deviate from the formulas. This could be the 
case if, for example, the Commission has experience at a level higher 
the amount given in the formula and believes that the higher level is 
appropriate, because the Commission has not observed any problems at 
the higher level. Furthermore, the

[[Page 96860]]

Commission has preliminarily determined that it will fix subsequent 
levels no less frequently than every two calendar years. This 
conclusion is reproposed in Sec.  150.2(e)(2).
i. CME and MGEX Agricultural Contracts
    The Commission is reproposing non-spot month speculative position 
limit levels for the Corn (C), Oats (O), Rough Rice (RR), Soybeans (S), 
Soybean Meal (SM), Soybean Oil (SO), and Wheat (W) core referenced 
futures contracts based on the 10, 2.5 percent open interest 
formula.\1331\ Based on the Commission's experience since 2011 with 
non-spot month speculative position limit levels for the Hard Red 
Winter Wheat (KW) and Hard Red Spring Wheat (MWE) core referenced 
futures contracts, the Commission is proposing to maintain the limit 
levels for those two commodities at the current level of 12,000 
contracts rather than reducing them to the lower levels that would 
result from applying the 10, 2.5 percent formula.\1332\
---------------------------------------------------------------------------

    \1331\ One commenter expressed concern ``that proposed all-
months-combined speculative position limits based on open interest 
levels is not necessarily the appropriate methodology and could lead 
to contract performance problems.'' This commenter urged ``that all-
months-combined limits be structured to `telescope' smoothly down to 
legacy spot-month limits in order to ensure continued convergence.'' 
CL-National Grain and Feed Association-60312 at 4.
    \1332\ One commenter supported a higher limit for KW than 
proposed to promote growth and to enable liquidity for Kansas City 
hedgers who often use the Chicago market. CL-Citadel-59717 at 8. 
Another commenter supported setting ``a non-spot month and combined 
position limit of no less than 12,000 for all three wheat 
contracts.'' CL-MGEX-60301 at 1. Contra CL-Occupy the SEC-59972 at 
7-8 (commending ``the somewhat more restrictive limitations . . . on 
wheat trading'').
---------------------------------------------------------------------------

    Maintaining the status quo for the non-spot month limit levels for 
the KW and MWE core referenced futures contracts means there will be 
partial wheat parity.\1333\ The Commission has preliminarily determined 
not to raise the limit levels for KW and MWE to the limit level for W, 
as 32,800 contracts appears to be extraordinarily large in comparison 
to open interest in the KW and MWE markets, and the limit level for KW 
and MWE is already larger than a limit level based on the 10, 2.5 
percent formula. Even when relying on a single criterion, such as 
percentage of open interest, the Commission has historically recognized 
that there can ``result . . . a range of acceptable position limit 
levels.'' \1334\
---------------------------------------------------------------------------

    \1333\ Several commenters supported adopting equivalent non-spot 
month position limits for the three existing wheat referenced 
contracts traders. See, e.g., CL-FIA-59595 at 4, 15; CL-CMC-60391 at 
8; CL-CMC-60950 at 11; CL-CME-59718 at 44; CL-American Farm Bureau-
59730 at 4; CL-MGEX-59932 at 2; CL-MGEX-60301 at 1; CL-MGEX-59610 at 
2-3; CL-MGEX-60936 at 2-3; CL-NCFC-59942 at 6; CL-NGFA-59956 at 3.
    \1334\ Revision of Speculative Position Limits, 57 FR 12770, 
12766, Apr. 13, 1992. See also Revision of Speculative Position 
Limits and Associated Rules, 63 FR 38525, 38527, Jul. 17, 1998. Cf. 
December 2013 Position Limits Proposal (there may be range of spot 
month limits that maximize policy objectives), 78 FR 75729, Dec. 12, 
2013.
---------------------------------------------------------------------------

ii. Softs
    The Commission is reproposing non-spot month speculative position 
limit levels for the CC, KC, CT, OJ, SB, SF and LC \1335\ core 
referenced futures contracts based on the 10, 2.5 percent open interest 
formula.
---------------------------------------------------------------------------

    \1335\ One commenter expressed concern that too high non-spot 
month limit levels could lead to a repeat of convergence problems 
experienced by certain contracts and that ``the imposition of all 
months combined limits in continuously produced non-storable 
commodities such as livestock . . . will reduce the liquidity needed 
by hedgers in deferred months who often manage their risk using 
strips comprised of multiple contract months.'' CL-American Farm 
Bureau Federation-59730 at 3-4. One commenter requested that the 
Commission withdraw its proposal regarding non-spot month limits, 
citing, among other things, the Commission's previous approval of 
exchange rules lifting all-months-combined limits for live cattle 
contracts ``to ensure necessary deferred month liquidity.'' CL-CME-
59718 at 4. Another commenter expressed concern that non-spot month 
limits would have a negative impact on live cattle market liquidity. 
CL- ``CMC'')-59634 at 12-13. See also CL-CME-59718 at 41.
---------------------------------------------------------------------------

iii. Metals
    The Commission is reproposing non-spot month speculative position 
limit levels for the GC, SI, PL, PA, and HG core referenced futures 
contracts based on the 10, 2.5 percent open interest formula.\1336\
---------------------------------------------------------------------------

    \1336\ One commenter was concerned that applying the 10, 2.5 
percent formula to open interest for gold would result in a lower 
non-spot month limit level than the spot month limit level, and 
urged the Commission to ``apply a consistent methodology to both 
spot and non-spot months.'' CL-WGC-59558 at 5.
---------------------------------------------------------------------------

iv. Energy
    The Commission is reproposing non-spot month speculative position 
limit levels for the NG, CL, HO, and RB core referenced futures 
contracts based on the 10, 2.5 percent open interest formula.\1337\
---------------------------------------------------------------------------

    \1337\ One commenter suggested deriving non-spot month limit 
levels for the CL, HO, and RB referenced contracts from the usage 
ratios for US crude oil and oil products rather than open interest 
and expressed concern that ``unnecessarily low limits will hamper 
legitimate hedging activity.'' CL-Citadel-59717 at 7-8. Another 
commenter suggested setting limit levels based on customary position 
size. CL-APGA-59722 at 6. This commenter also supported setting the 
single month limit at two-thirds of the all months combined limit in 
order to relieve market congestion as traders exit or roll out of 
the next to expire month into the spot month. CL-APGA-59722 at 7.
---------------------------------------------------------------------------

Summary of Comments
    A commenter claimed that the proposed rule did not address the 
price impact of speculative money flows into commodities, and that if 
the Commission is concerned with the types of manipulative activities 
shown by the Hunt Brothers and Amaranth cases, there are ``targeted and 
less burdensome and complex ways to prevent such a manipulative harm'' 
and the inclusion of position limits on swaps is invalid because swaps 
cannot be used to cause this detrimental impact.\1338\
---------------------------------------------------------------------------

    \1338\ CL-COPE-59662 at 5. The commenter asserted that the 
Commission's position limits proposal was based solely on concerns 
about attempts to manipulate the price discovery contract or hoard 
physical inventory because the Commission highlighted only the 
Amaranth and Hunt Brothers cases. Id.
---------------------------------------------------------------------------

    The Commission disagrees, and notes that swaps can be used to cause 
detrimental impact, as occurred in the Amaranth case. Amaranth entered 
into swaps on an exempt commercial market that were directly linked to 
a core reference futures contract. So to ignore swaps would not 
adequately address the issue that position limits are intended to 
address.
i. Sec.  150.2(f)-(g) Pre-Existing Positions and Positions on Foreign 
Boards of Trade
i. Summary of Changes
    The Commission is reproposing 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.\1339\
---------------------------------------------------------------------------

    \1339\ See also the definition of the term ``Pre-existing 
position'' adopted in Sec.  150.1. Such pre-existing positions that 
are in excess of the position limits will 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, reproposed Sec.  150.2(g) will apply position limits to 
positions on FBOTs provided that positions are held in referenced 
contracts that settle to a referenced contract and the FBOT allows 
direct access to its trading system for participants located in the 
United States.

[[Page 96861]]

ii. Baseline
    The baseline is the current Sec.  150.2 of the Commission's 
regulations.
iii. Benefits and Costs
    The Commission exempted certain pre-existing positions from 
position limits under new Sec.  150.2(f) as part of its grandfathering 
provisions.\1340\ Essentially, this means only futures contracts 
initially will be subject to non-spot month position limits, as well as 
swaps entered after the compliance date. The Commission notes that a 
pre-existing position in a futures contract also would not be a 
violation of a non-spot month limit, but, rather, would be 
grandfathered, as discussed under Sec.  150.2(f)(2). Therefore, market 
participants can more easily adjust their existing positions to the new 
federal position limit regime. Market participants will however incur 
costs for newly established positions in the relevant swaps after the 
compliance date, such as those discussed above such as the costs of 
monitoring their positions with respect to any applicable federal 
position limit and applying for exemptions should they need to exceed 
those limits.
---------------------------------------------------------------------------

    \1340\ The Commission excluded from position limits ``pre-
enactment swaps'' and ``transition period swaps,'' in its 
grandfathering provisions, as discussed above.
---------------------------------------------------------------------------

    New Sec.  150.2(g), extends the federal position limits to a person 
who holds positions in referenced contracts on an FBOT that settle 
against any price of one or more contracts listed for trading on a DCM 
or SEF that is a trading facility, if the FBOT makes available such 
referenced contracts to its members or other participants located in 
the United States through direct access to its electronic trading and 
ordering matching system. In that regard, 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.\1341\
---------------------------------------------------------------------------

    \1341\ See supra discussion of CEA section 4a(a)(6) concerning 
aggregate position limits and the treatment of FBOT contracts.
---------------------------------------------------------------------------

    Regulations 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, a consideration of costs and 
benefits of these provisions is not required under CEA section 15(a).
iv. Summary of Comments
    No commenter addressed the costs or benefits of Sec.  150.2(f) and 
(g).
5. Section 150.3--Exemptions From Federal Position Limits
    As discussed above, the Commission has provided a general 
discussion of reproposed Sec.  150.3 and highlighted the rule-text 
changes that it has made after several rounds of proposed rulemakings 
and responsive comments. In this release, the Commission has reproposed 
paragraphs (a), (b), (d), (e), (g) and (h) as proposed in December 
2013.\1342\ The Commission has amended the text in proposed Sec.  
150.3(c) and (f). In the December 2013 proposal, the Commission also 
discussed the costs and benefits of these two paragraphs, as well as, 
paragraphs (a), (b), (d), (e), (g) and (h).\1343\
---------------------------------------------------------------------------

    \1342\ December 2013 Proposal, 78 FR 75828, Dec. 12, 2013.
    \1343\ Reproposed Sec.  150.3 has ten paragraphs: (a) through 
(j). Reproposed Sec.  150.3(i) (aggregation of accounts) and (j) 
(delegation of authority to DMO Director) do not have cost-benefit 
implications, and are not discussed in this section.
---------------------------------------------------------------------------

    In the June 2016 Supplemental Position Limits Proposal, the 
Commission changed proposed paragraph (a). The Commission also 
explained in the 2016 cost-benefit section that the changes it was 
making to proposed Sec.  150.3(a)(1) should be read in conjunction with 
proposed Sec. Sec.  150.9, 150.10, and 150.11.\1344\ Between the June 
2016 changes to Sec. Sec.  150.9, 150.10, and 150.11 and now, the 
Commission has not made additional changes to Sec.  150.3(a)(1). In 
general, the proposed changes made in the June 2016 Supplemental 
Position Limits Proposal detailed processes that exchanges could offer 
to market participants who seek exemptions for positions to exchange-
set and federal position limits.
---------------------------------------------------------------------------

    \1344\ For a fuller discussion of all the changes to reproposed 
Sec.  150.3, see Section III.C., above.
---------------------------------------------------------------------------

    In this section, the Commission summarizes reproposed Sec.  150.3, 
and, thereafter, discusses the related benefits and costs of the final 
rules.
a. Section 150.3 Rule Summaries
i. Section 150.3(a)--Bona Fide Hedging Exemption
    Among other things, reproposed Sec.  150.3(a)(1)(i) codifies the 
statutory requirement that bona fide hedging positions be exempt from 
federal position limits. Reproposed Sec.  150.3(a)(2) authorizes other 
exemptions from position limits for financial-distress positions, 
conditional spot-month limit positions, spread positions, and other 
risk-reduction practices.
ii. Section 150.3(b)--Financial Distress Exemption
    Reproposed Sec.  150.3(b) provides the means for market 
participants to request relief from applicable position limits during 
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.
iii. Section 150.3(c)--Conditional Spot-Month Position Limit Exemption
    Reproposed Sec.  150.3(c) provides a conditional spot-month limit 
exemption that permits traders to acquire positions for natural gas up 
to 10,000 contracts if such positions are exclusively in cash-settled 
contracts. The natural-gas 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.
iv. Section 150.3(d)--Pre-Enactment and Transition Period Swaps 
Exemption
    Reproposed Sec.  150.3(d) provides an exemption from federal 
position limits for swaps entered into before 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--that is, its effective date.
v. Section 150.3(e)--Other Exemptions
    Reproposed Sec.  150.3(e) explains that a market participant 
engaged in risk-reducing practices that are not enumerated in the 
revised definition of bona fide hedging in reproposed Sec.  150.1 may 
use two different methods to apply to the Commission for relief from 
federal position limits. The market participant may request an 
interpretative letter from Commission staff pursuant to Sec.  140.9 
concerning the applicability of the bona fide hedging position 
exemption, or may seek exemptive relief from the Commission under CEA 
section 4a(a)(7) of the Act.
vi. Section 150.3(f)--Previously Granted Exemptions
    After reviewing comments, the Commission has preliminarily 
determined it is best to change the Sec.  150.3(f) text proposed in 
December 2013. The amended text broadens exemption relief to pre-
existing financial instruments that are within current Sec.  1.47's 
scope, and to exchange-granted non-enumerated exemptions in non-legacy 
commodity derivatives

[[Page 96862]]

outside of the spot month with other conditions.
vii. Section 150.3(g) and (h)--Recordkeeping
    Reproposed Sec.  150.3(g)(1) specifies recordkeeping requirements 
for market participants who claim any exemption in final Sec.  150.3. 
Market participants claiming exemptions under reproposed 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. Reproposed Sec.  150.3(g)(2) requires 
market participants seeking to rely upon the pass-through swap offset 
exemption to obtain a representation from its counterparty and keep 
that representation on file. Similarly, reproposed Sec.  150.3(g)(3) 
requires a market participant who makes such a representation to 
maintain records supporting the representation. Under reproposed Sec.  
150.3(h), all market participants 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).
b. Baseline
    The baseline is the current Sec.  150.3 of the Commission's 
regulations.
c. Benefits and Discussion of Comments
i. Section 150.3(a)--Positions Which May Exceed Limits
    As explained in the December 2013 Supplemental Position Limits 
Proposal, Sec.  150.3 works with Sec. Sec.  150.9, 150.10, and Sec.  
150.11. All of these rules operate together within the broader 
position-limits regulatory regime and provide significant benefits, 
such as regulatory certainty, consistency, and transparency. As such, 
the benefits of reproposed Sec.  150.3 are discussed in the cost-
benefit sections related to reproposed Sec. Sec.  150.9, 150.10, and 
150.11.
ii. Section 150.3(b)--Financial Distress Exemption
    The Commission continues to believe that by codifying historical 
practices of temporarily lifting position limit restrictions several 
benefits will ensue. Reproposed Sec.  150.3 ensures the orderly 
transfers of positions from financially distressed firms to financially 
secure firms or facilitating other necessary remediation measures 
during times of market stress. Because of this Reproposal, the 
Commission believes it is less likely that positions will be 
prematurely or unnecessarily liquidated, and it is less likely that the 
price-discovery function of markets will be harmed.
iii. Section 150.3(c)--Conditional Spot Month Limit Exemption
    In the December 2013 proposal, the Commission proposed Sec.  
150.3(c) that provided 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. The Commission 
explained that by prohibiting speculators using the exemption in the 
cash-settled contract from trading in the spot-month of the physical-
delivery contract, the final rules should further protect the delivery 
and settlement process, and reduce 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. The 
Commission invited comment on this general exemption. Upon review of 
the comment letters, the Commission has preliminarily determined to 
restrict the conditional-spot-month-limit exemption to natural gas 
cash-settled referenced contracts. The reasons for this change are 
explained above.
iv. Section 150.3(d)--Pre-Enactment and Transition Period Swaps 
Exemption
    The pre-existing swaps exemption in reproposedSec.  150.3(d) is 
consistent with CEA section 4a(b)(2). The exemption promotes the smooth 
transition for previously unregulated swaps markets to swaps markets 
that will be subjected to position limits compliance. In addition, 
allowing netting with pre-enactment and transition swaps provides 
flexibility where possible in order to lessen the impact of the regime 
on entities with swap positions.
v. Section 150.3(e)--Other Exemptions
    Reproposed Sec.  150.3(e) is essentially clarifying and 
organizational in nature. For the most part, the Reproposal provides 
the benefit of regulatory certainty for those granted exemptions.
vi. Section 150.3(f)--Other Exemptions and Previously Granted 
Exemptions
    As explained above, the Commission has expanded the scope of 
reproposed Sec.  150.3(f) exemptive relief. In December 2013, the 
Commission discussed the benefits of proposed Sec.  150.3(f), and 
believed that the benefits centered on regulatory certainty. Now that 
the Commission has increased the types of financial instruments that 
may be exempted from position limits under this rule, the Commission 
believes that it has reduced the likelihood of market disruption 
because of forced and unexpected liquidations. In other words, the 
Commission believes that reproposed Sec.  150.3(f) will support market 
stability.
vii. Section 150.3(g) and (h)--Recordkeeping and Special Calls
    The Commission believes that the reproposed Sec.  150.3(g)'s 
recordkeeping requirements are critical to the Commission's ability to 
effectively monitor compliance with exemption eligibility standards. 
Because the Commission will have access to records under Sec.  
150.3(h), it will be able to assess whether exemptions are susceptible 
to abuse and to support the position-limits regime, which, among other 
things, aims to prevent excessive speculation and/or market 
manipulation.
d. Costs and Discussion of Comments
    As the Commission expressed in the December 2013 Supplemental 
Position Limits Proposal, the exemptions under reproposed Sec.  150.3 
do not increase the costs of complying with position limits. The 
Commission continues to believe that many costs will likely decrease by 
the Commission providing for relief from position limits in certain 
situations. The reproposed Sec.  150.3 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. While the Commission appreciates that there will be 
compliance duties connected to the reproposed Sec.  150.3, the 
Commission does not anticipate the costs of obtaining any of the 
exemptions to be overly burdensome.\1345\
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    \1345\ See, e.g., the discussion of costs related to non-
enumerated bona fide hedging position determinations, anticipatory 
bona fide hedge filings, and spread exemptions below.
---------------------------------------------------------------------------

i. Section 150.3(a)--Positions Which May Exceed Limits
    Because of the proposed changes in the June 2016 Supplemental 
Position Limits Proposal, reproposed Sec.  150.3(a) must be read with 
reproposed Sec. Sec.  150.9, 150.10, and Sec.  150.11. Moreover, the 
costs of reproposed Sec.  150.3 are linked to reproposed Sec. Sec.  
150.9, 150.10, and Sec.  150.11, and are discussed more fully below.
ii. Section 150.3(b)--Financial Distress Exemption
    The Commission's view on the costs related to the financial 
distress exemption under reproposed Sec.  150.3(b) remains unchanged. 
The costs are likely to be minimal. Market participants who voluntarily 
employ these exemptions will incur filing and recordkeeping

[[Page 96863]]

costs. As explained in the 2013 proposal, the Commission cannot 
accurately estimate how often this exemption may be invoked because 
emergency or distressed market situations are unpredictable and 
dependent on a variety of firm- and market-specific factors as well as 
general macroeconomic indicators. The Commission, nevertheless, 
believes that emergency or distressed market situations that might 
trigger the need for this exemption will be infrequent. The Commission 
continues to assume that reproposed Sec.  150.3(b) will add 
transparency to the process. Finally, 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.
iii. Section 150.3(c)--Conditional Spot Month Limit Exemption
    A natural gas market participant that elects to exercise this 
exemption will incur certain direct costs to do so. The natural gas 
market participant must file Form 504 in accordance with requirements 
listed in reproposed Sec.  19.01. The Commission does not believe that 
there will be additional costs, or at least not significant costs, 
because exchanges already have the exemption. Given that there has been 
experience with this type of exemption for natural gas market 
participants,\1346\ the Commission does not believe that liquidity, in 
the aggregate (across the core referenced futures contract and 
referenced contracts) will be adversely impacted.\1347\ By retaining 
the exemption for natural gas contracts, the Commission has heeded 
commenters concerns about disrupting market practices and harming 
liquidity in the cash market, thus increasing the cost of hedging and 
possibly preventing convergence between the physical-delivery futures 
and cash markets.
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    \1346\ CL-ICE-59962 at 6-7 (commenter argued that the 
conditional limit for natural gas ``has had no adverse consequences 
with supply constraints and underlying physical delivery 
contracts.'')
    \1347\ CL-ICE-59966 at 4-5, CL-ICE-59962 at 5, and CL-IECAssn-
59679 at 30.
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iv. Section 150.3(d)--Pre-Enactment and Transition Period Swaps 
Exemption
    The exemption offered in reproposed Sec.  150.3(d) is self-
executing and will not require a market participant to file for relief. 
Nevertheless, as explained in the December 2013 proposal, a market 
participant may incur costs to identify positions eligible for 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. The Commission believes these costs will not be overly 
burdensome, and notes that market participants who assume such costs do 
so voluntarily.
v. Section 150.3(e)--Other Exemptions and Previously Granted Exemptions
    Under the reproposed Sec.  150.3(e), market participants electing 
to seek an exemption other than those specifically enumerated, will 
incur certain direct costs to do so. The Commission discussed the 
expected costs in the December 2013 proposal and continues to believe 
that the same costs will arise should market participants elect 
exemptive relief under reproposed Sec.  150.3(e). As explained in the 
December 2013 proposal, market participants will incur costs related to 
petitioning the Commission under Sec.  140.99 of the Commission's 
regulations or under CEA section 4a(a)(7). There also will be 
recordkeeping costs for those market participants who elect to pursue a 
Sec.  150.3(e) exemption. The Commission 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. The Commission 
has estimated the costs entities might incur and discussed those costs 
in the PRA section of this release.
vi. Section 150.3(f)--Previously Granted Exemptions
    Market participants who had previously relied upon the exemptions 
granted under current Sec.  1.47 will be able to continue to rely on 
such exemptions for existing positions under reproposed Sec.  150.3(f). 
Between the December 2013 proposal and now, the Commission has 
determined to expand the relief in reproposed Sec.  150.3(f). As more 
fully discussed above, the Commission amended the regulatory text so 
that previously-granted exemptions may apply to pre-existing financial 
instruments, rather than only to pre-existing swaps, and to exchange-
granted, non-enumerated exemptions in non-legacy commodity derivatives 
outside of the spot month, with other conditions. The Commission 
believes that there will be recordkeeping costs but there also will be 
cost-savings in the form of market stability because market 
participants will not be required to liquidate positions prematurely, 
and the relief covers financial instruments not just swaps.
vii. Section 150.3(g) and (h)--Recordkeeping and Special Calls
    Under reproposed Sec.  150.3(g) and (h), the costs related to 
maintaining and producing records will be minimal because, under most 
circumstances, market participants already maintain books and records 
in compliance with Commission regulations and as part of prudent 
accounting and risk management policies and procedures. The Commission 
has estimated the costs entities might incur and discussed those costs 
in the PRA section of this release.
6. Section 150.5--Exemptions From Exchange-Set Position Limits
    The Dodd-Frank Act scaled back the discretion afforded DCMs for 
establishing position limits under the earlier CFMA amendments. 
Specifically, among other things, the Dodd-Frank Act: (1) Amended DCM 
core principle 5 to 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; \1348\ 
and (2) added parallel core principle obligations on newly-authorized 
SEFs, including SEF core principle 6 regarding the establishment of 
position limits.\1349\
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    \1348\ 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).
    \1349\ Dodd-Frank Act section 733 (adding CEA section 5h; 7 
U.S.C. 7b-3).
---------------------------------------------------------------------------

a. Rule Summary
    In light of these Dodd-Frank Act statutory amendments, the 
Commission has adopted Sec.  150.5 to specify certain requirements and 
guidance for DCMs and SEFs establishing exchange-set limits.
    Specifically, Sec.  150.5(a)(1) requires that DCMs and SEFs set 
position limits for commodity derivative contracts, subject to federal 
position limits, at a level not higher than the Commission's levels 
specified in Sec.  150.2. In addition, exchanges with cash-settled 
contracts price-linked to contracts subject to federal limits must also 
adopt limit levels not higher than federal position limits.
    Further, Sec.  150.5(a)(5) requires for all contracts subject to 
federal speculative limits, and Sec. Sec.  150.5(b)(8) and 150.5(c)(8) 
suggest for other contracts not subject to federal speculative limits, 
that designated contract markets and swap execution facilities adopt 
aggregation rules that conform to Sec.  150.4. Regulation Sec.  
150.5(a)(2)(i) requires for all contracts subject to federal 
speculative limits, and

[[Page 96864]]

regulations Sec. Sec.  150.5(b)(5)(i)(A) and (c)(5)(1) suggest for 
other contracts not subject to federal speculative limits, that 
exchanges conform their bona fide hedging exemption rules to the Sec.  
150.1 definition of bona fide hedging position.
    Regulation Sec.  150.5(a)(2)(ii) requires, and Sec. Sec.  
150.5(b)(5)(iii) and (c)(5)(iii) suggest that exchanges condition any 
exemptive relief from federal or exchange-set position limits on an 
application from the trader. And, if granted an exemption, such trader 
must reapply for such exemption at least on an annual basis. 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.
    Finally, under Sec.  150.5(b) and Sec.  150.5(c) for commodity 
derivative contracts not subject to federal position limits, the 
Commission provides guidance for exchanges to use their reasonable 
discretion to set exchange position limits and exempt market 
participants from exchange-set limits. This includes, under Sec.  
150.5(b), commodity derivative contracts in a physical commodity as 
defined in Sec.  150.1, and, under Sec.  150.5(c), excluded commodity 
derivative contracts as defined in section 1a(19) of the Act.
b. Baseline
    The baseline is the current reasonable discretion afforded to 
exchanges to exempt market participant from their exchange-set position 
limits.
c. Benefits and Costs
    Functioning as an integrated component within the broader position 
limits regulatory regime, the Commission expects the proposed changes 
to Sec.  150.5 will further the four objectives outlined in CEA section 
4a(a)(3).\1350\ The Commission has endeavored to preserve the status 
quo baseline within the framework of establishing new federal position 
limits.
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    \1350\ 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 amendments addressed to 
exchange-set position limits as well.
---------------------------------------------------------------------------

    The reproposed regulations require that exchange-set limits employ 
aggregation policies that conform to the Commission's aggregation 
policy for contracts that are subject to federal limits under Sec.  
150.2, thus harmonizing aggregation rules for all federal and exchange-
set speculative position limits. For contracts subject to federal 
speculative position limits under 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 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, 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 increasing a DCM- or SEF-set limit to a level 
that is higher than that set by the Commission. Accordingly, 
harmonizing aggregation standards reinforces the efficacy and intended 
purpose of Sec. Sec.  150.5(a)(2)(ii), (b)(5)(iii) and (c)(5)(iii) by 
foreclosing an avenue to circumvent applicable limits. Moreover, by 
extending this harmonized approach to contracts not included in Sec.  
150.2, the Commission encourages a common standard for all federal and 
exchange-set limits. The adopted 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.
    With respect to exchange-set limits, DCM and SEF core principles 
already address the costs associated with the requirement that 
exchanges set position limits no higher than federal limits. Further, 
for commodity derivatives contracts subject to federal position limits, 
exchanges are provided the discretion to decide whether or not to set 
position-limits that are lower than the federal position limit. 
Finally, when an exchange grants an exemption from a lower exchange-set 
limit, it is not required to use the Commission's bona fide hedging 
position definition so long as the exempted position does not exceed 
the federal position limit.
    To the extent that a DCM or SEF grants exemptions, the Commission 
anticipates that exchanges and market participants will incur minimal 
costs to administer the application process for exemption relief in 
accordance with standards set forth in the proposed rule. 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 impact of 
the potential costs has been reduced because the nature of the 
exemption process is similar to what DCMs already have in place. 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 adopted 
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.
    Also, with respect to phasing, exchanges are not required to use 
the Commission's definition of bona fide hedging position when setting 
positon limits on commodity derivative contracts in a physical 
commodity that are not subject to federal position limits (and when 
exchanges grant an exemption from exchange-set limits if such exemption 
does not exceed the federal limit) or excluded commodity derivative 
contracts. Nevertheless, exchanges are free to use the Commission's 
bona fide hedging position definition if they so choose.
    Relative to the status quo baseline, this rulemaking imposes a 
ceiling on exchange-set position limits for referenced contracts in 25 
commodities. The core principals already require such ceiling, and such 
costs are addressed in the part 37 and 38 rulemakings. As mandated and 
necessary, this rule adopts limits for 16 additional commodities. In 
addition, market participants may be facing hard position limits on 
some contract that previously only had accountability levels. As such, 
this rulemaking will confer any benefits that hard position limits have 
over accountability levels. This may include information gleaned from 
exemption applications that will better inform the supervisory 
functions of DCMs or SEFs as well as to protect markets from any 
adverse effects from market participants that hold positions in excess 
of an exchange set position limit. In addition, exchanges retain the 
ability to set accountability levels lower than the levels of the 
position limits; if an exchanges chooses to adopt such accountability 
levels, they would

[[Page 96865]]

provide exchanges with additional information regarding positions of 
various market participants.
    Exchanges and market participants will have to adapt to new federal 
position limits. Position limits will alter the way that swap and 
futures trading is conducted. For many contracts that did not have 
federal limits, participants will be facing new exchange set position 
limits in the spot, single month, and all months combined. Such limits 
may impose new compliance costs on exchanges and market participants. 
These compliance costs may consists of adapting the method of 
aggregating contracts and filing for exchange exemptions to position 
limits. The Commission anticipates that these costs will be higher for 
contracts that have only had accountability levels and not hard 
exchange-set position limits. Exchange-set position limits may also 
deter some speculators from fully participating and affecting the price 
of some futures contracts. The Commission expects that for the most 
part, exchange-set position limits will not have much effect except for 
rare circumstances when exemptions to exchange set limits do not apply 
or other derivative contracts such as swap contracts (below the federal 
limit), forwards, or trade options are not adequate to meet a market 
participant's needs.
d. Response to Commenter
    A commenter asked whether the Supplemental Proposal's cost-benefit 
analysis assesses the appropriateness of such requirement on exchange-
set speculative position limits or includes the costs of processing 
non-enumerated bona fide hedging positions and Spread Exemptions for 
contracts subject only to exchange-set speculative position limits and 
not federal speculative position limits.\1351\
---------------------------------------------------------------------------

    \1351\ CL-Working Group-60947 at 14.
---------------------------------------------------------------------------

    The Commission notes that if an exchange elects to set a position 
limit lower than a federal limit, the costs resulting from such choices 
are not imposed by Sec.  150.5, because the exchange has made the 
choice not the Commission. The costs on market participants to apply 
for exchange set limits below the federal level are also discussed in 
Sec.  150.2. The Commission is unable to forecast these costs, because 
it does not know when an exchange will set its limits lower than the 
federal limit; nor does it know how low any such exchange-set position 
limit level may be.
    This rulemaking maintains the status quo for exchange-set 
speculative limits for contracts not subject to federal limits. 
Therefore, there are no costs and benefits resulting from this 
rulemaking on the processing of such exemptions.
7. Section 150.7--Reporting Requirements for Anticipatory Hedging 
Positions
a. Rule Summary
    The revised definition of bona fide hedging position reproposed in 
Sec.  150.1 of this rule incorporates hedges of five specific types of 
anticipated transactions: Unfilled anticipated requirements, unsold 
anticipated production, anticipated royalties, anticipated service 
contract payments or receipts, and anticipatory cross-hedges.\1352\ The 
Commission is reproposing new requirements in Sec.  150.7 for traders 
seeking an exemption from position limits for any of these five 
enumerated anticipated hedging transactions that were designed to build 
on, and replace, the special reporting requirements for hedging of 
unsold anticipated production and unfilled anticipated requirements in 
current Sec.  1.48.\1353\
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    \1352\ See paragraphs 3(iii), 4(i), 4(iii), 4(iv) and (5), 
respectively, of the Commission's definition of bona fide hedging 
position in Sec.  150.1 as discussed supra.
    \1353\ 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.
---------------------------------------------------------------------------

    The Commission proposed 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 
position in 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 
Sec.  150.2.
    Reproposed Sec.  150.7(f) adds 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. Reproposed Sec.  150.7(g) enables the Commission 
to review and compare the 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, reproposed Sec.  150.7(h) 
required 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.
b. Baseline
    The baseline is current Sec.  1.48.
c. Benefits and Costs
    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 excess speculation, may be 
exceedingly difficult if anticipatory transactions are not well 
defined. The Commission is, therefore, reproposing the collection of 
Form 704 to collect information that is vital in performing this 
distinction. While there will be costs associated with fulfilling 
obligations related to anticipatory hedging, the Commission believes 
that 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 Sec.  150.7(d) similarly allow the Commission to verify on 
an ongoing basis that the person's anticipated cash market 
transactions, estimated in good faith, closely track that person's real 
cash market activities. Absent monthly filing pursuant to Sec.  
150.7(e), 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 believes it is reproposing a low 
cost method of obtaining the necessary information to ensure that 
anticipatory hedges are valid.\1354\
---------------------------------------------------------------------------

    \1354\ The Commission understands that there will be costs 
associated with the filing of Form 704. Costs of filing that form 
are discussed in the context of the part 19 requirements as well as 
in the Paperwork Reduction Act section of this release.
---------------------------------------------------------------------------

d. Summary of Comments
    One commenter asserted that the reporting requirements for 
anticipatory hedges of an operational or commercial

[[Page 96866]]

risk comprising an initial, supplementary and annual report are unduly 
burdensome. The commenter recommended that the Commission require 
either an initial and annual report or an initial and supplementary 
report.\1355\ Another commenter agreed that the proposed requirements 
to file Forms 204, 704 and/or 604 ``are unduly burdensome and 
commercially impracticable,'' and stated that the Commission should 
``scale back both the frequency and the content of the filings required 
to maintain bona fide hedge positions.'' \1356\
---------------------------------------------------------------------------

    \1355\ CL-IECAssn-59679 at 11.
    \1356\ CL-BG Group-59656 at 11.
---------------------------------------------------------------------------

    Another commenter suggested deleting Form 704 because it believes 
that no matter how extensive the Commission makes reporting 
requirements, the Commission will still need to request additional 
information on a case-by-case basis to ensure hedge transactions are 
legitimate.\1357\ The commenter suggested that the Commission should be 
able to achieve its goal of obtaining enough information to determine 
whether to request additional information using Form 204 along with 
currently collected data sources and so the additional burden of the 
new series '04 reports outweighs the benefit to the Commission.\1358\
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    \1357\ CL-NGFA-60941 at 7-8.
    \1358\ Id.
---------------------------------------------------------------------------

    Several commenters remarked on the cost associated with Form 704. 
One commenter stated that the additional reporting requirements, 
including new Form 704 to replace the reporting requirements under 
current rule 1.48, and annual and monthly reporting requirements under 
rules 150.7(f) and 150.7(g) ``will impose significant additional 
regulatory and compliance burdens on commercials;'' the commenter 
believes that the Commission should consider alternatives, including 
targeted special calls when appropriate.\1359\ Another commenter stated 
the reporting requirements for the series 04 forms is overly burdensome 
and would impose a substantial cost to market participants because 
while the proposal would require the Commission to respond fairly 
quickly, it does not provide an indication of whether the Commission 
will deem the requirement accepted if the Commission does not respond 
within a stated time frame. The commenter is concerned that a market 
participant may have to refuse business if it does not receive an 
approved exemption in advance of a transaction.\1360\ A third commenter 
stated that Form 704 is ``commercially impracticable and unduly 
burdensome'' because it would require filers to ``analyze each 
transaction to see if it fits into an enumerated hedge category.'' The 
commenter is concerned that such ``piecemeal review'' would require a 
legal memorandum and the development of new software to track positions 
and, since the Commission proposed that Form 704 to be used in proposed 
Sec.  150.11, the burden associated with the form has increased.\1361\
---------------------------------------------------------------------------

    \1359\ CL-APGA-59722 at 10.
    \1360\ CL-EDF-59961 at 6.
    \1361\ CL-EEI-EPSA-60925 at 9.
---------------------------------------------------------------------------

    Finally, a commenter stated that the Commission significantly 
underestimated costs associated with reporting, and provided revised 
estimates of start-up and ongoing compliance costs for filing Form 
704.\1362\
---------------------------------------------------------------------------

    \1362\ CL-FIA at 35-36.
---------------------------------------------------------------------------

    As discussed in the December 2013 Position Limits Proposal, the 
Commission remains concerned about distinguishing between anticipatory 
reduction of risk and speculation.\1363\ Therefore, the Commission is 
retaining the requirement to file Form 704 for anticipatory hedges. The 
Commission notes that most of the information required on Form 704 is 
currently required under Sec.  1.48, and that such information is not 
found in any other Commission data source, including Form 204.
---------------------------------------------------------------------------

    \1363\ See December 2013 Position Limits Proposal, 78 FR at 
75746.
---------------------------------------------------------------------------

    The Commission is adopting the commenters' suggestions, however, to 
reduce the frequency of filings by maintaining the requirement for the 
initial statement and annual update but eliminating the supplemental 
filing as proposed in Sec.  150.7(e). After considering the commenter's 
concerns, the Commission believes the monthly reporting on Form 204 and 
annual updates on Form 704 will provide sufficient updates to the 
initial statement and is deleting the supplemental filing provision in 
proposed Sec.  150.7(e) to reduce the burden on filers. The Commission 
has made several burden-reducing changes to Form 704 and Sec.  
150.7(d), including merging the initial statement and annual update 
sections of Form 704, clarifying and amending the instructions to Form 
704, and eliminating redundant information.\1364\
---------------------------------------------------------------------------

    \1364\ See, supra, discussion of changes to Form 704 and Sec.  
150.7.
---------------------------------------------------------------------------

    In response to the commenter who suggested the Commission consider 
targeted special calls and other alternatives to the annual and monthly 
filings, the Commission believes these filings are critical to the 
Commission's Surveillance program. Anticipatory hedges, because they 
are by definition forward-looking, require additional detail regarding 
the firm's commercial practices in order to ensure that a firm is not 
using the provisions in proposed Sec.  150.7 to evade position limits. 
In contrast, special calls are backward-looking and would not provide 
the Commission's Surveillance program with the information needed to 
prevent markets from being susceptible to excessive speculation. 
However, the Commission expects the new filing requirements to be an 
improvement over current practice under Sec.  1.48 because as facts and 
circumstances change, the Commission's Surveillance program will have a 
more timely understanding of the market participant's hedging needs.
    The Commission notes in response to the commenter that there is no 
requirement to analyze individual transactions or submit a memorandum. 
Finally, while costs of filing Form 704 are discussed below in the 
context of part 19, the Commission notes that changes made to the 
frequency of the forms should help alleviate some of the cost burdens 
associated with filing Form 704.
8. 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 
hedging 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 hedging position 
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 
position exemption.
    In order to help ensure that the additional exemptions described in 
Sec.  150.3 are used in accordance with the requirements of the 
exemption

[[Page 96867]]

employed, as well as obtain information necessary to verify that any 
futures, options and swaps positions established in referenced 
contracts are justified, the Commission is making conforming and 
substantive amendments to part 19. First, the Commission is amending 
part 19 by adding new and modified cross-references to proposed part 
150, including the new definition of bona fide hedging position in 
reproposed Sec.  150.1.\1365\ Second, the Commission is amending Sec.  
19.00(a) by extending reporting requirements to any person claiming any 
exemption from federal position limits pursuant to reproposed Sec.  
150.3. The Commission is adding three new series '04 reporting forms to 
effectuate these additional reporting requirements. Third, the 
Commission is updating the manner of part 19 reporting. Lastly, the 
Commission is updating both the type of data that would be required in 
series '04 reports, as well as the time allotted for filing such 
reports.
---------------------------------------------------------------------------

    \1365\ These amendments are non-substantive conforming 
amendments and do not have implications for the Commission's 
consideration of costs and benefits.
---------------------------------------------------------------------------

    Below, the Commission describes each of the proposed changes; 
responds to commenters; and considers the costs and benefits of such 
changes.\1366\
---------------------------------------------------------------------------

    \1366\ The Commission notes that comments related to costs and 
benefits are described in this section, and other comments regarding 
these provisions are discussed in the section supra that describes 
the reproposed rules for part 19. For a complete picture of the 
comments received, the Commission's response to comments, and the 
reproposed rules, all sections of this preamble should be read 
together.
---------------------------------------------------------------------------

a. Amendments to Part 19
    In the December 2013 Position Limits Proposal, the Commission 
proposed to amend part 19 so that it would conform to the Commission's 
proposed changes to part 150.\1367\ The proposed conforming amendments 
included: Amending 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; updating Sec.  19.00(a) by extending 
reporting requirements to any person claiming any exemption from 
federal position limits pursuant to proposed Sec.  150.3; adding new 
series '04 reporting forms to effectuate these additional reporting 
requirements; updating the manner of part 19 reporting; and updating 
both the type of data that would be required in series '04 reports as 
well as the timeframe for filing such reports.
---------------------------------------------------------------------------

    \1367\ See December 2013 Position Limits Proposal, 78 FR at 
75741-46.
---------------------------------------------------------------------------

b. Baseline
    The baseline is current part 19.
c. Summary of Comments
    The Commission received several comments regarding the general 
nature of series '04 reports and/or the manner in which such reports 
are required to be filed. One commenter stated that the various forms 
required by the regime, while not lengthy, represent significant data 
collection and categorization that will require a non-trivial amount of 
work to accurately prepare and file. The commenter claimed that a 
comprehensive position limits regime could be implemented with a ``far 
less burdensome'' set of filings and requested that the Commission 
review the proposed forms and ensure they are ``as clear, limited, and 
workable'' as possible to reduce burden. The commenter stated that it 
is not aware of any software vendors that currently provide solutions 
that can support a commercial firm's ability to file the proposed 
forms.\1368\ Another commenter supports the Commission's decision to 
require applications for risk management exemptions but requests the 
Commission to reevaluate the cost the forms will impose such as new 
compliance programs, training of staff, and purchasing or modifying 
data management systems in order to meet and maintain the compliance 
requirements.\1369\
---------------------------------------------------------------------------

    \1368\ CL-COPE-59662 at 24, CL-COPE-60932 at 10. See also CL-
EEI-EPSA-60925 at 9.
    \1369\ CL-EDF-59961 at 6-7.
---------------------------------------------------------------------------

    Several commenters requested that the Commission create user-
friendly guidebooks for the forms so that all entities can clearly 
understand any required forms and build the appropriate systems to file 
such forms, including providing workshops and/or hot lines to improve 
the forms.\1370\
---------------------------------------------------------------------------

    \1370\ See CL-COPE-59662 at 24, CL-COPE-60932 at 10; CL-ASR-
60933 at 4; CL-Working Group-60947 at 17-18; CL-EEI-EPSA-60925 at 3.
---------------------------------------------------------------------------

    Finally, two commenters recommended modifying or removing the 
requirement to certify series '04 reports as ``true and correct.'' One 
commenter suggested that the requirement be removed due to the 
difficulty of making such a certification and the fact that CEA section 
6(c)(2) already prohibits the submission of false or misleading 
information.\1371\ Another noted that the requirement to report very 
specific information relating to hedges and cash market activity 
involves data that may change over time. The commenter suggested the 
Commission adopt a good-faith standard regarding ``best effort'' 
estimates of the data when verifying the accuracy of Form 204 
submissions.\1372\
---------------------------------------------------------------------------

    \1371\ See, CL-CMC-59634 at 17.
    \1372\ CL-Working Group-59693 at 65.
---------------------------------------------------------------------------

    The Commission is reproposing the amendments to part 19. The 
Commission agrees with the commenters that the forms should be clear 
and workable, and offers several clarifications and amendments in other 
sections of this release in response to comments about particular 
aspects of the series '04 reports.\1373\
---------------------------------------------------------------------------

    \1373\ See, supra, discussion of reproposed rules regarding 
series '04 reports and part 19.
---------------------------------------------------------------------------

    The Commission notes that the information required on the series 
'04 reports represents a trader's most basic position data, including 
the number of units of the cash commodity that the firm has purchased 
or sold, or the size of a swap position that is being offset in the 
futures market. The Commission believes this information is readily 
available to traders, who routinely make trading decisions based on the 
same data that is required on the series '04 reports. The Commission is 
moving to an entirely electronic filing system, allowing for 
efficiencies in populating and submitting forms that require the same 
information every month. Most traders who are required to file the 
series '04 reports must do so for only one day out of the month, 
further lowering the burden for filers. In short, the Commission 
believes potential burdens have been reduced while still providing 
adequate information for the Commission's Surveillance program. For 
market participants who may require assistance in monitoring for 
speculative position limits and gathering the information required for 
the series '04 reports, the Commission is aware of several software 
companies who, prior to the vacation of the Part 151 Rulemaking, 
produced tools that could be useful to market participants in 
fulfilling their compliance obligations under the new position limits 
regime.
    In response to the commenters that requested guidebooks for the 
series '04 reporting forms, the Commission has revised the series '04 
forms and the instructions to such forms as discussed supra in this 
release. The Commission believes that it is less confusing to ensure 
that form instructions are clear and detailed than it is to provide 
generalized guidebooks that may not respond to specific issues. The 
Commission's longstanding experience with collecting and reviewing Form 
204 and Form 304 has shown that many questions about the series '04 
reports are specific to the circumstances and trading strategies of an 
individual

[[Page 96868]]

market participant, and do not lend themselves to generalization that 
would be helpful to many market participants. The Commission notes 
that, should a market participant have questions regarding how to file 
a particular form, they are encouraged to contact Commission staff 
directly to get answers tailored to their particular circumstances.
    Finally, the Commission is amending the certification language 
found at the end of each form to clarify that the certification 
requires nothing more than is already required of market participants 
in CEA section 6(c)(2). The Commission believes the certification 
language is an important reminder to reporting traders of their 
responsibilities to file accurate information under several sections of 
the Act, including but not limited to CEA section 6(c)(2).
d. Information Required on Series '04 Reports
i. Bona Fide Hedgers Reporting on Form 204--Sec.  19.01(a)(3)
    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 proposed to continue using Forms 204 and 
304, which will feature only minor changes to the types of data to be 
reported under Sec.  19.01(a)(3).\1374\ These changes include removing 
the modifier ``fixed price'' from ``fixed price cash position;'' 
requiring cash market position information to be submitted in both the 
cash market unit of measurement (e.g., barrels or bushels) and futures 
equivalents; and adding a specific request for data concerning open 
price contracts to accommodate open price pairs. In addition, the 
monthly reporting requirements for cotton, including the granularity of 
equity, certificated and non-certificated cotton stocks, would be moved 
to Form 204, while weekly reporting for cotton would be retained as a 
separate report made on Form 304 in order to maintain the collection of 
data required by the Commission to publish its weekly public cotton 
``on call'' report.
---------------------------------------------------------------------------

    \1374\ The list of data required for persons filing on Forms 204 
and 304 has been relocated from current Sec.  19.01(a) to reproposed 
Sec.  19.01(a)(3).
---------------------------------------------------------------------------

    One commenter suggested that the costs to industry participants in 
collecting and submitting Form 204 data and to the Commission in 
reviewing it ``greatly outweigh'' the regulatory benefit. The commenter 
recommended that the Commission undertake a cost-benefit analysis to 
reconsider what information is required to be provided under part 19 
and on Form 204 and limit that information only to what will assist 
Commission staff in assessing the validity of claimed hedge 
exemptions.\1375\
---------------------------------------------------------------------------

    \1375\ CL-Working Group-60396 at 17-18.
---------------------------------------------------------------------------

    One commenter stated that CFTC should reduce the complexity and 
compliance burden of bona fide hedging record keeping and reporting by 
using a model similar to the current exchange-based exemption 
process.\1376\ The commenter also stated that the requirement to keep 
records and file reports, in futures equivalents, regarding the 
commercial entity's cash market contracts and derivative market 
positions on a real-time basis globally, will be complex and impose a 
significant compliance burden. The commenter noted such records are not 
needed for commercial purposes.\1377\
---------------------------------------------------------------------------

    \1376\ CL-ASR-59668 at 3.
    \1377\ Id. at 7. See also CL-ASR-60933 at 5.
---------------------------------------------------------------------------

    Another commenter recommended that the Commission should require a 
market participant with a position in excess of a spot-month position 
limit to report on Form 204 only the cash-market activity related to 
that particular spot-month derivative position, and not to require it 
to report cash-market activity related to non-spot-month positions 
where it did not exceed a non-spot-month position limit; the commenter 
stated that the burden associated with such a reporting obligation 
would increase significantly.\1378\
---------------------------------------------------------------------------

    \1378\ CL-FIA-59595 at 38.
---------------------------------------------------------------------------

    One commenter recommended that reporting rules require traders to 
identify the specific risk being hedged at the time a trade is 
initiated, to maintain records of termination or unwinding of a hedge 
when the underlying risk has been sold or otherwise resolved, and to 
create a practical audit trail for individual trades, to discourage 
traders from attempting to mask speculative trades under the guise of 
hedges.\1379\
---------------------------------------------------------------------------

    \1379\ CL-Sen. Levin-59637 at 8.
---------------------------------------------------------------------------

    The Commission recognizes that market participants will incur costs 
to file Form 204; these costs are described in detail below. However, 
the Commission believes that the costs of filing Form 204 are not 
overly burdensome for market participants, most of whom currently file 
similar information with either the Commission or the exchanges in 
order to obtain and maintain exemptions from speculative position 
limits. The Commission believes it is reproposing requirements for Form 
204 that provide the Commission with the most basic information 
possible to ascertain the veracity of claimed bona fide hedging 
positions. The Commission has in some cases accepted commenter 
suggestions to reduce or amend the information required in order to 
reduce confusion and alleviate burden on filers.\1380\ Where the 
Commission has retained required information fields, the Commission 
believes, based on its longstanding experience conducting surveillance 
in the markets it oversees, that such fields are necessary to determine 
the legitimacy of claimed bona fide hedging position exemptions.
---------------------------------------------------------------------------

    \1380\ See supra the Commission's determinations regarding part 
19
---------------------------------------------------------------------------

    The Commission notes that, while the exchange referred to by the 
commenter does not have a reporting process analogous to Form 204, it 
does require an application prior to the establishment of a position 
that exceeds a position limit. In contrast, advance notice is not 
required for most federal enumerated bona fide hedging positions.\1381\ 
In the Commission's experience, the series '04 reports have been useful 
and beneficial to the Commission's Surveillance program and the 
Commission finds no compelling reason to change the forms to conform to 
the exchange's process. Further, the Commission notes that Form 204 is 
filed once a month as of the close of business of the last Friday of 
the month; it is not and has never been required to be filed on a real-
time basis globally. A market participant only has to file Form 204 if 
it is over the limit at any point during the month, and the form 
requires only cash market activity (not derivatives market positions).
---------------------------------------------------------------------------

    \1381\ The Commission notes that advance notice is required for 
recognition of anticipatory hedging positions by the Commission. See 
supra for more discussion of anticipatory hedging reporting 
requirements.
---------------------------------------------------------------------------

    The Commission has never distinguished between spot-month limits 
and non-spot-month limits with respect to the filing of Form 204. The 
Commission notes that, as discussed in the December 2013 Position 
Limits Proposal, Form 204 is used to review positions that exceed 
speculative limits in general, not just in the spot-month.\1382\ 
Because of this, the Commission is proposing not to adopt the 
commenter's recommendation to

[[Page 96869]]

only require Form 204 when a market participant exceeds a spot-month 
limit.
---------------------------------------------------------------------------

    \1382\ The Commission stated that the Form 204 ``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'' 
because the Commission is seeking to ``ensure that any person who 
claims any exemption from federal speculative position limits can 
demonstrate a legitimate purpose for doing so.'' See December 2013 
Position Limits Proposal, 78 FR at 75741-42.
---------------------------------------------------------------------------

    In response to the commenter who suggested the Commission require a 
``practical audit trail'' for bona fide hedgers, the Commission notes 
that other sections of the Commission's regulations provide rules 
regarding detailed individual transaction recordkeeping as suggested by 
the commenter.
ii. Conditional Spot-Month Limit Exemption Reporting on Form 504--Sec.  
19.01(a)(1)
    As 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. In the December 2013 Position Limits Proposal, the Commission 
noted its concern about the cash market trading of those availing 
themselves of the conditional spot-month limit exemption and so 
proposed to 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.
    The Commission proposed to require reporting on new Form 504 for 
conditional spot-month limit exemptions in the natural gas commodity 
derivative contracts only, until the Commission gains additional 
experience with the limits in proposed Sec.  150.2 in other commodities 
as well.
Benefits and Costs
    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 part 19, the Commission would lack critical tools to 
identify abuses related to the exemptions afforded in Sec.  150.3 in a 
timely manner. 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 recognizes there will be costs associated with the 
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. As described 
above, 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 and 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 
Paperwork Reduction Act (``PRA'').\1383\
---------------------------------------------------------------------------

    \1383\ See supra for discussion of the Commission's Paperwork 
Reduction Act estimates and explanation.
---------------------------------------------------------------------------

    For Form 204, the Commission estimates that approximately 425 
market participants will file an average of 12 reports annually at an 
estimated labor burden of 3 hours per response for a total per-entity 
hour burden of approximately 36 hours, which computes to a total annual 
burden of 15,300 hours for all affected entities. Using an estimated 
hourly wage of $122 per hour,\1384\ the Commission estimates an annual 
per-entity cost of approximately $4,392 and a total annual cost of 
$1,866,600 for all affected entities. These estimates are summarized 
below in Table IV-A-1.
---------------------------------------------------------------------------

    \1384\ 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 $122 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 2013, modified to 
account for an 1800-hour work-year, adjusted to account for the 
average rate of inflation since 2013, 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.

                                                       Table IV-A-1--Burden Estimates for Form 204
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Annual number
                     Required record or report                       Total number of    Burden hours     of responses     Hourly wage       Per-entity
                                                                       respondents      per response    per respondent      estimate        labor cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 204...........................................................             425                3               12          $122.00           $4,392
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For Form 304, the Commission estimates that approximately 200 
market participants will file an average of 52 reports annually at an 
estimated labor burden of 1 hour per response for a total per-entity 
hour burden of approximately 52hours, which computes to a total annual 
burden of 10,400 hours for all affected entities. Using an estimated 
hourly wage of $122 per hour, the Commission estimates an annual per-
entity cost of approximately $6,344 and a total annual cost of 
$1,268,800 for all affected entities. These estimates are summarized 
below in Table IV-A-2.

[[Page 96870]]



                                                       Table IV-A-2--Burden Estimates for Form 304
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Annual number
                     Required record or report                       Total number of    Burden hours     of responses     Hourly wage       Per-entity
                                                                       respondents      per response    per respondent      estimate        labor cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 304...........................................................             200                1               52          $122.00           $6,344
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For Form 504, the Commission estimates 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 $122 per hour, the Commission estimates an 
annual per-entity cost of approximately $21,960 and a total annual cost 
of $878,400 for all affected entities. These estimates are summarized 
below in Table IV-A-3.

                                                       Table IV-A-3--Burden Estimates for Form 504
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Annual number
                     Required record or report                       Total number of    Burden hours     of responses     Hourly wage       Per-entity
                                                                       respondents      per response    per respondent      estimate        labor cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Form 504...........................................................              40               15               12          $122.00          $21,960
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For Form 604 filed outside of the spot month, the Commission 
estimates that approximately 250 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 75,000 hours for all 
affected entities. Using an estimated hourly wage of $122 per hour, the 
Commission estimates an annual per-entity cost of approximately $36,600 
and a total annual cost of $9,150,000 for all affected entities. For 
Form 604 filed during of the spot month, the Commission estimates that 
approximately 100 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 20,000 hours for all affected 
entities. Using an estimated hourly wage of $122 per hour, the 
Commission estimates an annual per-entity cost of approximately $24,400 
and a total annual cost of $2,440,000 for all affected entities. These 
estimates are summarized below in Table IV-A-4.

                                   Table IV-A-4--Burden Estimates for Form 604
----------------------------------------------------------------------------------------------------------------
                                                                  Annual  number
    Required record or report      Total number    Burden hours    of  responses    Hourly wage     Per-entity
                                  of respondents   per response   per respondent     estimate       labor cost
----------------------------------------------------------------------------------------------------------------
Form 604, Non-Spot-Month........             250              30              10         $122.00         $36,600
Form 604, Spot-Month............             100              20              10          122.00          24,400
----------------------------------------------------------------------------------------------------------------

    For initial statements filed on Form 704, the Commission estimates 
that approximately 250 market participants will file an average of 1 
report annually at an estimated labor burden of 15 hours per response 
for a total per-entity hour burden of approximately 15 hours, which 
computes to a total annual burden of 3,750 hours for all affected 
entities. Using an estimated hourly wage of $122 per hour, the 
Commission estimates an annual per-entity cost of approximately $1,830 
and a total annual cost of $457,500 for all affected entities. For 
annual updates filed on Form 704, the Commission estimates that 
approximately 250 market participants will file an average of 1 report 
annually at an estimated labor burden of 8 hours per response for a 
total per-entity hour burden of approximately 8 hours, which computes 
to a total annual burden of 2,000 hours for all affected entities. 
Using an estimated hourly wage of $122 per hour, the Commission 
estimates an annual per-entity cost of approximately $976 and a total 
annual cost of $244,000 for all affected entities. These estimates are 
summarized below in Table IV-A-5.

                                   Table IV-A-5--Burden Estimates for Form 704
----------------------------------------------------------------------------------------------------------------
                                                                  Annual  number
    Required record or report      Total number    Burden hours    of  responses    Hourly wage     Per-entity
                                  of respondents   per response   per respondent     estimate       labor cost
----------------------------------------------------------------------------------------------------------------
Form 704, Initial Statement.....             250              15               1            $122          $1,830
Form 704, Annual Update.........             250               8               1             122             976
----------------------------------------------------------------------------------------------------------------


[[Page 96871]]

(2) Summary of Comments
    Several commenters seemed not to understand which market 
participants will be required to file Form 504, as many made comments 
regarding the burden on bona fide hedgers (who are not required to file 
Form 504). One commenter stated its belief that the information 
required on Form 504 is redundant of information required on Form 204 
and would overly burden hedgers.\1385\ Another commenter stated that 
Form 504 creates a burden for hedgers to track their cash business and 
affected contracts and to create systems to file multiple forms. The 
commenter noted its belief that end-users/hedgers should never be 
subjected to the daily filing of reports.\1386\ Another commenter 
requested that the Commission change the Proposed Rule to permit market 
participants that rely on the conditional limit to file monthly bona 
fide hedging reports rather than a daily filing of all cash market 
positions because Form 504 would impose significant burdens on 
commercial market participants with cash market positions, particularly 
when compared to purely speculative traders who do not hold cash market 
positions.\1387\
---------------------------------------------------------------------------

    \1385\ CL-Working Group-59693 at 65-66
    \1386\ CL-COPE-59662 at 24
    \1387\ See, CL-EEI-EPSA-59602 at 10.
---------------------------------------------------------------------------

    A commenter suggested that the Commission should modify the data 
requirements for Form 504 in a manner similar to the approach used by 
ICE Futures U.S. for natural gas contracts, that is, requiring a 
description of a market participant's cash-market positions as of a 
specified date filed in advance of the spot-month.\1388\
---------------------------------------------------------------------------

    \1388\ CL-FIA-59595 at 37
---------------------------------------------------------------------------

    The Commission notes that there is a key distinction between Form 
504 and Form 204. Form 504 is required of speculators that are relying 
upon the conditional spot-month limit exemption. Form 204 is required 
for hedgers that exceed position limits. To the extent a firm is 
hedging, there is no requirement to file Form 504.
    In the unlikely event that a firm is both hedging and relying upon 
the conditional spot-month limit exemption, the firm would be required 
to file both forms at most one day a month, given the timing of the 
spot-month in natural gas markets (the only market for which Form 504 
will be required). In that event, however, the Commission believes that 
requiring similar information on both forms should encourage filing 
efficiencies rather than duplicating the burden. For example, both 
forms require the filer to identify fixed price purchase commitments; 
the Commission believes it is not overly burdensome for the same firm 
to report such similar information on Form 204 and Form 504, should a 
market participant ever be required to file both forms.
    The Commission does not believe that a description of a cash market 
position is sufficient to allow Commission staff to administer its 
Surveillance program. Descriptions are not as exact as reported 
information, and the Commission believes the information gathered in 
daily Form 504 reports would be more complete--and thus more 
beneficial--in determining compliance and detecting and deterring 
manipulation. The Commission reiterates that Form 504 will only be 
required from participants in natural gas markets who seek to avail 
themselves of the conditional spot-month limit exemption, limiting the 
burden to only those participants.\1389\
---------------------------------------------------------------------------

    \1389\ As stated in the December 2013 Position Limits Proposal, 
the Commission will closely monitor the reporting requirements 
associated with conditional spot-month limit exemptions in natural 
gas to determine whether reporting on Form 504 would be appropriate 
in the future for other commodity derivative contracts in response 
to market developments or in order to facilitate surveillance 
efforts. See December 2013 Position Limits Proposal, 78 FR at 75744. 
However, the Commission is not proposing a conditional spot-month 
limit exemption in any other commodity at this time.
---------------------------------------------------------------------------

iii. Time and Place of Filing Reports--Sec.  19.01(b)
    As proposed, Sec.  19.01(b)(1) would require all reports, except 
those submitted in response to special calls or on Form 504, Form 604 
during the spot-month, or Form 704, to be filed monthly as of the close 
of business on the last Friday of the month and not later than 9 a.m. 
Eastern Time on the third business day following the last Friday of the 
month.\1390\ For reports submitted on Form 504 and Form 604 during the 
spot-month, proposed Sec.  19.01(b)(2) would require filings to be 
submitted as of the close of business for each day the person exceeds 
the limit during the spot period and not later than 9 a.m. Eastern Time 
on the next business day following the date of the report.\1391\ 
Finally, 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.
---------------------------------------------------------------------------

    \1390\ The timeframe for filing Form 704 is included as part of 
proposed Sec.  150.7. See supra for discussion regarding the filing 
of Form 704.
    \1391\ In proposed Sec.  19.01(b)(2), the Commission 
inadvertently failed to include reports filed under Sec.  
19.00(a)(1)(ii)(B) (i.e. Form 604 during the spot month) in the same 
filing timeframe as reports filed under Sec.  19.00(a)(1)(i) (i.e. 
Form 504). The correct filing timeframe was described in multiple 
places on the forms published in the Federal Register as part of the 
December 2013 Position Limits Proposal.
---------------------------------------------------------------------------

    One commenter recommended an annual Form 204 filing requirement, 
rather than a monthly filing requirement. The commenter noted that 
because the general size and nature of its business is relatively 
constant, the differences between each monthly report would be 
insignificant. The commenter recommended the CFTC ``not impose 
additional costs of monthly reporting without a demonstration of 
significant additional regulatory benefits.'' The commenter noted its 
futures position typically exceeds the proposed position limits, but 
such positions are bona fide hedging positions.\1392\ Similarly, 
another commenter suggested that if the Commission does not eliminate 
the forms in favor of the requirements in the 2016 Supplemental 
Position Limits Proposal the Commission should require only an annual 
notice that details its maximum cash market exposure that justifies an 
exemption, to be filed with the exchange.\1393\
---------------------------------------------------------------------------

    \1392\ CL-DFA-59621 at 2.
    \1393\ CL-FIA-60937 at 17.
---------------------------------------------------------------------------

    One commenter suggested that the reporting date for Form 204 should 
be the close of business on the day prior to the beginning of the spot 
period and that it should be required to filed no later than the 15th 
day of the month following a month in which a filer exceeded a federal 
limit to allow the market participant sufficient time to collect and 
report its information.\1394\
---------------------------------------------------------------------------

    \1394\ CL-Working Group-60947 at 17-18
---------------------------------------------------------------------------

    With regards to proposed Sec.  19.01(b)(2), one commenter 
recommended that the Commission change the proposed next-day reporting 
of Form 504 for the conditional spot-month limit exemption and Form 604 
for the pass-through swap offsets during the spot-month, to a monthly 
basis, noting market participants need time to generate and collect 
data and verify the accuracy of the reported data. The commenter 
further stated that the Commission did not explain why it needs the 
data on Form 504 or Form 604 on a next-day basis.\1395\
---------------------------------------------------------------------------

    \1395\ CL-FIA-59595 at 35.
---------------------------------------------------------------------------

    Another asserted that the daily filing requirement of Form 504 for 
participants who rely on the conditional spot-month limit exemption 
``imposes significant burdens and substantial costs on market 
participants.'' The commenter urged a monthly rather than a daily 
filing of all cash market positions, which the commenter claimed is 
consistent with current

[[Page 96872]]

exchange practices.\1396\ Another commenter agreed, claiming that by 
making the reporting requirement monthly rather than daily, the 
Commission would balance the costs and benefits associated with Form 
504 requirements on market participants relying on the conditional spot 
month limit.\1397\
---------------------------------------------------------------------------

    \1396\ CL-ICE-59669 at 7.
    \1397\ See CL-EEI-EPSA-59602 at 10.
---------------------------------------------------------------------------

    In response to the commenters' suggestions that Form 204 be filed 
annually, the Commission notes that throughout the course of a year, 
most commodities subject to federal position limits under proposed 
Sec.  150.2 are subject to seasonality of prices as well as less 
predictable imbalances in supply and demand such that an annual filing 
would not provide the Commission's Surveillance program insight into 
cash market trends underlying changes in the derivative markets. This 
insight is necessary for the Surveillance program to determine whether 
price changes in derivative markets are caused by fundamental factors 
or manipulative behavior. Further, the Commission believes that an 
annual filing could actually be more burdensome for firms, as an annual 
filing could lead to special calls or requests between filings for 
additional information in order for the Commission's Surveillance 
program to fulfill its responsibility to detect and deter market 
manipulation. In addition, the Commission notes that while one 
participant's positions may remain constant throughout a year, the same 
is not true for many other market participants. The Commission believes 
that varying the filing arrangement depending on a particular market or 
market participant is impractical and would lead to increased burdens 
for market participants due to uncertainty regarding when each firm 
with a position in a particular commodity derivative would be required 
to file.
    The Commission is retaining the last Friday of the month as the 
required reporting date in order to avoid confusion and uncertainty, 
particularly for those participants who already file Form 204 and thus 
are accustomed to that reporting date.
    The Commission is reproposing Sec.  19.01(b)(2) to require next-
day, daily filing of Forms 504 and 604 in the spot-month. In response 
to the commenter, the Commission notes that it described its rationale 
for requiring Forms 504 and 604 daily during the spot-month in the 
December 2013 Position Limits Proposal.\1398\ In order to detect and 
deter manipulation during the spot-month, concurrent information 
regarding the cash positions of a speculator holding a conditional 
spot-month limit exemption (Form 504) or the swap contract underlying a 
large offsetting position in the physical-delivery contract (Form 604) 
is necessary during the spot-month. Receiving Forms 504 or 604 before 
or after the spot-month period would not help the Surveillance program 
to protect the price discovery process of physical-delivery contracts 
and to ensure that market participants have a qualifying pass-through 
swap contract position underlying offsetting futures positions held 
during the spot-month.
---------------------------------------------------------------------------

    \1398\ December 2013 Position Limits Proposal, 78 FR at 75744-
45. The Commission noted that its experience overseeing the 
``dramatic instances of disruptive trading practices in the natural 
gas markets'' warranted enhanced reporting for that commodity during 
the spot month on Form 504. The Commission noted its intent to wait 
until it gained additional experience with limits in other 
commodities before imposing enhanced reporting requirements for 
those commodities. The Commission further noted that it was 
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 (such as a 
swap), and that such a large position could disrupt the price 
discovery function of the core referenced futures contract.
---------------------------------------------------------------------------

    The Commission notes that Form 504 is required only for the Natural 
Gas commodity, which has a 3-day spot period. Daily reporting on Form 
504 during the spot-month allows the Surveillance program to monitor a 
market participant's cash market activity that could impact or benefit 
their derivatives position. Given the short filing period for natural 
gas and the importance of accurate information during the spot-month, 
the Commission believes that requiring Form 504 to be filed daily 
provides an important benefit that outweighs the potential burdens for 
filers.\1399\
---------------------------------------------------------------------------

    \1399\ Should the Commission determine in the future to require 
Form 504 for other commodities, particularly those with longer spot 
month periods, the Commission will evaluate the daily filing 
requirement as it applies to such other commodities.
---------------------------------------------------------------------------

    As a practical matter, the Commission notes that Form 604 is 
collected during the spot-month only under particular circumstances, 
i.e., for an offset of a cash-settled swap position with a physical-
delivery referenced contract during the spot-month. Because the ``five-
day rule'' applies to such positions, the spot-month filing of Form 604 
would only occur in contracts whose spot-month period is longer than 5 
days (excluding, for example, energy contracts, but including many 
agricultural commodities).
9. Sections 150.9, 150.10, and 150.11--Processes for Recognizing 
Positions Exempt From Position Limits
    The Commission is reproposing the process for recognizing certain 
market-participant positions as bona fide hedges (Sec.  150.9), spreads 
(Sec.  150.10), and anticipatory bona fide hedges (Sec.  150.11), so 
that the positions may be deemed exempt from federal and exchange-set 
position limits. The Commission invited the public to comment on the 
Commission's consideration of the costs and benefits of the processes 
in the 2016 Supplemental Position Limits Proposal, identify and assess 
any costs and benefits not discussed therein, and provide possible 
alternative proposals. The Commission received comment letters in 2013 
that helped the Commission re-design the exemption-recognition 
processes and then reproposrepropose them in the 2016 Supplemental 
Position Limits Proposal. The Commission received more comment letters 
on the June 2016 proposed exemption-recognition processes and a number 
of commenters remarked on the costs and benefits.
    The general theme of the costs-related comments is that the three, 
exemption-recognition processes have overly burdensome reporting 
requirements. And the majority of benefits-related comments expressed 
that the exchanges are the best positioned entities to assess whether 
market positions fall within one of the categories of positions exempt 
from position limits. There also were a few comments asserting that the 
Commission underestimated the quantified costs, such as staff hours 
needed to review exemption applications. The Commission is addressing 
the qualitative and quantitative comments in the discussion that 
follows. Furthermore, the Commission will explain why it believes, 
after careful consideration of the comments, that the reproposed 
exemption-recognition processes will, among other things, improve 
transparency via exchange- and Commission-reporting, and improve 
regulatory certainty by having applicants submit materials for review 
to exchanges, and by having exchanges assess whether positions should 
be deemed exempt from position limits.
    The baseline against which the Commission considers the benefits 
and costs of the exemption-recognition rules is a combination of CEA 
requirements and Commission regulations that are now in effect. That 
is, the general baseline is the Commission's part 150 regulations and 
current Sec. Sec.  1.47 and

[[Page 96873]]

1.48.\1400\ For greater specificity, the Commission has identified the 
specific, associated baseline from which costs and benefits are 
determined under each discussion of the reproposed exemption rules 
below.
---------------------------------------------------------------------------

    \1400\ See chart listing current regulations, December 2013 
Position Limits Proposal, 78 FR 75712, Dec. 12, 2013.
---------------------------------------------------------------------------

a. Section 150.9--Exchange Recognition of Non-Enumerated Bona Fide 
Hedging Positions
    Under Section III.G., above, the Commission summarizes the changes 
it reproposed in rule Sec.  150.9, which outlines the process that 
exchanges may employ to recognize certain commodity derivative 
positions as non-enumerated bona fide hedging positions. The reproposed 
version of Sec.  150.9 closely follows the regulatory text proposed in 
the June 2016 Supplemental Proposal. Most of the changes are 
clarifications. There are, however, substantive changes between the 
regulatory text proposed in June 2016 and the reproposed regulatory 
text in this Release; they are to the following subsections:
     The exchange-application requirements under Sec.  
150.9(a)(1)(v) and Sec.  150.9(a)(3)(ii), (iii), and (iv);
     the applicant-to-exchange, reporting requirement under 
Sec.  150.9(a)(6); and
     the exchange-to-Commission, reporting requirement under 
Sec.  150.9(c)(2).
i. Section 150.9(a)--Exchange-Administered Non-Enumerated Bona Fide 
Hedging Position Application Process
    In paragraph (a) of reproposed Sec.  150.9, the Commission 
identifies the process and information required for an exchange to 
assess whether it should grant a market participant's request that its 
derivative position(s) be recognized as an non-enumerated bona fide 
hedging position. In the reproposed version of Sec.  150.9(a), the 
Commission clarified a condition in Sec.  150.9(a)(1)(v).\1401\ The 
clarification is that an exchange offering non-enumerated bona fide 
hedging position exemptions must have at least one year of experience 
and expertise to administer position limits for a referenced contract 
rather than experience and expertise in the derivative contract. In 
reproposed Sec.  150.9(a)(2), the Commission offers guidelines for 
exchanges to establish adaptable application processes by permitting 
different processes for ``novel'' versus ``substantially similar'' 
applications for non-enumerated bona fide hedging position 
recognitions. Reproposed Sec.  150.9(a)(3) describes in general terms 
the type of information that exchanges should collect from applicants. 
The Commission made a material change in reproposed Sec.  
150.9(a)(3)(iv) by reducing the amount of cash-market data an applicant 
must submit to an exchange from three years to one year.\1402\ In 
addition, 150.9(a)(3)(ii) and (iv) were both changed to provide that 
the exchange need require the ``information'' rather than ``detailed 
information.'' Reproposed Sec.  150.9(a)(4) obliges applicants and 
exchanges to act timely in their submissions and notifications, 
respectively, and that exchanges retain revocation authority. 
Reproposed Sec.  150.9(a)(5) provides that the position will be deemed 
recognized as an non-enumerated bona fide hedging position when an 
exchange recognizes it. Reproposed Sec.  150.9(a)(6) instructs 
exchanges to determine whether there should be a reporting requirement 
for non-enumerated bona fide hedging positions. The Commission changed 
Sec.  150.9(a)(6) to relieve market participants from an additional 
filing, and to give exchanges discretion on non-enumerated bona fide 
hedging position reporting. Reproposed Sec.  150.9(a)(7) requires an 
exchange to publish on their Web site descriptions of unique types of 
derivative positions recognized as non-enumerated bona fide hedging 
positions based on novel facts and circumstances.
---------------------------------------------------------------------------

    \1401\ For a fuller discussion of the change, see Section 
III.G.3.a.(i)-(iii).
    \1402\ For a fuller discussion of the change, see Section 
III.G.3.b.(iii)
---------------------------------------------------------------------------

ii. Section 150.9(b)--Non-Enumerated Bona Fide Hedging Position 
Recordkeeping Requirements
    The Commission made no changes to the rule text in Sec.  150.9(b) 
between the 2016 supplemental proposal and this Reproposal. Under 
reproposed Sec.  150.9(b), exchanges will be required to maintain 
complete books and records of all activities relating to the processing 
and disposition of non-enumerated bona fide hedging position 
applications. As explained in reproposed Sec.  150.9(b)(1) through 
(b)(2), the Commission instructs exchanges to retain applicant-
submission materials, exchange notes, and determination documents. 
Moreover, consistent with current Sec.  1.31, the Commission expects 
that these records will be readily accessible until the termination, 
maturity, or expiration date of the bona fide hedge recognition and 
during the first two years of the subsequent, five-year retention 
period.
iii. Section 150.9(c)--Non-Enumerated Bona Fide Hedging Positions 
Reporting Requirements
    The Commission made a change to reporting to the rule text in Sec.  
150.9(c) between the 2016 supplemental proposal and this Reproposal. 
While the Commission is reproposing rules requiring weekly reporting 
obligations by exchanges for positions recognized as non-enumerated 
bona fide hedging positions, the Commission changed Sec.  
150.9(c)(1)(i) and Sec.  150.9(c)(2) for purposes of clarification. In 
regards to Sec.  150.9(c)(1)(i), the Commission is clarifying that the 
reports required under (c)(1)(i) are those for each commodity 
derivatives position that had been recognized that week and for any 
revocation or modification of a previously granted recognition. The 
change to Sec.  150.9(c)(2) explains that exchanges must file monthly 
Commission reports only if the exchange has determined, in its 
discretion, that applicants should file exchange reports. The 
Commission also reproposes Sec.  150.9(c)(1)(ii), which provides that 
exchanges post non-enumerated bona fide hedging position summaries on 
their Web sites.
iv. Section 150.9(d) and (e)--Commission Review
    The Commission made no changes to the rule text in Sec. Sec.  150.9 
(d) or (e) between the 2016 supplemental proposal and this Reproposal. 
The Commission reproposes rules that states that market participants 
and exchanges must respond to Commission requests, as well as 
liquidated positions within a commercially reasonable amount of time if 
required under Sec.  150.9(d).
v. Section 150.9(f)--Delegation to Director of the Division of Market 
Oversight
    The Commission made no changes to the rule text in Sec.  150.9(f) 
between the 2016 supplemental proposal and this Reproposal. In the 
reproposed version of Sec.  150.9(f), the Commission delegates certain 
review authority for the non-enumerated bona fide hedging position 
recognition-process to the Director of the Division of Market 
Oversight.
vi. Baseline
    For the non-enumerated bona fide hedging position process, the 
baseline for non-enumerated bona fide hedging positions subject to 
federal position limits is current Sec.  1.47. For non-enumerated bona 
fide hedging position exemptions to exchange-set position limits, the 
baseline is the current exchange regulations and practices as well as 
the Commission's guidance to

[[Page 96874]]

exchanges in current Sec.  150.5(d). The current rule provides, 
generally, that an exchange may recognize bona fide hedging positions 
in accordance with the general definition of bona fide hedging position 
in current Sec.  1.3(z)(1).
vii. Benefits and Discussion of Comments
    The Commission continues to believe that the non-enumerated bona 
fide hedging position exemption-recognition process outlined in Sec.  
150.9 will produce significant benefits. As explained in the 2016 
supplemental proposal, the Commission recognizes that there are 
positions that reduce price risks incidental to commercial operations. 
For that reason, among others, such positions that are shown to be bona 
fide hedging positions under CEA Section 4a(c) are not subject to 
position limits. And, therefore, it is beneficial for market 
participants to have several options regarding bona fide hedging 
positions. With this Reproposal, market participants will have three 
ways in which they may determine that positions are bona fide hedging 
positions. First, market participants could conclude that a commodity 
derivative position comports with the definition of bona fide hedging 
position under Sec.  150.1. Second, market participants may request a 
staff interpretive letter under Sec.  140.99 or seek exemptive relief 
under CEA section 4(a)(7). Third, they may file an application with an 
exchange for recognition of an non-enumerated bona fide hedging 
position under reproposed Sec.  150.9.
    While all of the aforementioned options are viable, the Commission 
continues to believe that reproposed Sec.  150.9 outlines a framework 
similar to existing exchange practices that recognize non-enumerated 
bona fide hedge exemptions to exchange-set limits. These practices are 
familiar to many market participants. Moreover, a number of commenters 
agreed that exchanges should oversee the exemption-recognition 
process.\1403\
---------------------------------------------------------------------------

    \1403\ See, e.g., CL-CME-60926; CL-Nodal-60948.
---------------------------------------------------------------------------

    The Commission believes that under reproposed Sec.  150.9, the 
Commission will be able to leverage exchanges' existing practices and 
expertise in administering exemptions. Thus, reproposed Sec.  150.9 
should reduce the need to invent new procedures to recognize non-
enumerated bona fide hedging positions. As explained in the 2016 
supplemental proposal, exchanges also may be familiar with the 
applicant-market participant's needs and practices so there will be an 
advanced understanding for why certain trading strategies are pursued. 
The Commission received comments that were consistent with this view.
    For example, in response to proposed Sec.  150.9(a)(3)(iv)--the 
rule requiring applicants to submit detailed information regarding the 
applicant's activity in the cash market during the past three years--
there were a few comments. One commenter noted that exchanges should 
have the discretion to determine the requisite number of years of data 
that should be collected.\1404\ Another commenter proposed that 
exchanges have the discretion to collect up to one year of data.\1405\ 
A different commenter remarked that proposed Sec.  150.9(a)(3)(iii) 
(requiring an applicant to identify ``the maximum size of all gross 
positions in derivative contracts to be acquired by the applicant 
during the year after the application is submitted'') is unnecessary 
and unduly burdensome.'' \1406\
---------------------------------------------------------------------------

    \1404\ CL-AGA-60943 at 6.
    \1405\ CL-NCGA/NGSA-60919 at 10.
    \1406\ CL-Commercial Energy Working Group-60932 at 10.
---------------------------------------------------------------------------

    These comments support the Commission's determination to reduce 
filing burdens. In reproposed Sec.  150.9(a)(3)(ii) and (iv), the 
Commission changed the requirement that the application process require 
an applicant submit ``detailed information'' in regards to certain 
information to ``information.'' The change provides the exchanges with 
the discretion to determine what level of detail is needed to make 
their determination. The Commission has also reduced the minimum cash 
market data requirement to one-year from three-years in proposed Sec.  
150.9(a)(3)(iv), which will reduce market participants burden in 
comparison to the proposed rule.\1407\ Furthermore, the Commission 
continues to believe, even with this change to Sec.  150.9(a)(3)(iv), 
that given the availability of the exchange's analysis and the 
Commission's macro-view of the markets, the Commission will be well-
informed should it become necessary for the Commission to review a 
determination under reproposed Sec.  150.9(d), and determine whether a 
commodity derivative position should be recognized as an non-enumerated 
bona fide hedging position. The Commission also has clarified in 
reproposed Sec.  150.9(a)(3)(iii) that the filing must include the 
maximum size of all gross positions for which the application is 
submitted, which may be a longer time period than the proposed one-year 
period. In administering requests for recognition of non-enumerated 
bona fide hedging position exemptions under Sec.  1.47, the Commission 
has found a maximum size statement, as required under Sec.  1.47(b)(4), 
to be useful both at the time of review of the filing (in determining 
whether the requested maximum size is reasonable in relation to past 
cash market activity) and at the time of review of a filer's position 
that exceeds the level of the position limit (reducing the need for 
special calls to inquire as to the reason a position exceeds a position 
limit level).
---------------------------------------------------------------------------

    \1407\ It should be noted that this one-year cash-market history 
is less than the three-year cash-market history required under 
reproposed Sec.  150.7(d)(1)(iv) for initial statements regarding 
enumerated anticipatory bona fide hedging positions.
---------------------------------------------------------------------------

    In general, the non-enumerated bona fide hedging position 
recognition process under reproposed Sec.  150.9 should reduce 
duplicative efforts because applicants will be saved the expense of 
applying to both an exchange for relief from exchange-set position 
limits and to the Commission for relief from federal limits. The 
Commission also seeks to collect relevant information. Thus, because 
commenters reasonably complained about the application requirement for 
three years of cash-market position information, the Commission changed 
the requirement to one year.\1408\ Once commenter stated that the 
three-year data provided ``little practical benefit'' for assessing 
whether an non-enumerated bona fide hedging position is 
appropriate.\1409\
---------------------------------------------------------------------------

    \1408\ For a fuller discussion, see Section III.G.1.b. See also 
the following comment letters: CL-AGA-60943 at p. 6 (requirement is 
vague and restrictive); CL-CCI-60935 at p. 7 (one year of data 
suggested); CL-EEI-EPSA-60925 at p. 10 (requirement is ``unduly 
burdensome and unnecessary''); CL-NCGA/NGSA-60919 at p. 10 (same); 
CL-COPE-60932 at p. 9 (criticized the three-year data requirement); 
CL-Commercial Energy Working Group-60932 at p. 11 (the requirement 
is unnecessary).
    \1409\ CL-Commercial Energy Working Group-60932 at 11.
---------------------------------------------------------------------------

    Another section where commenters observed redundancy was in 
proposed Sec.  150.9(a)(6) regarding requirements for exchanges to 
require applicants to file reports.\1410\ One commenter stated that the 
proposal to require reports ``is particularly problematic due to its 
vagueness in terms of the frequency that a cash market report must be 
provided.'' \1411\ Another commenter explained further that proposed 
Sec.  150.9(a)(6) had no ``incremental market surveillance or other 
regulatory benefit'' because other rules provide for applicants to 
reapply for exemptions

[[Page 96875]]

annually, real-time market surveillance, the exchanges' abilities to 
make one-off requests for information, and the Commission's special 
call authority.\1412\ There also was a commenter who stated that 
``neither exchanges nor the Commission are likely to have resources 
available to meaningfully review such reports'' as those under Sec.  
150.9(a)(6), as well as those reports under Sec.  105.10(a)(6).\1413\ 
As explained above, the Commission changed the regulatory text so that 
exchanges may decide whether non-enumerated bona fide hedging position 
applicants should provide additional reports to exchanges. As a result 
of this change, market participants may have less reporting 
requirements but that assessment will depend on whether the exchanges--
based on their experiences and expertise in position limits in general 
and in non-enumerated bona fide hedging positions specifically--decide 
to grant a non-enumerated bona fide hedging position exemption without 
establishing a reporting requirement.
---------------------------------------------------------------------------

    \1410\ See also CL-Commercial Energy Working Group-60932 at 12 
(the same conclusion applies to proposed 105.10(a)(6), and Sec.  
150.11(a)(5)).
    \1411\ CL-AGA-60943 at 6.
    \1412\ CL-CCI-60935 at 7-8 (the same argument applies to 
proposed Sec. Sec.  150.10(a)(6) and 150.11(a)(5)). See also CL-
Commercial Energy Working Group-60932 at 12 (the same argument 
applies to proposed Sec.  105.10(a)(6), and Sec.  150.11(a)(5). See 
also CL-FIA-60937 at 16 (criticism of requirement to produce 
enhanced information regarding cash market activity and size of cash 
market exposure.
    \1413\ CL-ISDA-60931 at 10.
---------------------------------------------------------------------------

    As expressed in the 2016 supplemental proposal, the creation and 
retention of records under Sec.  150.9 may be used as reference 
material in the future for similar bona fide hedge recognition requests 
either by relevant exchanges or the Commission. This will be beneficial 
because retained records will help the Commission to ensure that an 
exchange's determinations are internally consistent and consistent with 
the Act and the Commission's regulations thereunder. There is also the 
additional benefit that records will be accessible if they are needed 
for a potential enforcement action.
    The Commission continues to believe that the exchange-to-Commission 
reporting under Sec.  150.9(c) will have surveillance benefits. The 
reports will provide the Commission with notice that an applicant may 
take a commodity derivative position that the exchange has recognized 
as an non-enumerated bona fide hedging position, and also will show the 
applicant's underlying cash commodity and expected maximum size in the 
cash markets. Reports will facilitate the tracking of non-enumerated 
bona fide hedging positions recognized by the exchanges, and will 
assist the Commission in ensuring that a market participant's 
activities conform to the exchange's terms of recognition and to the 
Act. While there are great benefits, in reproposed Sec.  150.9(c)(1)(i) 
and Sec.  150.9(c)(2), the Commission made clarifications that, as 
noted above, eased the burden on exchanges and applicants. 
Asreproposed, Sec.  150.9(c)(1)(i) clarifies that the reports required 
are only for those for each commodity derivatives position that had 
been recognized that week and for any revocation or modification of a 
previously granted recognition. In addition, reproposed Sec.  
150.9(c)(2) defers to the exchanges by clarifying that they have the 
discretion to determine whether a market participant must report under 
reproposed Sec.  150.9(a)(6); however, if an exchange requires reports 
of a market participant, that exchange must forward any such report to 
the Commission under reproposed Sec.  150.9(c)(2). This gives the 
exchanges flexibility and defers to their expertise. The web-posting of 
summaries also will benefit market participants in general by providing 
transparency and open access to the non-enumerated bona fide hedging 
position recognition process. In addition, reporting and posting gives 
market participants seeking recognition of a non-enumerated bona fide 
hedging position an understanding of the types of commodity derivative 
positions an exchange may recognize as an non-enumerated bona fide 
hedging position, thereby providing greater administrative and legal 
certainty.
viii. Costs and Discussion of Comments
    In the June 2016 Supplemental Proposal, the Commission explained 
that to a large extent, exchanges and market participants have incurred 
already many of the compliance costs associated with the proposed 
exemptions. The Commission, however, detailed a number of the readily-
quantifiable costs for exchanges and market participants associated 
with processing non-enumerated bona fide hedging position recognitions, 
as well as spreads and anticipatory bona fide hedges. The Commission 
invited public comment on the estimated financial numbers, which were 
detailed in tables. Several commenters remarked on the costs the 
Commission quantitatively estimated in the June 2016 Supplemental 
Proposal. One group commenter stated that the Commission underestimated 
costs to market participants.\1414\ The same commenter explained that 
the Commission failed to ``break out the costs for submitting an 
initial application and filing subsequent updates every time 
information in the application changes.'' \1415\ Another commenter 
stated that the 2016 Supplemental Proposal has ``highly unrealistic 
estimates of the time and cost that will be required to implement and 
maintain compliance programs.'' \1416\
---------------------------------------------------------------------------

    \1414\ CL-Commercial Energy Working Group-60932 at 13.
    \1415\ Id.
    \1416\ CL-ISDA-60931 at 5.
---------------------------------------------------------------------------

    One exchange commenter declared that the Commission ``significantly 
underestimates the number of exemptions that the Exchange will be 
required to review,'' and offered different numbers.\1417\ For example, 
the exchange commenter stated that it reviewed as many as 500 exemption 
requests annually as opposed to the 285 exemption requests that the 
Commission estimated.\1418\ In addition, the exchange commenter stated 
that the Commission underestimated the number of staff-review hours, 
and that the number should be two additional hours for a total of seven 
hours per exemption review.\1419\ The exchange commenter also provided 
different hours for different exercises: (a) Seven hours for preparing 
quarterly Web site postings; (b) six hours for preparation for weekly 
reports; and (c) six hours for preparing monthly reports.\1420\ The 
exchange commenter also explained that it believed it would need to 
hire a seasoned, senior level employee to help comply with the proposed 
rules and three regulatory analysts.\1421\ Finally, the exchange 
commenter noted that the Commission failed to consider start-up costs 
associated with complying with reporting requirements.\1422\
---------------------------------------------------------------------------

    \1417\ CL-ICE-60929 at p 17.
    \1418\ Id.
    \1419\ Id.
    \1420\ Id.
    \1421\ Id.
    \1422\ CL-ICE-60929 at 17.
---------------------------------------------------------------------------

    In response, the Commission is persuaded by commenters, and is 
adjusting its estimated staff-review hours and costs that it believes 
exchanges and market participants will incur to comply with exemption-
recognition processes in this Reproposal. These estimates are reflected 
in the tables below.
    Even though the Commission has outlined three different exemption-
application processes in this release, the Commission believes that 
aspects of the processes will become standardized and the data 
collected for one exemption will be the same as data collected for 
another exemption. As a result, it is likely that over time some costs 
will

[[Page 96876]]

decrease. Some commenters, however, expressed different views. One 
commenter stressed that the Commission's proposed exemption processes 
triggered greater oversight, increased scope of monitoring, and need 
for additional staff; whereas a standardized application might reduce 
market-entry barriers.\1423\ The same commenter remarked that increased 
compliance costs and capital investments might lead to decreased market 
participation and liquidity.\1424\ The commenter then suggested the 
development of a standardized hedge exemption application to minimize 
monitoring and compliance costs.\1425\ Finally, the same commenter 
asserted that a standardized application might drive efficiency and 
minimize regulatory risk exposure via innovation.
---------------------------------------------------------------------------

    \1423\ CL-EDF-60944 at 2.
    \1424\ Id.
    \1425\ Id.
---------------------------------------------------------------------------

    The Commission continues to believe that there are costs that are 
not easily quantified. These are qualitative costs that are related to 
the specific attributes and needs of individual market participants 
that are hedging. Given that qualitative costs are highly specific, the 
Commission continues to believe that market participants will choose to 
incur Sec.  150.9-related costs only if doing so is less costly than 
complying with position limits and not executing the desired hedge 
position. Thus, by providing market participants with an option to 
apply for relief from speculative position limits under reproposed 
Sec.  150.9, the Commission continues to believe it is offering market 
participants a way to ease overall compliance costs because it is 
reasonable to assume that entities will seek recognition of non-
enumerated bona fide hedging positions only if the outcome of doing so 
justifies the costs. This is because the Commission appreciates that 
the costs of not trading might be substantially higher. The Commission 
also believes that market participants will consider how the costs of 
applying for recognition of an non-enumerated bona fide hedging 
position under reproposed Sec.  150.9 will compare to the costs of 
requesting a staff interpretive letter under Sec.  140.99, or seeking 
exemptive relief under CEA section 4a(a)(7). Likewise, exchanges must 
consider qualitative costs in their decision to create an non-
enumerated bona fide hedging position application process or revise an 
existing program.
    The Commission acknowledges that there may also be other costs to 
market participants if the Commission disagrees with an exchange's 
decision to recognize an non-enumerated bona fide hedging position 
under reproposed Sec.  150.9 or under an independent Commission request 
or review under reproposed Sec.  150.9(d) or (e). These costs will 
include time and effort spent by market participants associated with a 
Commission review, which the Commission addresses in the tables below. 
There also is the possibility that market participants will lose 
amounts that the Commission can neither predict nor quantify if it 
became necessary to unwind trades or reduce positions were the 
Commission to conclude that an exchange's disposition of an non-
enumerated bona fide hedging position application is inconsistent with 
section 4a(c) of the Act and the general definition of bona fide 
hedging position in Sec.  150.1.
    A few commenters remarked on this concern and pointed to the term 
that the Commission would provide applicants a ``commercially 
reasonable amount of time'' to unwind positions that the Commission 
determined did not fall within the categories of exempted positions 
under Sec.  150.9(d)(4), 150.10(d)(4), and 150.11(d)(3).\1426\ One 
commenter explained that if a market participant is required to unwind 
a position in the middle of its green-lit hedging activity, the unwind 
could cause ``significant harm to the participant,'' and the ``rapid 
unanticipated liquidation of positions could result in market 
disruption''.\1427\ The commenter also highlighted that the less-than-
24-hours, commercially-reasonable period compels market participants to 
seek pre-approval of positions by the Commission or not engage in risk 
mitigation.\1428\ The commenter also added that market participants 
might restrict trading to some exchanges and concentrate market risk on 
a single exchange.\1429\
---------------------------------------------------------------------------

    \1426\ CL-MGEX-90936 at 8; CL-EEI-EPSA-60925 at 10 (one business 
to unwind is ``unreasonable'' in energy products); CL-NCGA/NGSA-
60919 at 13 (concerned about Commission's suggestion that positions 
can be unwound in less than one business day); CL-NGFA-60941 at 3; 
CL-NCFC-60930 at 5 (dislikes the one-day unwind period for dairy 
market).
    \1427\ CL-MGEX-90936 at 8. See also CL-NCGA/NGSA-60919 at 13 
(``Unwinding a position quickly in an illiquid market, such as in 
many non-spot month contracts, could create a significant market 
disruption.''); CL-NGFA-60941 at 3 (commented that a one-day 
liquidation ``in thinly traded contracts without broad liquidity'' 
could be extremely disruptive); CL-NCFC-60930 at 5 (``Requiring the 
same time period and the same process to unwind the dairy 
transactions could lead to a market disruption, disorderly trading 
and regulatory-influence and unnecessary price volatility.'').
    \1428\ CL-MGEX-90936 at 8.
    \1429\ Id.
---------------------------------------------------------------------------

    The Commission recognizes that costs may result if the Commission 
disagrees with an exchange's disposition of a non-enumerated bona fide 
hedging position application under reproposed Sec.  150.9 (or other 
exempt position under Sec. Sec.  150.10 or 150.11). The Commission, 
however, believes such situations will be limited based on the history 
of exchanges approving similar applications for exemptions to exchange-
set limits. Moreover, as explained in the 2016 supplemental proposal, 
exchanges have incentives to protect market participants from the harms 
that position limits are intended to prevent, such as manipulation, 
corners, and squeezes. In addition, an exchange that recognizes a 
market participant's non-enumerated bona fide hedging position (or 
other exempt position) that enables the participant to exceed position 
limits must then deter the same market participant from trading in a 
manner that causes adverse price impacts on the market; such adverse 
price impacts may cause financial harm to market participants, or even 
reputational risk or economic disadvantage to the exchange.\1430\
---------------------------------------------------------------------------

    \1430\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38488-89.
---------------------------------------------------------------------------

ix. Costs To Create or Amend Exchange Rules for Non-Enumerated Bona 
Fide Hedging Position Application Programs
    The Commission believes that exchanges electing to process non-
enumerated bona fide hedging position applications under reproposed 
Sec.  150.9(a) are likely to already administer similar processes and 
will need to file with the Commission amendments to existing exchange 
rules rather than create new rules. The exchanges will only have to 
file amendments once. As discussed in the Paperwork Reduction Act 
discussion below, the Commission forecasts an average annual filing 
cost of $1,220 per exchange that files new rules or modifications per 
final process that an exchange adopts. Under the Paperwork Reduction 
Act, these costs are reported as an average annual cost over a five-
year period.

[[Page 96877]]



                                             Table IV-A-6--Burden Estimates for Filing New or Amended Rules
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
New or amended rule filings under part 40 per Sec.                        6                  5                  2            $122.00             $1,220
 150.9(a)(1), (a)(6).....................................
--------------------------------------------------------------------------------------------------------------------------------------------------------

x. Costs To Review Applications Under Reproposed Processes
    An exchange that elects to process applications also will incur 
costs related to the review and disposition of such applications 
pursuant to reproposed Sec.  150.9(a). For example, exchanges will need 
to expend resources on reviewing and analyzing the facts and 
circumstances of each application to determine whether the application 
meets the standards established by the Commission. Exchanges also will 
need to expend effort in notifying applicants of the exchanges' 
disposition of recognition or exemption requests. The Commission 
believes that exchanges electing to process non-enumerated bona fide 
hedging position applications under reproposed Sec.  150.9(a) are 
likely to have processes for the review and disposition of such 
applications currently in place. The Commission has adjusted the costs 
in Table IV-A-7 based on information submitted by commenters. Thus, the 
Commission has forecast that the average annual cost for each exchange 
to process applications for non-enumerated bona fide hedging position 
recognitions is $277,500.

                                                Table IV-A-7--Burden Estimates for Reviewing Applications
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Collection, review, and disposition of application per                    6                  7                325            $122.00           $277,550
 Sec.   150.9(a).........................................
--------------------------------------------------------------------------------------------------------------------------------------------------------

xi. Costs To Post Summaries for Non-Enumerated Bona Fide Hedging 
Position Recognitions
    Exchanges that elect to process the applications under reproposed 
Sec.  150.9 will incur costs to publish on their Web sites summaries of 
the unique types of non-enumerated bona fide hedging position 
positions. The Commission has estimated an average annual cost of 
$25,620 for the web-posting of non-enumerated bona fide hedging 
position summaries.

                                                  Table IV-A-8--Burden Estimates for Posting Summaries
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Summaries Posted Online per Sec.   150.9(a)..............                 6                  7                 30            $122.00            $25,620
--------------------------------------------------------------------------------------------------------------------------------------------------------

xii. Costs To Market Participants Who Will Seek Non-Enumerated Bona 
Fide Hedging Position Relief From Position Limits
    Under reproposed Sec.  150.9(a)(3), market participants must submit 
applications that provide sufficient information to allow the exchanges 
to determine, and the Commission to verify, whether it is appropriate 
to recognize such position as an non-enumerated bona fide hedging 
position. These applications will be updated annually. Reproposed Sec.  
150.9(a)(6) will require applicants to file a report with the exchanges 
when an applicant owns, holds, or controls a derivative position that 
has been recognized as an non-enumerated bona fide hedging position. 
The Commission estimates that each market participant seeking relief 
from position limits under reproposed Sec.  150.9 will likely incur 
approximately $976 annually in application costs.\1431\
---------------------------------------------------------------------------

    \1431\ Assuming that exchanges administer exemptions to 
exchange-set limits, these costs are incrementally higher.

                                             Table IV-A-9--Burden Estimates for Market Participants To Apply
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.9(a)(3) Application...........................               325                  4                  2            $122.00               $976
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 96878]]

xiii. Costs for Non-Enumerated Bona Fide Hedging Position Recordkeeping
    The Commission believes that exchanges that currently process 
applications for spread exemptions and bona fide hedging positions 
maintain records of such applications as required pursuant to other 
Commission regulations, including Sec.  1.31. The Commission, however, 
also believes that the reproposed rules may confer additional 
recordkeeping obligations on exchanges that elect to process 
applications for non-enumerated bona fide hedging positions. The 
Commission estimates that each exchange electing to administer the 
reproposed non-enumerated bona fide hedging position process will 
likely incur approximately $3,660 annually to retain records for each 
process.

                                                    Table IV-A-10--Burden Estimates for Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.9(b) Recordkeeping............................                 6                 30                  1            $122.00             $3,660
--------------------------------------------------------------------------------------------------------------------------------------------------------

xiv. Costs for Weekly and Monthly Non-Enumerated Bona Fide Hedging 
Position Reporting to the Commission
    The Commission anticipates that exchanges that elect to process 
non-enumerated bona fide hedging position applications will be required 
to file two types of reports. The Commission is aware that five 
exchanges currently submit reports each month, on a voluntary basis, 
which provide information regarding exchange-processed exemptions of 
all types. The Commission believes that the content of such reports is 
similar to the information required of the reports in proposed rule 
Sec.  150.9(c), but the frequency of such required reports will 
increase under the reproposed rule. The Commission estimates an average 
cost of approximately $38,064 per exchange for weekly reports under 
reproposed Sec.  150.9(c).

                                              Table IV-A-11--Burden Estimates for Submitting Weekly Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.9(c)(1) Weekly Report.........................                 6                  6                 52            $122.00            $38,064
--------------------------------------------------------------------------------------------------------------------------------------------------------

    For the monthly report, the Commission anticipates a minor cost for 
exchanges because the reproposed rules will require exchanges 
essentially to forward to the Commission notices received from 
applicants who own, hold, or control the positions that have been 
recognized or exempted. The Commission estimates an average cost of 
approximately $8,784 per exchange for monthly reports under reproposed 
Sec.  150.9(c).

                                             Table IV-A-12--Burden Estimates for Submitting Monthly Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.9(c)(2) Monthly Report........................                 6                  6                 12            $122.00             $8,784
--------------------------------------------------------------------------------------------------------------------------------------------------------

xv. Costs Related to Subsequent Monitoring
    Exchanges will have additional surveillance costs and duties with 
respect to non-enumerated bona fide hedging position that the 
Commission believes will be integrated with their existing self-
regulatory organization surveillance activities as an exchange.
b. Section 150.10--Spread Exemptions
    Since the Commission issued the June 2016 Supplemental Proposal, 
the Commission made very few changes to the provisions authorizing 
exchanges to exempt spread positions from federal position limits under 
reproposed Sec.  150.10. In addition to non-substantive changes for 
purposes of clarification, substantive changes were made in subsections 
s of paragraphs (a) and (c) of Sec.  150.10: Sec. Sec.  
150.10(a)(1)(ii); 150.10(a)(3)(ii) and (iii); 150.10(a)(6); 
150.10(c)(2); The Commission did not make changes to paragraphs (b), 
(d), (e), or (f) of reproposed Sec.  150.10.
i. Section 150.10(a)--Exchange-Administered Spread Exemption
    In paragraph (a) of reproposed Sec.  150.10, the Commission 
identifies the process and information required for an exchange to 
grant a market participant's request that its derivative position(s) be 
recognized as an exempt spread position.
    As an initial step under reproposed Sec.  150.10(a)(1), exchanges 
that voluntarily elect to process spread exemption applications are 
required to notify the Commission of their intention to do so by filing 
new rules or rule amendments with the Commission under part 40 of the 
Commission's regulations. The Commission clarified reproposed Sec.  
150.10(a)(1)(ii) to explain that an exchange may offer spread 
exemptions if the contract, which is either a component of the spread 
or a referenced contract that is related to the spread, in a particular 
commodity is actively traded. The Commission reduced the burden of 
proposed Sec.  150.10(a)(1)(ii) (that would require an

[[Page 96879]]

exchange to have applied position limits for at least one year), by 
providing in reproposed Sec.  150.10(a)(1) that an exchange must have 
at least one year of experience and expertise administering position 
limits for such referenced contract. As explained above, the exchange 
may gain such experience and expertise, for example, through employing 
experienced staff.
    In reproposed Sec.  150.10(a)(2), the Commission identifies four 
types of spreads that an exchange may approve. Reproposed Sec.  
150.10(a)(3) describes in general terms the type of information that 
exchanges should collect from applicants. In reproposed Sec.  
150.10(a)(3)(ii), similar to the change made in Sec.  150.9(a)(3), the 
Commission changed the requirement that the application process require 
an applicant submit ``detailed information'' in regards to certain 
information to ``information.'' The change provides the exchanges with 
the discretion to determine what level of detail is needed to make 
their determination. The Commission clarified the reproposed 
requirements to explain that applicant must report its maximum size of 
all gross positions in the commodity related to the spread-exemption 
application. Reproposed Sec.  150.10(a)(4) obliges applicants and 
exchanges to act timely in their submissions and notifications, 
respectively, and require exchanges to retain revocation authority. 
Reproposed Sec.  150.10(a)(6) was modified and authorizes exchanges to 
determine whether enhanced reporting is necessary. Reproposed Sec.  
150.10(a)(7) requires exchanges to publish on its Web site a summary 
describing the type of spread position and explaining why it was 
exempted.
ii. Section 150.10(b)--Spread Exemption Recordkeeping Requirements
    The Commission made no changes to the regulatory text in Sec.  
150.10(b) that was proposed in June 2016. Under the reproposed rule, 
exchanges must maintain complete books and records of all activities 
relating to the processing and disposition of spread exemption 
applications under reproposed Sec.  150.10(b). This is similar to the 
record retention obligations of exchanges for positions recognized as 
non-enumerated bona fide hedging positionss.
iii. Section 150.10(c)--Spread Exemption Reporting Requirements
    The Commission amended Sec.  150.10(c)(2) and kept the rest of 
regulatory text in Sec.  150.10(c) the same as the text proposed in the 
2016 supplemental proposal. Under the reproposed rule exchanges will 
have weekly reporting obligations for spread exemptions. The change in 
subsection (c)(2) clarifies that exchanges have the discretion to 
determine whether applicants should have monthly reports that must 
ultimately be sent to the Commission. These reporting obligations are 
similar to the reporting obligations of exchanges for positions 
recognized as non-enumerated bona fide hedging positions.
iv. Baseline
    For the reproposed spread exemption process for positions subject 
to federal limits, the baseline is CEA section 4a(a)(1). In that 
statutory section, the Commission is authorized to recognize certain 
spread positions. That statutory provision is currently implemented in 
a limited calendar-month spread exemption in Sec.  150.3(a)(3). For 
exchange-set position limits, the baseline for spreads is the guidance 
in current Sec.  150.5(a), which provides generally that exchanges may 
recognize exemptions for positions that are normally known to the trade 
as spreads.
v. Benefits
    CEA section 4a(a)(1) authorizes the Commission to exempt certain 
spreads from speculative position limits. In exercising this authority, 
the Commission recognizes that spreads can have considerable benefits 
for market participants and markets. The Commission now proposes a 
spread exemption framework that utilizes existing exchanges--resources 
and exchanges--expertise so that fair access and liquidity are promoted 
at the same time market manipulations, squeezes, corners, and any other 
conduct that will disrupt markets are deterred and prevented. Building 
on existing exchange processes preserves the ability of the Commission 
and exchanges to monitor markets and trading strategies while reducing 
burdens on exchanges that will administer the process, and market 
participants, who will utilize the process.
    In addition to these benefits, there are other benefits related to 
reproposed Sec.  150.10 that will inure to markets and market 
participant. Yet, there is difficulty in quantifying these benefits 
because benefits are dependent on the characteristics, such as 
operational size and needs, of the market participants that will seek 
spread exemptions, and the markets in which the participants trade. 
Accordingly, the Commission considers the qualitative benefits of 
reproposed Sec.  150.10.
    For both exchanges and market participants, reproposed Sec.  150.10 
will likely alleviate compliance burdens to the status quo. Exchanges 
will be able to build on established procedures and infrastructure. As 
stated earlier, many exchanges already have rules in place to process 
and grant applications for spread exemptions from exchange-set position 
limits pursuant to part 38 of the Commission's regulations (in 
particular, current Sec.  38.300 and Sec.  38.301) and current Sec.  
150.5. In addition, exchanges may be able to use the same staff and 
electronic resources that will be used for reproposed Sec.  150.9 and 
Sec.  150.11. Market participants also may benefit from spread-
exemption reviews by exchanges that are familiar with the commercial 
needs and practices of market participants seeking exemptions. Market 
participants also might gain legal and regulatory clarity and 
consistency that will help in developing trading strategies. Moreover, 
the Commission has reduced burdens by making changes to proposed 
Sec. Sec.  150.10(a)(1) and (3). In the reproposed Sec.  150.10(a)(1), 
the Commission changed the rule so that exchanges may employ 
experienced staff to satisfy the requirement that an exchange have at 
least one year of experience and expertise in administering position 
limits for referenced contracts related to spread exemptions. In 
reproposed Sec.  150.10(a)(3)(ii), the Commission gave exchanges 
greater discretion in determining the level of detail needed from 
spread-exemption applicants.
    Reproposed Sec.  150.10 will authorize exchanges to approve spread 
exemptions that permit market participants to continue to enhance 
liquidity, rather than being restricted by a position limit. For 
example, by allowing speculators to execute intermarket and intramarket 
spreads in accordance with reproposed Sec.  150.3(a)(1)(iv) and Sec.  
150.10, speculators will be able to hold a greater amount of open 
interest in underlying contract(s), and, therefore, bona fide hedgers 
may benefit from any increase in market liquidity. Spread exemptions 
might lead to better price continuity and price discovery if market 
participants who seek to provide liquidity (for example, through entry 
of resting orders for spread trades between different contracts) 
receive a spread exemption and, thus, will not otherwise be constrained 
by a position limit.
    Here are two examples of positions that could benefit from the 
spread exemption in reproposed Sec.  150.10:
     Reverse crush spread in soybeans on the CBOT subject to an 
intermarket spread exemption. In the case where soybeans are processed 
into two different products, soybean meal and

[[Page 96880]]

soybean oil, the crush spread is the difference between the combined 
value of the products and the value of soybeans. There are two actors 
in this scenario: The speculator and the soybean processor. The 
spread's value approximates the profit margin from actually crushing 
(or mashing) soybeans into meal and oil. The soybean processor may want 
to lock in the spread value as part of its hedging strategy, 
establishing a long position in soybean futures and short positions in 
soybean oil futures and soybean meal futures, as substitutes for the 
processor's expected cash market transactions (purchase of the 
anticipated inputs for processing and sale of the anticipated 
products). On the other side of the processor's crush spread, a 
speculator takes a short position in soybean futures against long 
positions in soybean meal futures and soybean oil futures. The soybean 
processor may be able to lock in a higher crush spread, because of 
liquidity provided by such a speculator who may need to rely upon a 
spread exemption. It is important to understand that the speculator is 
accepting basis risk represented by the crush spread, and the 
speculator is providing liquidity to the soybean processor. The crush 
spread positions may result in greater correlation between the futures 
prices of soybeans and those of soybean oil and soybean meal, which 
means that prices for all three products may move up or down together 
in a closer manner.
     Wheat spread subject to intermarket spread exemptions. 
There are two actors in this scenario: The speculator and the wheat 
farmer. In this example, a farmer growing hard wheat will like to 
reduce the price risk of her crop by shorting MGEX wheat futures. 
There, however, may be no hedger, such as a mill, that is immediately 
available to trade at a desirable price for the farmer. There may be a 
speculator willing to offer liquidity to the hedger; the speculator may 
wish to reduce the risk of an outright long position in MGEX wheat 
futures through establishing a short position in CBOT wheat futures 
(soft wheat). Such a speculator, who otherwise will have been 
constrained by a position limit at MGEX or CBOT, may seek exemptions 
from MGEX and CBOT for an intermarket spread, that is, for a long 
position in MGEX wheat futures and a short position in CBOT wheat 
futures of the same maturity. As a result of the exchanges granting an 
intermarket spread exemption to such a speculator, who otherwise may be 
constrained by limits, the farmer might be able to transact at a higher 
price for hard wheat than might have existed absent the intermarket 
spread exemptions. Under this example, the speculator is accepting 
basis risk between hard wheat and soft wheat, reducing the risk of a 
position on one exchange by establishing a position on another 
exchange, and potentially providing liquidity to a hedger. Further, 
spread transactions may aid in price discovery regarding the relative 
protein content for each of the hard and soft wheat contracts.
    Finally, the Commission is allowing exchanges to recognize and 
exempt spreads during the five-day spot month. There may be 
considerable benefits that evolve from spreads exempted during the spot 
month, in particular. Besides enhancing the opportunity for market 
participants to use strategies involving spread trades into the spot 
month, this relief may improve price discovery in the spot month for 
market participants. And, as in the intermarket wheat example above, 
the spread relief in the spot month may better link prices between two 
markets, e.g., the price of MGEX wheat futures and the price of CBOT 
wheat futures. Put another way, the prices in two different but related 
markets for substitute goods may be more highly correlated, which 
benefits market participants with a price exposure to the underlying 
protein content in wheat generally, rather than that of a particular 
commodity.
vi. Costs and Discussion of Comments
    As discussed in the 2016 supplemental proposal, the Commission has 
been able to quantify some costs, but other costs related to reproposed 
Sec.  150.10 are not easily quantifiable. The Commission continues to 
believe that some costs are more dependent on individual markets and 
market participants seeking a spread exemption, and, thus, are more 
readily considered qualitatively. In general, the Commission believes 
that reproposed Sec.  150.10 should provide exchanges and market 
participants greater regulatory and administrative certainty and that 
costs will be small relative to the benefits of having an additional 
trading tool under reproposed Sec.  150.10.
    The Commission comes to this conclusion even though the most common 
complaint about the spread-exemption process is that it requires 
excessive reporting. One exchange commenter focused specifically on the 
spread-exemption-recognition process, and stated that it is ``overly 
prescriptive as to the information that must be provided by the 
applicant, especially when the exchange may have superior information 
regarding intramarket spreads.'' \1432\ The exchange commenter 
criticized the proposed intramarket spread exemption application as 
possibly being ``inefficient and time consuming thereby hindering the 
exchange from effectively supporting its bona fide hedgers.'' \1433\ 
And the exchange commenter suggested that the Commission grant the 
exchanges the ``flexibility and discretion to establish'' application 
processes.\1434\ The exchange commenter further explained that 
exchanges are best positioned to assess liquidity for bona fide hedgers 
and perform the price discovery function for granting exemptions, 
which, in turn protects market participants and the public.\1435\
---------------------------------------------------------------------------

    \1432\ CL-Nodal-60948 at 2.
    \1433\ Id.
    \1434\  Id. at 3.
    \1435\ Id. at 4.
---------------------------------------------------------------------------

    The Commission recognizes that spread-exemption application 
requirements and reporting requirements are detailed. Moreover, these 
costs will be borne by exchanges and market participants. But, the 
Commission continues to believe that the qualitative costs will be 
reasonable in view of the benefits to exchanges and market participants 
of being able to use spread exemptions. Furthermore, the benefits of 
having an application process and reporting regime will create cost-
savings to the public in the form of enhanced regulatory oversight.
    The Commission, however, did respond to comments about proposed 
Sec.  150.10(a)(3)(iii), which requires an applicant to identify ``the 
maximum size of all gross positions in derivative contracts to be 
acquired by the applicant during the year after the application is 
submitted.'' The comment was that the requirement was too broad and 
almost impossible because of the inability to predict trading activity 
over the next year.\1436\ Another commenter described the proposed rule 
as ``unnecessary and unduly burdensome.'' \1437\ The Commission, as 
discussed above regrading reproposed Sec.  150.9(a)(3)(iii), has 
clarified in reproposed Sec.  150.10(a)(3)(iii) that the filing must 
include the maximum size of all gross positions for which the 
application is submitted, which may be a longer time period that the 
proposed one-year period. As noted above, in administering requests for 
recognition of non-enumerated bona fide hedging position exemptions 
under Sec.  1.47, the Commission has found a maximum size statement, as 
required under Sec.  1.47(b)(4), to be useful both at the time

[[Page 96881]]

of review of the filing and at the time of review of a filer's position 
that exceeds the level of the position limit.
---------------------------------------------------------------------------

    \1436\ CL-ISDA-60931 at 10.
    \1437\ CL-Working Group-60947 at 10.
---------------------------------------------------------------------------

    Finally, like the discussion about quantified costs related to 
reproposed Sec.  150.9, exchanges and market participants may have 
already many of the financial outlays for administering the application 
process and applying for spread exemptions, respectively. Yet, as 
commenters have asserted, the Commission might have underestimated the 
costs. In deference to the comments, the Commission has adjusted its 
estimates of quantified costs that will arise from reproposed Sec.  
150.10 in Tables IV-A-13 through IV-A-19, below. The Commission's new 
estimates are based on commenters noting that the Commission estimated 
staff hours, as well as the number of exemption requests, were low.
    Note: The activities priced in Tables A2 to G2 are similar to the 
activities discussed in the section affiliated with Tables A1 through 
G1, above.

                                               Table IV-A-13--Burden Estimates Filing New or Amended Rules
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
New or amended rule filings under part 40 per Sec.                        6                  5                  2            $122.00             $1,220
 150.10(a)(1), (a)(6)....................................
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                               Table IV-A-14--Burden Estimates for Reviewing Applications
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Collection, review, and disposition of application per                    6                  7                 85            $122.00            $72,590
 Sec.   150.10(a)........................................
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                  Table IV-A-15--Burden Estimates for Posting Summaries
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Summaries Posted Online per Sec.   150.10(a).............                 6                  7                 10            $122.00             $8,540
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Regarding the following Table D2, note that reports are also 
required to be sent to the Commission in the case of exempt spread 
positions under Sec.  150.10(a)(5).

                                            Table IV-A-16--Burden Estimates for Market Participants to Apply
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.10(a)(3) Spread Exemption Application.........                85                  3                  2            $122.00               $732
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                    Table IV-A-17--Burden Estimates for Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.10(b) Recordkeeping...........................                 6                 30                  1            $122.00             $3,660
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                              Table IV-A-18--Burden Estimates for Submitting Weekly Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.10(c)(1) Weekly Report........................                 6                  6                 52            $122.00            $38,064
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 96882]]


                                             Table IV-A-19--Burden Estimates for Submitting Monthly Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                  Annual number of
                Required record or report                   Total number of    Burden hours per    responses per       Hourly wage      Per-entity labor
                                                              respondents          response          respondent          estimate             cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.10(c)(2) Monthly Report.......................                 6                  6                 12            $122.00             $8,784
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Other costs to exchanges will include those related to 
surveillance. For example, exchanges that elect to grant spread 
exemptions will have to adapt and develop procedures to determine 
whether a particular spread exemption furthers the goals of CEA section 
4a(a)(3)(B) as well as monitor whether applicant speculators are, in 
fact, providing liquidity to other market participants. There will 
likely also be costs related to disagreements between the Commission 
and exchanges over exchanges' disposition of a spread applications, or 
costs from a Commission request or review under reproposed Sec.  
150.11(d) or (e). As expressed in the 2016 supplemental proposal, these 
costs are not easily quantified because they depend on the specifics of 
the Commission's request or review.
c. Section 150.11--Enumerated Anticipatory Bona Fide Hedges
    Between the 2016 Supplemental Proposal and now, the Commission is 
making two changes in the following regulatory text: Sec.  
150.11(a)(1)(v) and Sec.  150.11(a)(6).
i. Section 150.11(a)--Exchange-Administered Enumerated Anticipatory 
Bona Fide Hedge Process
    Under reproposed Sec.  150.11(a)(1), exchanges that voluntarily 
elect to process enumerated anticipatory bona-fide hedge applications 
are required to notify the Commission of their intention to do so by 
filing new rules or rule amendments with the Commission under part 40 
of the Commission's regulations. In reproposed Sec.  150.11(a)(1)(v), 
the Commission clarified that exchanges that elect to offer a Sec.  
150.11 exemption, must have at least one year of experience and 
expertise in the referenced contract, rather than the derivative 
contract. In reproposed Sec.  150.11(a)(2), the Commission identifies 
certain types of information necessary for the application, including 
information required under reproposed Sec.  150.7(d). In reproposed 
Sec.  150.11(a)(3), the Commission states that applications must be 
updated annually and that the exchanges have ten days in which to 
recognize an enumerated anticipatory bona fide hedge. In addition, 
exchanges must retain authority to revoke recognitions. reproposed 
Sec.  150.11(a)(4) states that once an enumerated anticipatory bona 
fide hedging position has been recognized by an exchange, the position 
will be deemed to be recognized by the Commission. Reproposed Sec.  
150.11(a)(5) discusses reports that must be filed by an applicant 
holding an enumerated anticipatory bona fide hedging position, as 
required under reproposed Sec.  150.7(e). The Commission clarified 
those reporting requirements, which were also proposed in Sec.  
150.11(a)(3)(i), and eliminated language that was confusing to 
commenters regarding updating and maintaining the accuracy of such 
reports. Reproposed 150.11(a)(6) explains that exchanges may choose to 
seek Commission review of an application and the Commission has ten 
days in which to respond.
ii. Section 150.11(b)--Enumerated Anticipatory Bona Fide Hedge 
Recordkeeping Requirements
    The Commission did not make any changes to Sec.  150.11(b) as 
proposed in the 2016 supplemental proposal. Exchanges must maintain 
complete books and records of all activities relating to the processing 
and disposition of anticipatory hedging applications under reproposed 
Sec.  150.11(b).
iii. Section 150.11(c)--Enumerated Anticipatory Bona Fide Hedge 
Reporting Requirements
    The Commission did not make any changes to Sec.  150.11(c) as 
proposed in the 2016 supplemental proposal. Exchanges will have weekly 
reporting obligations under reproposed Sec.  150.11(c).
iv. Baseline
    The baseline is the same as it was in the December 2013 Position 
Limits Proposal: The current filing process detailed in current Sec.  
1.48.
v. Benefits
    There are significant benefits that will likely accrue should Sec.  
150.11 be finalized. Recognizing anticipatory positions as bona fide 
hedging positions under Sec.  150.11 will provide market participants 
with potentially a more expeditious recognition process than the 
Commission proposal for a 10-day Commission recognition process under 
reproposed Sec.  150.7. The benefit of prompter recognitions, though, 
is not readily quantifiable, and, in most circumstances, is subject to 
the characteristics and needs of markets as well as market 
participants. So it is challenging to quantify the benefits that will 
likely be associated with reproposed Sec.  150.11.
    For example, exchanges will be able to use existing resources and 
knowledge in the administration and assessment of enumerated 
anticipatory bona fide hedging positions. The Commission and exchanges 
have evaluated these types of positions for years (as discussed in the 
December 2013 Position Limits Proposal). Utilizing this experience and 
familiarity will likely produce such benefits as prompt but reasoned 
decision making and streamlined procedures. In addition, reproposed 
Sec.  150.11 permits exchanges to act in less than ten days--a 
timeframe that will be less than the Commission's process under current 
Sec.  1.48, or under reproposed Sec.  150.7.\1438\ This could 
potentially enable commercial market participants to pursue trading 
strategies in a more timely fashion to advance their commercial and 
hedging needs to reduce risk.
---------------------------------------------------------------------------

    \1438\ See discussion in December 2013 Position Limits Proposal, 
78 FR 75745-46, Dec. 12, 2013.
---------------------------------------------------------------------------

    Reproposed Sec.  150.11, similar to reproposed Sec.  150.9 and 
Sec.  150.10, also will provide the benefit of enhanced record-
retention and reporting of positions recognized as enumerated 
anticipatory bona fide hedging positions. As previously discussed, 
records retained for specified periods will enable exchanges to develop 
consistent practices and afford the Commission accessible information 
for review, surveillance, and enforcement efforts. Likewise, weekly 
reporting under Sec.  150.11 will facilitate the tracking of positions 
by the Commission.
vi. Costs and Discussion of Comments
    The Sec.  150.11-related comments in response to the 2016 
supplement proposal's request for comments

[[Page 96883]]

centered on the claim that the exemption process and reporting 
requirements are burdensome. Nevertheless, as explained above, the 
Commission made a few changes to clarify application and reporting 
requirements.
    The costs for reproposed Sec.  150.11 are similar to the costs for 
reproposed Sec. Sec.  150.9 and 150.10, and have been quantified are in 
Tables A3 through G3. As mentioned earlier, the Commission has 
increased the number of staff hours and exemption requests based on 
commenters stating that the Commission underestimated costs. Other 
costs associated with reproposed Sec.  150.11, like those for 
reproposed Sec. Sec.  150.9 and 150.10, are more qualitative in nature 
and hinge on specific market and participant attributes. Other costs 
could arise from reproposed Sec.  150.11 if the Commission disagrees 
with an exchange's disposition of an enumerated anticipatory bona fide 
hedging position application, or costs from a Commission request or 
review under reproposed Sec.  150.11(d). These costs will include time 
and effort spent by market participants associated with a Commission 
review. In addition, market participants will lose amounts that the 
Commission can neither predict nor quantify if it became necessary to 
unwind trades or reduce positions were the Commission to conclude that 
an exchange's disposition of an enumerated anticipatory bona fide 
hedging position application is not appropriate or is inconsistent with 
the Act. This concern was raised by commenters as discussed above. The 
Commission believes that such disagreements will be rare based on the 
Commission's past experience and review of exchanges' efforts. 
Nevertheless, the Commission notes that assessing whether a position is 
for the reduction of risk arising from anticipatory needs or excessive 
speculation is complicated.

    Note: For a general description of reproposed rules identified 
in the following Tables IV-A-20 to IV-A-24, see discussion above.


                                             Table IV-A-20--Burden Estimates for Filing New or Amended Rules
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Annual number
                     Required record or report                       Total number of    Burden hours     of responses     Hourly wage       Per-entity
                                                                       respondents      per response    per respondent      estimate        labor cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
New or amended rule filings under part 40 per Sec.   150.11(a)(1),                6                5                2          $122.00           $1,220
 (a)(5)............................................................
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                               Table IV-A-21--Burden Estimates for Reviewing Applications
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Annual number
                     Required record or report                       Total number of    Burden hours     of responses     Hourly wage       Per-entity
                                                                       respondents      per response    per respondent      estimate        labor cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Collection, review, and disposition of application per Sec.                       6                7               90          $122.00          $76,860
 150.11(a).........................................................
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                            Table IV-A-22--Burden Estimates for Market Participants to Apply
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Annual number
                     Required record or report                       Total number of    Burden hours     of responses     Hourly wage       Per-entity
                                                                       respondents      per response    per respondent      estimate        labor cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.11(a)(2) Application on Form 704........................              90                3                2          $122.00             $732
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                                    Table IV-A-23--Burden Estimates for Recordkeeping
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Annual number
                     Required record or report                       Total number of    Burden hours     of responses     Hourly wage       Per-entity
                                                                       respondents      per response    per respondent      estimate        labor cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.11(b) Recordkeeping.....................................               6               30                1          $122.00           $3,660
--------------------------------------------------------------------------------------------------------------------------------------------------------


                                              Table IV-A-24--Burden Estimates for Submitting Weekly Reports
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                        Annual number
                     Required record or report                       Total number of    Burden hours     of responses     Hourly wage       Per-entity
                                                                       respondents      per response    per respondent      estimate        labor cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.   150.11(c) Weekly Report.....................................               6                6               52          $122.00          $38,064
--------------------------------------------------------------------------------------------------------------------------------------------------------

    Exchanges will have additional surveillance costs and duties that 
the Commission believes will be integrated with their existing self-
regulatory organization surveillance activities as an exchange.

[[Page 96884]]

10. Summary of CEA Section 15(a) Factors
    CEA section 15(a) requires the Commission to consider the costs and 
benefits of its actions in light of five factors.
a. Protection of Market Participants and the Public
    The imposition of position limits is intended to protect the 
markets and market participants from manipulation and excessive 
speculation. Position limits may serve as a prophylactic measure that 
reduces market volatility due to a participant otherwise engaging in 
large trades that induce price impacts. Such price impacts may occur 
when a party who is holding large open interest is not willing or is 
unable to meet a call for additional margin. In such an instance, a 
substantial amount of open interest may have to be liquidated in a 
short time interval. In addition, price impacts could also occur from a 
large trader establishing or liquidating large positions.
    There are additional benefits to imposing position limits in the 
spot month. Spot month position limits are designed to deter and 
prevent corners and squeezes as well as promote a more orderly 
liquidation process at expiration.\1439\ Spot month position limits may 
also make it more difficult to mark the close of a futures contract to 
possibly benefit other contracts that settle on the closing futures 
price. Marking the close harms markets by spoiling convergence between 
futures prices and spot prices at expiration. Convergence is desirable, 
because many market participants want to hedge the spot price of a 
commodity at expiration. In addition, since many other contracts, 
including cash market contracts, settle based on the futures price at 
expiration, the mispricing might affect a larger amount of the 
commodity than the deliverable supply of the futures contract.
---------------------------------------------------------------------------

    \1439\ Most futures contracts do not ultimately result in 
physical delivery. Instead, most positions are eliminated by a 
trader taking an offsetting position in the contract.
---------------------------------------------------------------------------

    The CEA provides that position limits do not apply to positions 
shown to be bona fide hedging positions, as defined by the Commission, 
or spread positions, as recognized by the Commission. Exemptions from 
federal position limits for bona fide hedging positions of qualified 
market participants help ensure the hedging utility of the futures 
markets while protecting market participants from excess speculation. 
The Commission believes that the reproposed rules will preserve the 
important protections of the federal position limit regime while 
maintaining the hedging function of the futures or swaps markets.
    The Commission believes the exemption provisions of these 
reproposed rules will have a negligible effect on the protection 
afforded market participants and the public, as compared to the level 
of protection that is provided by the exemptions policy reflected 
currently in Sec.  150.3. Moreover, by expanding current Sec.  150.3 to 
allow exchanges to review applications for exemptions from federal 
limits, the Commission will be able to rely on the exchanges' 
experience and expertise in monitoring their own contract markets, with 
Commission supervision, to help ensure that any exemptions do not 
detract from the protection of market participants and the public. 
Because exchanges have experience and expertise, including as part of 
their SRO functions, the Commission believes they will be able to 
carefully design exemptions under which position limits will continue 
to protect market participants while meeting needs for bona fide 
hedging. Moreover, exchanges have strong incentives--such as 
maintaining credibility of their markets through protecting against the 
harms of excessive speculation and manipulation--to appropriately 
administer exemptions.
b. Efficiency, Competitiveness, and Financial Integrity of Futures 
Markets
    There is a potential market integrity issue with excess 
speculation. People may not be willing to participate in a futures 
market if they perceive that there is a participant with an unusually 
large speculative position exerting what they believe is unreasonable 
market power. A lack of participation may harm liquidity, and 
consequently, may harm market efficiency.
    On the other hand, traders who find position limits binding may 
have to trade in substitute instruments--such as futures contracts that 
are similar but not the same as the core referenced futures contract, 
forward contracts, trade options, or futures on a foreign board of 
trade--in order to meet their demand for speculative instruments. These 
traders may also decide to not trade beyond the federal speculative 
position limit. Trading in substitute instruments may be less effective 
that trading in referenced contracts and, thus, may raise the 
transaction costs for such traders. In these circumstances, futures 
prices might not fully reflect all the speculative demand to hold the 
futures contract, because substitute instruments may not fully 
influence prices the same way that trading directly in the futures 
contract does. Thus, market efficiency might be harmed.
c. Price Discovery
    Reduced liquidity may have a negative impact on price discovery. In 
the absence of position limits, market participants might elect to 
trade less as a result of a perception that the market pricing is 
unfair as a consequence of what they perceive is the exercise of too 
much market power by a larger speculator. On the other hand, liquidity 
may also be harmed by a speculator being restricted from additional 
trading by a position limit. The Commission has set the levels of 
position limits at high levels, to avoid harming liquidity that may be 
provided by speculators that would establish large positions, while 
restricting speculators from establishing extraordinarily large 
positions. The Commission believes that the recognition and exemption 
processes will foster liquidity and potentially improve price discovery 
by making it easier for market participants to have their bona fide 
hedging exemptions and spread exemptions recognized, however.
    Position limits may serve as a prophylactic measure that reduces 
market volatility due to a participant otherwise engaging in large 
trades that induce price impacts which interrupt price discovery. Spot 
month position limits make it more difficult to mark the close of a 
futures contract to possibly benefit other contracts that settle on the 
closing futures price. Marking the close harms markets by spoiling 
convergence between futures prices and spot prices at expiration and 
damaging price discovery.
d. Sound Risk Management Practices
    The Commission believes that traders knowing their positions and 
ensuring that they do not exceed a position limit or exempted level is 
a sound risk management practice. Under the exemption processes, market 
participants must explain and document the methods behind their hedging 
or spreading strategies to exchanges, and the Commission or exchanges 
would have to evaluate them. As a result, the Commission believes that 
the evaluation processes should help market participants, exchanges, 
the Commission, and the public to understand better the risk management 
techniques and objectives of various market participants.
e. Other Public Interest Considerations
    The Commission has not identified any other public interest 
considerations.

[[Page 96885]]

The Commission declined to treat the goal of fostering innovation and 
growth for the betterment of markets as an additional public interest 
consideration, because these objectives are amorphous and likely 
difficult to accomplish with a position limit. Instead, exchanges have 
proper incentives and a variety of tools, including financial 
innovation, with which to increase liquidity on their exchanges.
9. CEA Section 15(b) Considerations
    Section 15(b) of the CEA requires the Commission to consider the 
public interest to be protected by the antitrust laws and to endeavor 
to take the least anticompetitive means of achieving the objectives, 
policies and purposes of the CEA, before promulgating a regulation 
under the CEA or issuing certain orders. The Commission believes that 
the rules and guidance in this notice are consistent with the public 
interest protected by the antitrust laws.
    The Commission acknowledges that, with respect to exchange 
qualifications to recognize or grant non-enumerated bona fide hedging 
positions, spread exemptions, and anticipatory bona fide hedging 
position exemptions for federal position limit purposes, the threshold 
experience requirements that it is reproposing will advantage certain 
more-established incumbent DCMs (``incumbent DCMs'') over smaller DCMs 
seeking to expand or future entrant DCMs (collectively ``entrant 
DCMs'') or SEFs.\1440\ Specifically, incumbent DCMs--based on their 
past track records of: (1) Listing actively traded referenced contracts 
or actively traded components of spreads; and (2) setting and 
administering exchange-set position limits applicable to those 
contracts for at least a year, or having otherwise hired staff with 
such position limit experience gained elsewhere--will be immediately 
eligible to submit rules to the Commission under part 40 of the 
Commission's regulations to process trader applications for recognition 
of non-enumerated bona fide hedging positions, spread exemptions,\1441\ 
and anticipatory bona fide hedges; in contrast, entrant DCMs and SEFs 
will be foreclosed from doing so until such time as they have met the 
eligibility criteria, although the Commission has clarified in the 
reproposed rule that any exchange may meet the experience requirement, 
but not the actively traded contract requirement, by hiring staff with 
appropriate experience. However, in the absence of any comments 
supporting a contrary view, the Commission does not perceive that an 
ability to process applications for non-enumerated bona fide hedging 
positions, spread exemptions and/or anticipatory bona fide hedging 
positions is a necessary function for a DCM or SEF to compete 
effectively as a trading facility. In the event an incumbent DCM 
declines to process a trader's request for hedging recognition or a 
spread exemption,\1442\ the trader may seek the recognition or 
exemption directly from the Commission in order to trade on an entrant 
DCM or SEF. Accordingly, the Commission does not view the reproposed 
threshold experience requirements as establishing a barrier to entry or 
competitive restraint likely to facilitate anticompetitive effects in 
any relevant antitrust market for contract trading.\1443\
---------------------------------------------------------------------------

    \1440\ See reproposed Sec. Sec.  150.9(a)(1), 150.10(a)(1), and 
150.11(a)(1).
    \1441\ In the case of qualifications to exempt certain spread 
positions, the contract may be either a referenced contract that is 
a component of the spread or another contract that is a component of 
the spread. See reproposed Sec.  150.10(a)(1)(i).
    \1442\ The Commission recognizes that in certain circumstances 
it might be in an exchange's economic interest to deny processing a 
particular trader's application for hedge recognition or a spread 
exemption. For example, this might occur in a circumstance in which 
a trader has reached the exchange-set limit and the exchange 
determines that liquidity is insufficient to maintain a fair and 
orderly contract market if the trader's position increases.
    \1443\ See, e.g., Brown Shoe Co. v. U.S., 370 U.S. 294, 324-25 
(1962) (``The outer boundaries of a product market are determined by 
the reasonable interchangeability of use or the cross-elasticity of 
demand between the product itself and the substitutes for it''); 
U.S. v. E.I. du Pont de Nemours & Co., 353 U.S. 586, 593 
(1957)(``Determination of the relevant market is a necessary 
predicate to finding a violation''); Rebel Oil v. Atl. Richfield 
Co., 51 F. 3d 1421, 1434 (9th Cir. 1995) (``A `market' is any 
grouping of sales whose sellers, if unified by a monopolist or a 
hypothetical cartel will have market power in dealing with any group 
of buyers,'' quoting Phillip Areeda & Herbert Hovenkamp, Antitrust 
Law ]518.1b, at 534 (Supp. 1993)).
---------------------------------------------------------------------------

    The Commission invited comment on any considerations related to the 
public interest to be protected by the antitrust laws and potential 
anticompetitive effects of the proposal, as well as data or other 
information to support such considerations. One exchange commenter 
responded that it was concerned that the overly prescriptive 
intramarket spread exemption application process might diminish spread 
trading on all exchanges.\1444\ More specifically, the exchange 
commenter stated that it believed it would be adversely affected by the 
proposed spread exemption rule because it is an exchange that offers a 
certain type of spread trading.\1445\ Moreover, the exchange commenter 
relies on intramarket spread trading to enhance liquidity on less 
actively traded contracts and believes the publication requirement 
under Sec.  150.10(a)(7) would have an anti-competitive effect.\1446\
---------------------------------------------------------------------------

    \1444\ CL-Nodal-60948 at 4.
    \1445\ Id. at 4.
    \1446\ Id. at 4.
---------------------------------------------------------------------------

    In response, the Commission notes that it has the responsibility to 
review the record of the exchange in granting spread exemptions. For 
example, a spread trader, who is a speculator, may amass a large 
position in a referenced contract and a corresponding large position in 
a non-referenced contract. Such a speculator has an incentive to mark 
the close of the core referenced futures contract to benefit their 
large position in a referenced contract. The Commission is concerned 
that it has an adequate record to review timely a grant of a spread 
exemption, which would allow a speculator to build a large position in 
a referenced contract, exempt from position limits. Regarding the 
publication requirement, the Commission reiterates that the publication 
requirement is only for a summary describing the type of spread 
position and why it was exempted and, thus, does not require details of 
all components of spread trading within low liquidity non-referenced 
contract markets to be revealed; the Commission notes it would not 
expect such a summary would reveal identifying information for any 
trader, but, rather, would reveal, at a minimum, the referenced 
contract and a generic description of the type of non-referenced 
contract that is a component of the spread. In addition, the Commission 
notes that spread trades may qualify as bona fide hedging positions, 
obviating the need for a spread exemption. Finally, the Commission 
notes an exchange may petition the Commission for an exemption under 
CEA section 4a(a)(7) or the Commission staff for a no-action letter 
under Sec.  140.99.

B. Paperwork Reduction Act

1. Overview
    The Paperwork Reduction Act (``PRA''), 44 U.S.C. 3501 et seq., 
imposes certain requirements on Federal agencies, including the 
Commission, in connection with their conducting or sponsoring any 
collection of information as defined by 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''). This 
reproposed rulemaking would result in the collection of information 
within the meaning of the PRA, as discussed

[[Page 96886]]

below. Specifically, if adopted, it would amend previously-approved 
collection of information requirements. Therefore, the Commission is 
submitting this reproposal to OMB for review in accordance with 44 
U.S.C. 3507(d) and 5 CFR 1320.11. The information collection 
requirements reproposed herein will be an amendment to the previously-
approved collection associated with OMB control number 3038-0013.\1447\
---------------------------------------------------------------------------

    \1447\ Part 19--Reports by persons holding bona fide hedge 
positions--currently covered by OMB control number 3038-0009, is 
being proposed for inclusion in OMB control number 3038-0013.
---------------------------------------------------------------------------

    If the reproposed changes to regulations are adopted, responses to 
this collection of information would be mandatory. Several of the 
reporting requirements would be mandatory in order to obtain exemptive 
relief, and, therefore, would be mandatory under the PRA to the extent 
a market participant elects to seek such relief. The Commission will 
protect any proprietary information received in accordance with the 
Freedom of Information Act and 17 CFR part 145, titled ``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.'' \1448\ The Commission also is required to protect certain 
information contained in a government system of records pursuant to the 
Privacy Act of 1974.\1449\
---------------------------------------------------------------------------

    \1448\ 7 U.S.C. 12(a)(1).
    \1449\ 5 U.S.C. 552a.
---------------------------------------------------------------------------

    In December 2013, the Commission proposed a number of modifications 
to its speculative position limits regime. Under that proposal, market 
participants with positions in a ``referenced contract,'' as defined in 
Sec.  150.1, would be subject to the position limit framework 
established in parts 19 and 150 of the Commission's regulations. 
Proposed changes to part 19 would prescribe new forms and reporting 
requirements for persons claiming exemptions to speculative position 
limits and update reporting obligations and required information on 
existing forms. In proposed part 150, the Commission changed reporting 
requirements for DCMs listing a core referenced futures contract as 
well as for traders who wish to apply for an exemption from exchange-
set position limits. The Commission also proposed to update and change 
recordkeeping requirements for market participants and exchanges.
    In June 2016, the Commission published in the Federal Register a 
supplemental notice of proposed rulemaking to update and revise the 
regulations proposed in the December 2013 Position Limits Proposal. The 
Commission proposed to allow a participant to exceed speculative 
position limits to the extent that the participant's position is 
recognized as a non-enumerated bona fide hedging position, an exempt 
spread position, or an enumerated anticipatory bona fide hedge, by a 
DCM or SEF. The Commission proposed to require new or amended rule 
filings under part 40 of its regulations that comply with certain 
conditions set forth in the revisions to part 150. Further, the 
proposed changes stated that in order to seek exemptive relief market 
participants would need to file applications with a DCM or SEF that met 
criteria established under the proposal.
    In this Reproposal, the Commission is reproposing its changes to 
parts 1, 15, 17, 19, 37, 38, 140, 150, and 151 of the Commission's 
regulations. Specifically, with regard to the PRA, the Commission is 
reproposing the following: New and amended series '04 forms under part 
19 and Sec.  150.7; submission of deliverable supply estimates under 
Sec.  150.2(a)(3); recordkeeping obligations under Sec.  150.3(g); 
revised special call authority under Sec.  150.3(h); exchange set limit 
exemption application requirements under Sec.  150.5(a)(2); and 
requirements for recognition of non-enumerated bona fide hedging 
positions, certain spread positions, and enumerated anticipatory bona 
fide hedging positions under Sec.  150.9, Sec.  150.10, and Sec.  
150.11, respectively.
    The Commission proposes reorganizing the information found in the 
OMB Collection Numbers associated with this rule. In particular, the 
Commission proposes that the burdens related to series '04 forms be 
moved from OMB Collection #3038-0009 to OMB Collection #3038-0013. This 
change is non-substantive but allows for all information collections 
related to exemptions from speculative position limits to be housed in 
one collection, making it simpler for market participants to know where 
to find the relevant PRA burdens. If adopted, OMB Collection #3038-0009 
would hold collections of information related to parts 15, 17, and 21 
while OMB Collection #3038-0013 would hold collections of information 
related to parts 19 and 150.
2. Methodology and Assumptions
    It is not possible at this time to accurately determine the number 
of respondents that will be affected by the these 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.
    The provisions under Sec.  150.9-11 permits designated contract 
markets and swap execution facilities to elect to process applications 
for recognition of non-enumerated bona fide hedging positions, exempt 
spread positions, or enumerated anticipatory bona fide hedges; 
accordingly the Commission does not know which, or how many, designated 
contract markets and swap execution facilities may elect to offer such 
recognition processes, or which, or how many market participants may 
submit applications. The Commission is unsure of how many designated 
contract markets, swap execution facilities, and market participants 
not currently active in the market 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 the Commission's 
lack of experience enforcing speculative position limits for such 
markets and for 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.
3. Information Provided by Reporting Entities/Persons
    To determine the number of entities who may file series '04 forms 
with the Commission and/or exemption applications with DCMs that elect 
to process such applications, the Commission used its proprietary data 
collected from market participants as well as information provided by 
DCMs regarding the number of exemptions processed by exchange 
surveillance programs each year.\1450\ As discussed

[[Page 96887]]

supra,\1451\ the Commission analyzed data covering a two-year period of 
July 1, 2014-June 30, 2016 to determine how many participants would 
have been over 60, 80, 100, 125, 150, 175, 200, and 500 percent of the 
limit levels in each of the 25 commodities subject to limits under 
Sec.  150.2 had such levels been in effect during the covered 
period.\1452\ The Commission determined that in that period, 409 unique 
entities would have exceeded any of the limits in any commodities; the 
Commission is using a figure of 425 entities to account for any 
additional entities which may be required to comply with limits. The 
Commission assumes that only entities over such levels--or close to 
being over such levels--will file the necessary forms and applications. 
The Commission's analysis does not account for persons holding hedging 
or other exemptions from position limits, and the figures provided by 
DCMs account for exemptions filed for all commodities, not just the 25 
subject to limits under Sec.  150.2. Accordingly, the Commission 
believes the estimates of the number of 425 respondents used herein are 
highly conservative.
---------------------------------------------------------------------------

    \1450\ The Commission also described this information in the 
2016 Supplemental Position Limits Proposal. See 2016 Supplemental 
Position Limits Proposal, 81 FR 38500.
    \1451\ See supra discussion of number of traders over the limit 
levels.
    \1452\ The Commission also used this analysis to determine the 
number of entities subject to the Commission's recordkeeping and 
special call rules in Sec.  150.3.
---------------------------------------------------------------------------

    To determine the number of exchanges who would be affected by the 
reproposal, the Commission analyzed how many exchanges currently list 
actively traded contracts in the commodities for which federal position 
limits will be set, as the proposed rules in Sec.  150.5 as well as in 
Sec. Sec.  150.9, 150.10, and 150.11 will all apply to exchanges that 
list commodity derivative contracts that may be subject federal limits 
under Sec.  150.2(d).
    The Commission's estimates concerning wage rates are based on 2013 
salary information for the securities industry compiled by the 
Securities Industry and Financial Markets Association (``SIFMA''). The 
Commission is using a figure of $122 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 2013, modified to account for an 1800-hour work-year, adjusted 
to account for the cumulative rate of inflation since 2013. This figure 
was then multiplied by 1.33 to account for benefits, and further by 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 
(average of senior and non-senior)'' (15% weight), ``senior 
accountant'' (15%) ``compliance manager'' (30%), and ``assistant/
associate general counsel'' (40%). All monetary estimates below have 
been rounded to the dollar.
    A commenter estimated that for an exchange to promulgate the 
regulations required of them under this part such an exchange would 
need a senior level regulation employee and three regulatory 
analysts.\1453\ When the Commission estimated a per-hour wage rate 
using these professions, however, the average hourly wage rate was 
lower than the $122 estimated above.\1454\ In this reproposal, the 
Commission is therefore estimating all burdens with the higher wage 
rate. The Commission notes that the wage rate used for PRA calculations 
is an average rate, and that some entities may face a higher or lower 
wage rate based on individual circumstances.
---------------------------------------------------------------------------

    \1453\ CL-ICE-60929 at 17.
    \1454\ The Commission computed the alternative wage rate as a 
weighted national average of salary for professionals with the 
following titles (and their relative weight); ``compliance manager'' 
(25 percent weight), 3 ``compliance examiner, intermediate'' (15 
percent each) and ``assistant/associate general counsel'' (30 
percent). After adjusting for inflation, overhead, and benefits, the 
wage rate was $107. These titles appeared to best represent the 
commenter's suggestion but without additional input from the 
commenter it is impossible to ascertain the commenter's original 
intent regarding titles of necessary staffing.
---------------------------------------------------------------------------

4. Collections of Information
(a) Recordkeeping and Reporting Obligations for Market Participants
(i) Forms 204 and 304
    Previously, the Commission estimated the combined annual labor 
hours for both Form 204 and Form 304 to be 1,350 hours, which amounted 
to a total labor cost to industry of $68,850 per annum.\1455\ Below, 
the Commission has estimated the costs for each form separately.
---------------------------------------------------------------------------

    \1455\ 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.
---------------------------------------------------------------------------

    As proposed, Form 204 would be required to be filed when a trader 
accumulates a net long or short commodity derivative position that 
exceeds a federal limit in a referenced contract. Form 204 would 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 425 traders would be 
required to file Form 204 once a month (12 times per year) each. At an 
estimated 3 labor hours to complete and file each Form 204 report for a 
total annual burden to industry of 15,300 labor hours, the Form 204 
reporting requirement would cost industry $1,866,600 in labor costs.
    As proposed, Form 304 would be required to be filed by merchants 
and dealers in cotton and contains information on the quantity of call 
cotton bought or sold on a weekly basis. Form 304 would be required in 
order for the Commission to produce its weekly cotton ``on call'' 
report.\1456\
---------------------------------------------------------------------------

    \1456\ The Commission's Weekly Cotton On-Call Report can be 
found here: http://www.cftc.gov/MarketReports/CottonOnCall/index.htm.
---------------------------------------------------------------------------

    The Commission estimates that approximately 200 traders would be 
required to make a Form 304 submission for call cotton 52 times per 
year each. At 1 hour to complete each submission for a total annual 
burden to industry of 10,400 labor hours, the Form 304 reporting 
requirement would impose upon industry $1,268,800 in labor costs.
(ii) Form 504
    As proposed, Sec.  19.01(a)(1) would require persons claiming a 
conditional spot month limit exemption pursuant to Sec.  150.3(c) to 
file Form 504. Unlike other series '04 forms, Form 504 would apply only 
to commodity derivative contracts in natural gas markets.\1457\ A Form 
504 filing would show the composition of the natural gas cash position 
underlying a referenced contract that is held or controlled for which 
the exemption is claimed. The Commission notes that this form should be 
submitted daily for each day of the 3-day spot period for the core 
referenced futures contract in natural gas. The Commission estimates 
that approximately 40 traders would claim a conditional spot month 
limit 12 times per year, and each corresponding submission would take 
15 labor hours to complete and file. Therefore, the Commission 
estimates that the proposed Form 504 reporting requirement would result 
in approximately 7,200 total annual labor hours for an additional 
industry-wide labor cost of $878,400.

[[Page 96888]]

The Commission requests comment on its estimates regarding new Form 
504.
---------------------------------------------------------------------------

    \1457\ See supra, discussion of conditional spot month limit 
exemption (Sec.  150.3(c)).
---------------------------------------------------------------------------

(iii) Form 604
    Persons claiming a pass-through swap exemption pursuant to Sec.  
150.3(a) would be required to file proposed 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. For proposed Form 604 reports filed for 
positions held outside of the spot month, the Commission estimates that 
approximately 250 traders would claim a pass-through swap exemption an 
average of 10 times per year each. At approximately 30 labor hours to 
complete each corresponding submission for a total burden to traders of 
75,000 annual labor hours, compliance with the proposed Form 604 filing 
requirements industry-wide would impose an additional $9,150,000 in 
labor costs.
(iv) Form 704
    Traders claiming anticipatory bona fide hedging exemptions would be 
required to file proposed Form 704 for the initial statement/
application pursuant to Sec.  150.7(d), along with an annual update on 
the same form. Because annual update requires mostly the same 
information as the initial statement, allowing market participants to 
update only fields that have changed since the initial statement was 
filed rather than having to update the entire form, the Commission 
anticipates the annual update requiring about half the time to 
complete. The Commission estimates that approximately 250 traders would 
claim anticipatory exemptions by filing an initial statement 
approximately once per year. At an estimated 15 labor hours to complete 
and file an initial statement on Form 704 for a total annual burden to 
traders of 3,750 labor hours, the anticipatory exemption filing 
requirement would cost industry an additional $457,500 in labor costs. 
The annual update to proposed Form 704 is estimated to be required of 
the same 250 traders once a year, at an estimated 8 hours to complete 
and file, for an industry-wide burden of 2,000 hours and $244,000 in 
labor costs.
(v) Recordkeeping and Other Provisions
    Any person claiming an exemption from federal position limits under 
part 150 would be required 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 would be required to be comprehensive, in that 
they must cover anticipated requirements, production and royalties, 
contracts for services, cash commodity products and by-products, pass-
through swaps, cross-commodity hedges, and more.
    The Commission estimates that approximately 425 traders would 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 
would incur a total of 20,000 annual labor hours amounting to 
$2,592,500 in additional labor costs.
    In addition, proposed Sec.  150.3(h) would provide that upon call 
from the Commission any person claiming an exemption from speculative 
position limits under proposed Sec.  150.3 must provide to the 
Commission any information as specified in the call. It is difficult to 
determine in advance of any such call who may be required to submit 
information under proposed Sec.  150.3(h), how that information may be 
submitted, or how many labor hours it may take to prepare and submit 
such information. However, for the purposes of the PRA, the Commission 
has made estimates regarding the potential burden.
    The Commission estimates that approximately 425 traders would be 
eligible to be called upon for additional information under proposed 
Sec.  150.3(h) each year. At approximately two hours per exemption 
claimed to keep and maintain the required books and records, the 
Commission estimates that industry would incur a total of 850 annual 
labor hours amounting to $103,700 in additional labor costs.
(vi) Exchange-Set Limits and Exchange-Recognized Exemptions
    Traders who wish to avail themselves of any exemption from a DCM or 
SEF's speculative position limit rules would need 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 proposed codification of this requirement would 
have the practical effect of incrementally increasing, rather than 
creating, the burden of applying for such exemptive relief. The 
Commission estimates that approximately 425 traders would claim 
exemptions from DCM or SEF-established speculative position limits each 
year, with each trader on average making 1 application to the DCM or 
SEF each year. Each submission is estimated to take 2 hours to complete 
and file, meaning that these traders collectively would incur a total 
burden of 850 labor hours per year for an industry-wide additional 
labor cost of $39,976.
    Under proposed Sec. Sec.  150.9(a)(3), 150.10(a)(3), and 
150.11(a)(2), designated contract markets and swap execution facilities 
that elect to process applications to establish an application process 
that elicits sufficient information to allow the designated contract 
market or swap execution facility to determine, and the Commission to 
verify, whether it is appropriate to recognize a commodity derivative 
position as an non-enumerated bona fide hedging position, exempt spread 
position or enumerated anticipatory bona fide hedge, respectively. 
Pursuant to proposed Sec. Sec.  150.9(a)(4)(i), 150.10(a)(4), and 
150.11(a)(3), an applicant would be required to update an application 
at least on an annual basis. Further, DCMs and SEFs have authority 
under Sec. Sec.  150.9(a)(6), 150.10(a)(6), and 150.11(a)(5) to require 
that any such applicant file a report with the designated contract 
market or swap execution facility pertaining to the use of any 
exemption that has been granted.
    The Commission anticipates that market participants would be mostly 
familiar with the non-enumerated bona fide hedging position application 
provided by exchanges that currently process such applications, and 
thus believes that the burden for applying to an exchange would be 
minimal. Information included in the application would be required to 
be sufficient to allow the exchange to determine, and the Commission to 
verify, whether the position meets the requirements of CEA section 
4a(c), but specific data fields are left to the exchanges to determine. 
The Commission notes that there would be a slight additional burden for 
market participants to submit the notice

[[Page 96889]]

regarding the use of any exemption granted, should the DCM or SEF 
require such a report.
    The Commission estimates that 325 entities would file an average of 
2 applications each year to obtain recognition of certain positions as 
non-enumerated bona fide hedges and that each application, including 
any usage report that may be required by the DCM or SEF, would require 
approximately 4 burden hours to complete and file. Thus, the Commission 
estimates an average per entity burden of 8 labor hours and an 
industry-wide burden of 2,600 labor hours annually. The Commission 
estimates an average cost of approximately $976 per entity or $317,200 
for the industry as a whole for applications under Sec.  150.9(a)(3).
    The Commission anticipates that market participants would be mostly 
familiar with the spread exemption application provided by exchanges 
that currently process such applications, and thus believes that the 
burden for applying to an exchange would be minimal. Information 
included in the application is required to be sufficient to allow the 
exchange to determine, and the Commission to verify, whether the 
position fulfills the objectives of CEA section 4a(a)(3)(B), but 
specific data fields are left to the exchanges to determine. The 
Commission notes that there would be a slight additional burden for 
market participants to submit the notice regarding the use of any 
exemption granted should the DCM or SEF require such a report.
    The Commission estimates that 85 entities would file an average of 
2 applications each year to obtain an exemption for certain spread 
positions and that each application, including any usage report 
required by the DCM or SEF, would require approximately 3 burden hours 
to complete and file. Thus, the Commission approximates an average per 
entity burden of 6 labor hours and an industry-wide burden of 510 labor 
hours annually. The Commission estimates an average cost of 
approximately $732 per entity or $62,220 for the industry as a whole 
for applications under Sec.  150.10(a)(2).
    The Commission anticipates that market participants would be mostly 
familiar with the enumerated anticipatory bona fide hedge application 
provided by exchanges that currently process such applications, and 
thus believes that the burden for applying to an exchange would be 
minimal. The application is required to include, at a minimum, the 
information required under Sec.  150.7(d). The Commission estimates 
that 90 entities would file an average of 2 applications each year to 
obtain recognition that certain positions are enumerated anticipatory 
bona fide hedges and that each application would require approximately 
3 burden hours to complete and file. Thus, the Commission estimates an 
average per entity burden of 6 labor hours and an industry-wide burden 
of 510 labor hours annually. The Commission estimates an average cost 
of approximately $732 per entity or $65,880 for the industry as a whole 
for applications under proposed Sec.  150.11(a)(2). The Commission 
invites comments on any these proposed estimates.
(b) Recordkeeping and Reporting Obligations for DCMs and SEFs
(i) Submission of Estimates of Deliverable Supply
    For purposes of assisting the Commission in resetting spot-month 
limits, proposed Sec.  150.2(e)(3)(ii) would require 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 of approximately 
$2,440. 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 notes that, in response to comments, the Commission 
proposes to allow a DCM that does not wish a spot-month limit level to 
be changed to petition the Commission to not change the limit level 
and, if the petition is approved, the DCM would not need to submit 
deliverable supply estimates for such a commodity. A DCM that submits 
one petition may incur a burden of one hour, resulting in an estimated 
per-petition cost of approximately $488. Again, DCMs that submit more 
than one petition may multiply this per-petition burden by the number 
of petitions submitted.
(ii) Filing New or Amended Rules Pursuant to Part 40
    Designated contract markets and swap execution facilities that 
elect to process the recognition of non-enumerated bona fide hedging 
positions, exempt spread positions, or enumerated anticipatory bona 
fide hedging positions would be required to file new rules or rule 
amendments pursuant to Part 40 of this chapter, establishing or 
amending its application process for recognition of the above-
referenced positions, consistent with the requirements of proposed 
Sec. Sec.  150.9, 150.10, and 150.11.
    The Commission estimates that, at most, 6 entities would file new 
rules or rule amendments pursuant to Part 40 to elect to process non-
enumerated bona fide hedging, spread, or enumerated anticipatory 
hedging applications. The Commission determined this estimate by 
analyzing how many exchanges currently list actively traded contracts 
for the 28 commodities for which federal position limits would be set, 
because proposed Sec. Sec.  150.9(a), 150.10(a), and 150.11(a) would 
require a referenced contract to be listed by and actively traded on 
any exchange that elects to process applications for recognition of 
positions in such referenced contract. The Commission anticipates that 
the exchanges that would elect to process applications under these 
sections are likely to have processes for recognizing such exemptions 
currently, and so would need to file amendments to existing exchange 
rules rather than adopt new rules. Thus, the Commission approximates an 
average per entity burden of 10 labor hours.\1458\ The Commission 
estimates an average cost of approximately $1,220 per entity for filing 
revised rules under part 40 of the Commission's regulations.
---------------------------------------------------------------------------

    \1458\ Table IV-B-1 at the end of this section provides a more 
detailed breakdown of costs.
---------------------------------------------------------------------------

(iii) Review and Disposition of Applications
    An exchange that elects to process applications may incur a burden 
related to the review and disposition of such applications pursuant to 
proposed Sec. Sec.  150.9(a), 150.10(a), and 150.11(a). The review of 
an application would be required to include analysis of the facts and 
circumstances of such application to determine whether the application 
meets the standards established by the Commission. Exchanges would be 
required to notify the applicant regarding the disposition of the 
application, including whether the application was approved, denied, 
referred to the Commission, or requires additional information.
    In the 2016 Supplemental Proposal, the Commission noted that the 
exchanges that would elect to process non-enumerated bona fide hedging 
position, exempt spread position, and

[[Page 96890]]

enumerated anticipatory bona fide hedging position applications are 
likely to have processes for the review and disposition of such 
applications currently in place. The Commission noted its preliminary 
belief that in such cases, complying with the rules would be less 
burdensome because the exchange would already have staff, policies, and 
procedures established to accomplish its duties under the rules.
    One exchange submitted a comment requesting the Commission alter 
its estimates of the burdens to exchanges for reviewing such 
submissions, noting that the proposed rules ``provide[d] for the 
collection of considerably more documents than are currently required 
for Exchange exemption requests.'' The commenter continued that the 
``review and consideration of these documents will result in additional 
time spent on each exemption request'' and suggested the Commission 
increase its estimate from five hours to seven hours per review.\1459\ 
The commenter also suggested the Commission increase the number of 
applications that exchanges are estimated to process, stating that the 
Commission's estimate of 285 exemption requests (for all three types of 
applications) paled in comparison to the exchange's estimate of 500 
applications.\1460\
---------------------------------------------------------------------------

    \1459\ See CL-ICE-60929 at 17.
    \1460\ Id.
---------------------------------------------------------------------------

    The Commission notes that it is unclear whether the exchange's 
estimate of 500 applications includes applications in commodities 
outside of the commodities subject to the proposed rules. If so, the 
exchange may have overestimated the number of new applications the 
exchange may process per year. Further, the estimates of one exchange 
may not be representative of the number of applications received by the 
other five exchanges. However, in an abundance of caution, the 
Commission proposes to use the exchange's estimate for the number of 
applications. Since the commenter did not suggest the proportion of 
applications was improperly distributed amongst the sections regarding 
non-enumerated bona fide hedging positions, exempt spread positions, 
and enumerated anticipatory hedging positions, the Commission has 
estimated the costs resulting from each type of application using 
roughly the same proportion as originally proposed.
    Thus, the Commission estimates that each exchange would process 
approximately 325 non-enumerated bona fide hedging position 
applications per year and that each application would require 7 hours 
to process, for an average per entity burden of 2,275 labor hours 
annually. The Commission estimates an average cost of approximately 
$277,500 per entity under Sec.  150.9(a).
    The Commission estimates that each exchange would process about 85 
spread exemption applications per year and that each application would 
require 7 hours to process, for an average per entity burden of 595 
labor hours annually. The Commission estimates an average cost of 
approximately $72,590 per entity under proposed Sec.  150.10(a). The 
Commission invites comments on these estimates.
    The Commission estimates that each entity would process about 90 
anticipatory hedging applications per year and that each application 
would require 7 hours to process, for an average per entity burden of 
630 labor hours annually. The Commission estimates an average cost of 
approximately $76,860 per entity under proposed Sec.  150.11(a).
(iv) Publication of Summaries
    Exchanges that would elect to process the applications under 
proposed Sec. Sec.  150.9 and 150.10 may incur burdens to publish on 
their Web sites summaries of the unique types of non-enumerated bona 
fide hedging position positions and spread positions, respectively. 
This requirement would be new even for exchanges that already have a 
similar process under exchange-set limits.
    The Commission estimated in the 2016 Supplemental Position Limits 
Proposal that a single summary would require 5 hours to write, approve, 
and post. An exchange also commented that these summaries would likely 
require seven hours per summary to prepare.\1461\ Thus, the Commission 
now estimates that each exchange would post approximately 40 summaries 
per year, with an average per summary burden of 7 labor hours.\1462\ 
The Commission estimates an average cost of approximately $34,160 per 
entity, representing the combined burdens of Sec.  150.9(a)(7) and 
Sec.  150.10(a)(7). The Commission invites comments on these estimates.
---------------------------------------------------------------------------

    \1461\ See CL-ICE-60929 at 17.
    \1462\ The Commission has combined the burdens for summaries 
published in accordance with Sec.  150.9(a)(7) and Sec.  
150.10(a)(7) in order to make the text clearer. Table IV-B-1 at the 
end of this section provides a more detailed breakdown of costs by 
regulation.
---------------------------------------------------------------------------

(v) Recordkeeping
    Designated contract markets and swap execution facilities that 
elect to process applications are required under proposed Sec. Sec.  
150.9(b), 150.10(b), and 150.11(b) to keep full, complete, and 
systematic records, which include all pertinent data and memoranda, of 
all activities relating to the processing and disposition of 
applications for recognition of non-enumerated bona fide hedging 
positions, exempt spread positions, and enumerated anticipatory bona 
fide hedges. The Commission believes that exchanges currently process 
applications for recognition of non-enumerated bona fide hedging 
positions, exempt spread positions, and enumerated anticipatory bona 
fide hedges maintain records of such applications as required pursuant 
to other Commission regulations, including Sec.  1.31. However, the 
Commission also believes that the rules may confer additional 
recordkeeping obligations on exchanges that elect to process 
applications for recognition of non-enumerated bona fide hedging 
positions, exempt spread positions, and enumerated anticipatory bona 
fide hedges.
    The Commission estimates that 6 entities would have recordkeeping 
obligations pursuant to proposed Sec. Sec.  150.9(b), 150.10(b), and 
150.11(b). Thus, the Commission approximates an average per entity 
burden of 90 labor hours annually for all three sections. The 
Commission estimates an average cost of approximately $10,980 per 
entity for records and filings under Sec. Sec.  150.9(b), 150.10(b), 
and 150.11(b).\1463\ The Commission invites comments on its estimates.
---------------------------------------------------------------------------

    \1463\ The Commission has combined the burdens for recordkeeping 
under Sec. Sec.  150.9(b), 150.10(b), and 150.11(b). Table IV-B-1 at 
the end of this section provides a more detailed breakdown of costs 
by regulation.
---------------------------------------------------------------------------

(vi) Reporting
    The Commission anticipates that exchanges that elect to process 
applications for recognition of non-enumerated bona fide hedging 
positions, spread exemptions, and enumerated anticipatory bona fide 
hedges would be required to file two types of reports. In particular, 
proposed Sec. Sec.  150.9(c) and 150.10(c) would require a designated 
contract market or swap execution facility that elects to process 
applications for non-enumerated bona fide hedging positions and exempt 
spread positions to submit to the Commission (i) a summary of any non-
enumerated bona fide hedging position and exempt spread position newly 
published on the designated contract market or swap execution 
facility's Web site; and (ii) no less frequently than monthly, any 
report submitted by an applicant to such designated contract market or 
swap execution facility pursuant to rules authorized under

[[Page 96891]]

proposed Sec. Sec.  150.9(a)(6)and 150.10(a)(6), respectively. Further, 
proposed Sec. Sec.  150.9(c), 150.10(c), and 150.11(c) would require 
designated contract markets and swap execution facilities that elect to 
process relevant applications to submit to the Commission a report for 
each week as of the close of business on Friday showing various 
information concerning the derivative positions that have been 
recognized by the designated contract market or swap execution facility 
as an non-enumerated bona fide hedging position, exempt spread 
position, or enumerated anticipatory bona fide hedge position, and for 
any revocation, modification or rejection of such recognition.
    The Commission understands that 5 exchanges currently submit 
reports, on a voluntary basis each month, which provide information 
regarding exchange-recognized exemptions of all types. The Commission 
stated in the 2016 Supplemental Position Limits Proposal its 
preliminary belief that the content of such reports is similar to the 
information required of the reports in Sec. Sec.  150.9(c), 150.10(c), 
and 150.11(c), but the frequency of such reports would increase under 
the proposed rules. The Commission estimated that the weekly report 
would require approximately 3 hours to complete and submit and that the 
monthly report would require 2 hours to complete and submit.
    An exchange commented that the Commission ``significantly 
understated'' the time required to prepare, review, and submit the 
weekly and monthly reports based on the amount of time the exchange 
currently spends to prepare and submit the reports it already submits. 
The commenter suggested the Commission revise its estimates to reflect 
the exchange's estimates of six hours to prepare the weekly report and 
six hours to prepare the monthly report.\1464\
---------------------------------------------------------------------------

    \1464\ See CL-ICE-60929 at 17.
---------------------------------------------------------------------------

    The Commission estimates that 6 entities would have weekly 
reporting obligations pursuant to reproposed Sec. Sec.  150.9(c)(1), 
150.10(c)(1), and 150.11(c).\1465\ The Commission is revising its 
estimate to reflect the commenter's assertion that the weekly report 
will require a burden of approximately 6 hours to complete and submit. 
Thus, the Commission estimates an average per entity burden of 936 
labor hours annually. The Commission estimates an average cost of 
approximately $114,192 per entity for weekly reports pursuant to all 
three related sections. The Commission invites comments on its 
estimates.
---------------------------------------------------------------------------

    \1465\ The Commission has combined the burdens for recordkeeping 
under Sec. Sec.  150.9(c), 150.10(c), and 150.11(c). Table IV-B-1 at 
the end of this section provides a more detailed breakdown of costs 
by regulation.
---------------------------------------------------------------------------

    The Commission also estimates that 6 entities would have monthly 
reporting obligations pursuant to reproposed Sec. Sec.  150.9(c)(2) and 
150.10(c)(2).\1466\ The Commission also estimates that the monthly 
report would require a burden of approximately 6 hours to complete and 
submit. Thus, the Commission approximates an average per entity burden 
of 144 labor hours annually. The Commission estimates an average cost 
of approximately $17,568 per entity for monthly reports under both 
sections.
---------------------------------------------------------------------------

    \1466\ The Commission has combined the burdens for recordkeeping 
under Sec. Sec.  150.9(c)(2) and 150.10(c)(2). Table IV-B-1 at the 
end of this section provides a more detailed breakdown of costs by 
regulation.

                                    Table IV-B-1--Breakdown of Burden Estimates by Regulation and Type of Respondent
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                             Estimated
                                                                           Total number    Annual number   Total annual      number of
         Type of  respondent               Required record or report      of respondents   of responses      responses     burden hours    Annual burden
                                                                                          per respondent                   per response
A                                      B................................               C               D        E \1467\               F        G \1468\
--------------------------------------------------------------------------------------------------------------------------------------------------------
Exchange.............................  New or amended rule filings under               6               2              12               5              60
                                        part 40 per Sec.   150.9(a)(1),
                                        (a)(6).
Exchange.............................  New or amended rule filings under               6               2              12               5              60
                                        part 40 per Sec.   150.10(a)(1),
                                        (a)(6).
Exchange.............................  New or amended rule filings under               6               2              12               5              60
                                        part 40 per Sec.   150.11(a)(1),
                                        (a)(5).
Exchange.............................  Collection, review, and                         6             325           1,950               7          13,650
                                        disposition of application per
                                        Sec.   150.9(a).
Exchange.............................  Collection, review, and                         6              85             510               7           3,570
                                        disposition of application per
                                        Sec.   150.10(a).
Exchange.............................  Collection, review, and                         6              90             540               7           3,780
                                        disposition of application per
                                        Sec.   150.11(a).
Exchange.............................  Summaries Posted Online per Sec.                6              30             180               7           1,260
                                         150.9(a).
Exchange.............................  Summaries Posted Online per Sec.                6              10              60               7             420
                                         150.10(a).
Exchange.............................  Sec.   150.9(b) Recordkeeping....               6               1               6              30             180
Exchange.............................  Sec.   150.10(b) Recordkeeping...               6               1               6              30             180
Exchange.............................  Sec.   150.11(b) Recordkeeping...               6               1               6              30             180
Exchange.............................  Sec.   150.9(c)(1) Weekly Report.               6              52             312               6           1,872
Exchange.............................  Sec.   150.10(c)(1) Weekly Report               6              52             312               6           1,872
Exchange.............................  Sec.   150.11(c) Weekly Report...               6              52             312               6           1,872
Exchange.............................  Sec.   150.9(c)(2) Monthly Report               6              12              72               6             432
Exchange.............................  Sec.   150.10(c)(2) Monthly                     6              12              72               6             432
                                        Report.
Exchange.............................  Sec.   150.2(a)(3)(ii) DS                       6               4              24               1              24
                                        Estimate Submission Petition.
Exchange.............................  Sec.   150.2(a)(3)(ii) DS                       6               4              24              20             480
                                        Estimate Submission.
Exchange.............................  Sec.   150.5(a)(2)(ii) Exchange-                6             425           2,550               2           5,100
                                        Set Limit Exemption Application.
Market Participant...................  Sec.   150.5(a)(2)(ii) Exchange-              425               1             425               2             850
                                        Set Limit Exemption Application.
Market Participant...................  Sec.   150.9(a)(3) NEBFH                      325               2             650               4           2,600
                                        Application.

[[Page 96892]]

 
Market Participant...................  Sec.   150.10(a)(3) Spread                     85               2             170               3             510
                                        Exemption Application.
Market Participant...................  Sec.   150.11(a)(2) Application                90               2             180               3             540
                                        On Form 704.
Market Participant...................  Sec.   150.3(g) Recordkeeping....             425              50          21,250               1          21,250
Market Participant...................  Sec.   19.01(a)(1) Form 504......              40              12             480              15           7,200
Market Participant...................  Sec.   19.01(a)(2)(i) Form 604                250              10           2,500              30          75,000
                                        Non Spot Month.
Market Participant...................  Sec.   19.01(a)(2)(ii) Form 604               100              10           1,000              20          20,000
                                        Spot Month.
Market Participant...................  Sec.   19.02 Form 304............             200              52          10,400               1          10,400
Market Participant...................  Sec.   19.01(a)(3) Form 204......             425              12           5,100               3          15,300
Market Participant...................  Sec.   150.3(h) Special Call.....             425               1             425               2             850
Market Participant...................  Sec.   150.7(a) Form 704 Initial              250               1             250              15           3,750
                                        Statement.
Market Participant...................  Sec.   150.7(a) Form 704 Annual               250               1             250               8           2,000
                                        Update.
                                      ------------------------------------------------------------------------------------------------------------------
    Totals...........................  .................................             431          116.13          50,052            3.91         195,734
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1467\ Column C times column D.
\1468\ Column E times column F.

4. Initial Set-Up and Ongoing Maintenance Costs
    In documents submitted to OMB in accordance with the requirements 
of the Paperwork Reduction Act, the Commission estimated that the total 
annualized capital, operational, and maintenance costs associated with 
complying with the proposed rules amending part 150 would be 
approximately $11.6 million across approximately 400 firms. Of this 
$11.6 million, the Commission estimated that $5 million would be from 
annualized capital and start-up costs and $6.6 million would be from 
operating and maintenance costs. These cost estimates were based on 
Commission staff's estimated costs to develop the reports and 
recordkeeping required in the proposed part 150.
    The Commission explained that the proposed expansion of the number 
of contract markets with Commission-set position limits, and the 
Congressional determination that such limits be applied on an aggregate 
basis across all trading venues and all economically-equivalent 
contracts, might increase operational costs for traders to monitor 
position size to remain in compliance with federal position limits. The 
Commission further explained that as such limits have been in place in 
the futures markets for over 70 years, the Commission believed that 
traders in those markets would have already developed means of 
compliance and thus would not require additional capital or start-up 
costs. The Commission stated its expectation that, while affected 
futures entities would be able to significantly leverage existing 
systems and faculties to comply with the extended regime, entities 
trading only or primarily in swaps contracts may not have developed 
such means.
    One commenter provided specific estimates of the start-up costs to 
develop new systems to track and report positions, stating that per-
entity costs will range from $750,000 to $1,500,000. The commenter also 
stated that ongoing annual costs would range from $100,000 to $550,000 
per entity.\1469\ The Commission notes that the commenter did not 
provide data underlying its cost estimates from which the Commission 
could duplicate the commenter's estimates.
---------------------------------------------------------------------------

    \1469\ See CL-FIA-59595 at 35-36.
---------------------------------------------------------------------------

    The Commission maintains its belief that market participants will 
be able to leverage existing systems and strategies for tracking and 
reporting positions. As noted above, the Commission recognizes that 
expanding the federal speculative position limits regime into 
additional commodities beyond the legacy agricultural commodities will 
increase monitoring costs for firms. However, the Commission continues 
to expect that firms trading in the commodities subject to federal 
limits under Sec.  150.2 do currently monitor for exchange-set and/or 
federal limits, and submit reports to claim exemptions in contracts for 
future delivery in such commodities. The Commission therefore continues 
to believe that costs for futures market participants resulting from 
the rules adopted herein are marginal increases upon existing costs, 
rather than entirely new burdens. Further, the Commission notes that it 
is difficult to ascertain an estimate of the average cost to market 
participants, as, depending on its size and complexity, a market 
participant could comply with position limits using anything from an 
Excel spreadsheet to multiple transaction capture systems.
    The Commission is increasing its estimates to respond to the 
commenter. For swaps market participants unused to speculative position 
limits on swaps contracts, the Commission continues to estimate a 
greater cost to start and continue monitoring for and complying with 
speculative position limits.
    Specifically, the Commission estimates that 441 entities would 
incur annualized start-up costs across all affected entities of 
$47,800,000. The

[[Page 96893]]

Commission also estimates that 441 entities would incur ongoing 
operating and maintenance costs of $12,075,000 across all affected 
entities. The Commission invites comments on its estimates. Table IV-B-
2 breaks down the start-up and annual operating and maintenance costs 
by affected entities.

                                     Table IV-B-2--Breakdown of Start-Up and Annual Operating and Maintenance Costs
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                              Average
                                                                               Total          Average      Total annual       annual           Total
                                                           Total number     annualized      annualized      operating &    (operating &     annualized
                                                          of respondents  capital/start-  capital/start-    maintenance     maintenance   cost requested
                                                                             up costs        up costs          costs          costs)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Sec.  Sec.   19 and 150--Futures & Swaps Participants...             425      42,500,000         100,000      10,625,000          25,000      53,125,000
Sec.  Sec.   19 and 150--Swaps Only Participants........              10       5,000,000         500,000       1,000,000         100,000       6,000,000
Sec.   150--Exchanges...................................               6         300,000          50,000         450,000          75,000         750,000
                                                         -----------------------------------------------------------------------------------------------
    Total...............................................  ..............      47,800,000  ..............      12,075,000  ..............      59,875,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

5. Request for Comment
    The Commission invites the public and other Federal agencies to 
comment on any aspect of the reproposed information collection 
requirements discussed above. The Commission will consider public 
comments on this reproposed collection of information in:
    (1) Evaluating whether the reproposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information will have a practical 
use;
    (2) evaluating the accuracy of the estimated burden of the 
reproposed collection of information, including the degree to which the 
methodology and the assumptions that the Commission employed were 
valid;
    (3) enhancing the quality, utility, and clarity of the information 
proposed to be collected; and
    (4) minimizing the burden of the reproposed information collection 
requirements on registered entities, including through the use of 
appropriate automated, electronic, mechanical, or other technological 
information collection techniques, e.g., permitting electronic 
submission of responses.
    Copies of the submission from the Commission to OMB are available 
from the CFTC Clearance Officer, 1155 21st Street NW., Washington, DC 
20581, (202) 418-5160 or from http://RegInfo.gov. Organizations and 
individuals desiring to submit comments on the reproposed information 
collection requirements should send those comments to:
     The Office of Information and Regulatory Affairs, Office 
of Management and Budget, Room 10235, New Executive Office Building, 
Washington, DC 20503, Attn: Desk Officer of the Commodity Futures 
Trading Commission;
     (202) 395-6566 (fax); or
     [email protected] (email).
    Please provide the Commission with a copy of submitted comments so 
that all comments can be summarized and addressed in the final 
rulemaking, and please refer to the ADDRESSES section of this 
rulemaking for instructions on submitting comments to the Commission. 
OMB is required to make a decision concerning the proposed information 
collection requirements between 30 and 60 days after publication of 
this Release in the Federal Register. Therefore, a comment to OMB is 
best assured of receiving full consideration if OMB receives it within 
30 calendar days of publication of this Release. Nothing in the 
foregoing affects the deadline enumerated above for public comment to 
the Commission on the Reproposal.

C. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') requires that 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.\1470\ 
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).\1471\ The 
requirements related to the proposed amendments fall mainly on 
registered entities, exchanges, FCMs, swap dealers, clearing members, 
foreign brokers, and large traders. The Commission has previously 
determined that registered DCMs, FCMs, swap dealers, major swap 
participants, eligible contract participants, SEFs, clearing members, 
foreign brokers and large traders are not small entities for purposes 
of the RFA.\1472\
---------------------------------------------------------------------------

    \1470\ 44 U.S.C. 601 et seq.
    \1471\ 5 U.S.C. 601(2), 603-05.
    \1472\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618-19, Apr. 30, 1982 (DCMs, FCMs, and large traders) (``RFA 
Small Entities Definitions''); Opting Out of Segregation, 66 FR 
20740-43, Apr. 25, 2001 (eligible contract participants); 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, Jun. 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, (swap dealers and major swap participants); and 
Special Calls, 72 FR 50209, Aug. 31, 2007 (foreign brokers).
---------------------------------------------------------------------------

    One commenter, the NFP Electric Entities,\1473\ stated that the 
Commission ``ignore[d] its responsibilities under the RFA'' because it 
did not account for the impact on the members of the trade 
associations. The commenter states that the rules impose costs on 
``small entities'' that ``should not be swept up in the Commission's 
new speculative position limits.'' \1474\ The Commission notes, 
however, that under the Between NFP Electrics Exemptive Order certain 
delineated non-financial energy transactions between certain 
specifically defined entities were exempted, pursuant to CEA sections 
4(c)(1) and 4(c)(6), from all requirements of the CEA and Commission 
regulations issued thereunder, subject to certain anti-fraud, anti-
manipulation, and record inspection conditions.\1475\ All entities

[[Page 96894]]

that meet the requirements for the exemption provided by the Federal 
Power Act 201(f) Order are, therefore, already exempt from position 
limits compliance for all transactions that meet the Order's 
conditions.
---------------------------------------------------------------------------

    \1473\ The NFP Electric Entities is a group of trade 
associations related to electricity entities comprised of the 
National Rural Electric Cooperative Association, the American Public 
Power Association, and the Large Public Power Council, with the 
support of ACES and The Energy Authority.
    \1474\ See CL-NFP-59690 at 26-27.
    \1475\ See the Between NFP Electrics Exemptive Order (Order 
Exempting, Pursuant to Authority of the Commodity Exchange Act, 
Certain Transactions Between Entities Described in the Federal Power 
Act, and Other Electric Cooperatives, 78 FR 19670 (Apr. 2, 2013) 
(``Federal Power Act 201(f) Order''). See also CL-NFP-59690 at 14-
15. The Federal Power Act 201(f) Order exempted all ``Exempt Non-
Financial Energy Transactions'' (as defined in the Federal Power Act 
201(f) Order) that are entered into solely between ``Exempt 
Entities'' (also as defined in the Federal Power Act 201(f) Order, 
namely ``any electric facility or utility that is wholly owned by a 
government entity as described in the Federal Power Act (`FPA') 
section 201(f) . . .; (ii) any electric facility or utility that is 
wholly owned by an Indian tribe recognized by the U.S. government 
pursuant to section 104 of the Act of November 2, 1994 . . .; (iii) 
any electric facility or utility that is wholly owned by a 
cooperative, regardless of such cooperative's status pursuant to FPA 
section 201(f), so long as the cooperative is treated as such under 
Internal Revenue Code section 501(c)(12) or 1381(a)(2)(C), . . . and 
exists for the primary purpose of providing electric energy service 
to its member/owner customers at cost; or (iv) any other entity that 
is wholly owned, directly or indirectly, by any one or more of the 
foregoing.''). See Federal Power Act 201(f) Order at 19688.
---------------------------------------------------------------------------

    Further, while the requirements under this rulemaking may impact 
non-financial end users, the Commission notes that position limits 
levels apply only to large traders. Accordingly, the Chairman, on 
behalf of the Commission, hereby certifies, on behalf of the 
Commission, 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. The Chairman made the same 
certification in the December 2013 Position Limits Proposal \1476\ and 
the 2016 Supplemental Position Limits Proposal.\1477\
---------------------------------------------------------------------------

    \1476\ See December 2013 Position Limits Proposal, 78 FR at 
75784.
    \1477\ See 2016 Supplemental Position Limits Proposal, 81 FR at 
38499.
---------------------------------------------------------------------------

V. Appendices

A. Appendix A--Review of Economic Studies \1478\
---------------------------------------------------------------------------

    \1478\ Earlier this year, a draft literature review written by 
staff was released prematurely. Although there are similarities 
between the analysis in that document and the analysis herein, that 
document did not represent the final views of the Commission or the 
Office of the Chief Economist.
---------------------------------------------------------------------------

Introduction
    There are various statistical techniques for testing various 
hypotheses about position limits and related matter. Many of these 
techniques are deployed to determine whether speculative positions 
influence price, price changes, or volatility. The Commission has 
engaged in a comprehensive review and analysis of the various economic 
studies and papers in the administrative record.
    These economic studies bearing on the proposed rule arrived in the 
administrative record in various ways. They include studies cited in 
the Commission's notice of proposed rulemaking; studies substantially 
relied upon in comment letters; and studies mentioned in a list 
submitted by commenter Markus Henn (``Henn Letter'').\1479\ Those 
studies that were submitted formally for the record receive focused 
discussion in Section IV below.
---------------------------------------------------------------------------

    \1479\ February 10, 2014, comment letter by Markus Henn of World 
Economic, Ecology & Development, including an attachment, a November 
26, 2013 list entitled ``Evidence on the Negative Impact of 
Commodity Speculation by Academics, Analysis and Public 
Institutions.'' See http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59628&SearchText=henn. As noted, of the various 
economic studies and papers in the administrative record, some were 
cited in the December 2013 Position Limits Proposal. Others were 
substantially relied upon in comment letters or mentioned in a list 
submitted by commenter Markus Henn (CL-WEED-59628); these studies 
are available in the comment letter file through the Commission's 
Web site at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=1708.
---------------------------------------------------------------------------

    As a group, these studies do not show a consensus in favor of or 
against position limits. Many studies limited themselves to subsidiary 
questions and did not direct address the desirability or utility of 
position limits themselves. The quality of the studies varies. Some 
studies are written by esteemed economists and published in academic, 
peer-reviewed journals. For other studies, that is not the case. Those 
studies that did at least touch on position limits had disparate 
conclusions on the ability economists to use market fundamentals to 
explain commodity prices; the existence of ``excessive speculation'' in 
various futures markets; and the utility of position limits. Section 
4a(a)(1) of the CEA provides for position limits as a means to address 
certain specified burdens on interstate commerce. Studies that dispute 
the utility of position limits for the purposes Congress identified are 
less helpful than studies addressing other questions.
Preliminary Matters
1. Defining ``Speculation'' and Use of Proxies To Measure Speculation
    It can be difficult to distinguish between ordinary speculation 
that is permitted and desirable, because it facilitates the transfer of 
risk and provides liquidity for hedgers, and harmful or ``excessive'' 
speculation. Ideally, speculation may better align prices with market 
fundamentals.\1480\ Speculators in the commodity futures market can 
generally enhance liquidity and reduce a hedger's cost associated with 
searching for a counterparty who wants to take an opposition position. 
Speculators facilitate the needs of hedgers to transfer price risk and 
increase overall trading volume, all of which can generally contribute 
to the well-being of a marketplace.\1481\
---------------------------------------------------------------------------

    \1480\ Speculation is a natural market phenomenon in a market 
with differing investor expectations. Harrison and Kreps, 
Speculative Investor Behavior in a Stock Market with Heterogeneous 
Expectations, Quarterly Journal of Economics (Oxford University 
Press 1978).
    \1481\ Bahattin B[uuml]y[uuml]k[scedil]ahin and Jeffrey H. 
Harris, The Role of Speculators in the Crude Oil Futures Market 
(working paper 2009).
---------------------------------------------------------------------------

    Congress has found ``excessive speculation'' in futures contracts 
to be ``an undue and unnecessary burden on interstate commerce.'' 
\1482\ In accordance with that finding, Congress has provided for 
position limits in order to ``diminish, eliminate, or prevent such 
burden.'' This paper evaluates economic studies concerning how position 
limits can diminish unreasonable price fluctuations and changes.
---------------------------------------------------------------------------

    \1482\ 7 U.S.C. 6a(a)(1).
---------------------------------------------------------------------------

a.''Excess Speculation'' and Volatility
    Although volatility may be an indicator of excess speculation, as 
Congress has determined, price volatility, in itself, does not 
establish ``excess speculation.'' \1483\ Changes in fundamentals of 
supply and demand can create substantial volatility, and some 
commodities are, based on their nature, more prone to price volatility. 
Changes in these fundamentals may induce disagreement between market 
participants on the appropriate price, causing some measure of price 
volatility, but this does not necessarily imply the existence of excess 
speculation.
---------------------------------------------------------------------------

    \1483\ Id.
---------------------------------------------------------------------------

    One of the main functions of the swaps and futures markets is to 
permit parties with structural exposure to price risk (hedgers such as 
buyers or sellers of commodity-related products) to manage price 
changes or price volatility by transferring price risk to others. 
Speculators in these markets often, in effect, shield hedgers from some 
forms of price volatility by accepting this price risk. The nation's 
futures and swaps markets helps producers and suppliers of these 
commodities, and the customers they serve, hedge price risk to avoid 
price uncertainty when desired. In this way, volatility and speculation 
are not per se unwelcome phenomena in these markets. They are natural 
events in these markets. It is the nature of markets to 
fluctuate.\1484\
---------------------------------------------------------------------------

    \1484\ What may be ``natural'' volatility in one commodity 
futures market may be unexpected in another. Some critics of the 
proposed rule emphasize that different commodity markets behave 
differently, and that not all of the commodity markets referenced in 
the rule are likely to behave as the crude oil markets did in the 
2006-2009 time period. On the other hand, some economic studies 
suggest there can be ``spillovers'' or transmission of volatility 
from one commodity market to the next. See, e.g., Du, Yu, and Hayes, 
Speculation and Volatility Spillover in the Crude Oil and 
Agricultural Commodity Markets: A Bayesian Analysis, Energy 
Economics (2012).

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

[[Page 96895]]

    Just as volatility is not a per se harmful or unexpected event in 
the commodity futures markets, speculation in those markets is welcome 
and will often actually reduce volatility. A well-reasoned 2009 
economic study (by economists who were then CFTC employees) concluded 
that speculative trading in the futures market is not, in and of 
itself, destabilizing.\1485\ This frequently cited study concludes that 
normal speculative trading activity actually reduces volatility levels, 
as a general rule, while acknowledging that there are limited empirical 
studies on the subject. ``The limited nature of the previous literature 
on the market impact of speculators can be attributed to the difficulty 
of obtaining data on their trading activities.'' \1486\ There is, 
however, substantial theoretical literature that predicts that 
profitable speculation has a stabilizing effect, ``since speculators 
buy when the price is low, therefore, increasing depressed prices, and 
sell when the price is high, therefore, decreasing inflated prices.'' 
\1487\
---------------------------------------------------------------------------

    \1485\ Brunetti and B[uuml]y[uuml]k[scedil]ahin, Is Speculation 
Destabilizing? (working paper 2009). The Commission cited this study 
in particular in its December 2013 Position Limits Proposal. In 
addition, a copy of this economic study was formally submitted by 
the CME Group, Inc., as part of the administrative record in a March 
28, 2011 comment.
    \1486\ Id. at 3.
    \1487\ Id. at 5.
---------------------------------------------------------------------------

    Some economic studies attempt to distinguish between normal and 
helpful speculative activity and excessive speculation: between normal 
volatility and, in the words of the Commodity Exchange Act, 
``unreasonable fluctuations'' in price.\1488\ Part of the research task 
before any economist studying markets for excessive speculation is to 
model and interpret excessive speculation and unwanted volatility so as 
to distinguish between unwanted phenomena and the proper workings of a 
well-functioning market.
---------------------------------------------------------------------------

    \1488\ 7 U.S.C. 6a(a)(1).
---------------------------------------------------------------------------

b. Working's Speculative T Index
    While there is no well-established economic definition of ``excess 
speculation,'' many economists studying commodity futures marketplace 
have used a proxy for speculation in commodity futures marketplace 
known in the economic literature as the Working's speculative T index. 
Economist Holbrook Working devised in 1960 a ratio to measure the 
adequacy or excessiveness of speculation. As applied to commodity 
futures positions, the speculative T index is used to assess the amount 
of speculative positions in the marketplace beyond the amount of 
speculative positions necessary to provide liquidity for hedgers in the 
marketplace.\1489\
---------------------------------------------------------------------------

    \1489\ See Bahattin B[uuml]y[uuml]k[scedil]ahin and Jeffrey H. 
Harris, The Role of Speculators in the Crude Oil Futures Market, at 
9 n.7, 10-11 & 24 (working paper 2009) (employing this technique).
[GRAPHIC] [TIFF OMITTED] TP30DE16.000

It is calculated by computing the ratio of long and short positions for 
all trades in the commodity market, including those of hedgers and 
those of speculators.\1490\ A high ratio indicates many speculators are 
holding commodity futures positions. When this speculative T-index is 
included as an economic variable in economist's models to explain 
prices, economists may interpret the T index to be a proxy for the 
relative amount of speculation in the marketplace.
---------------------------------------------------------------------------

    \1490\ The Working speculative index is ``predicated on the fact 
that long and short hedgers do not always trade simultaneously or in 
the same quantity, so that speculators fill the role of satisfying 
unmet hedging demand in the marketplace. Id. at 1.
---------------------------------------------------------------------------

    A high Working T index is one way to quantify excess speculation in 
technical terms, but even then that may not translate into excessive 
speculation in ``economic terms.''\1491\ Additional economic analysis 
or historical comparisons are useful to understand the meaning and 
impact of a relatively high number of speculators in a market 
place.\1492\
---------------------------------------------------------------------------

    \1491\ Id. at 10.
    \1492\ See id. at 9-10 (a speculative index of 1.41 for crude 
oil futures contracts in 2008 meant that share of speculation beyond 
what was minimally necessary to meeting short and long hedging 
needs, was 41 percent: while such a percentage may seem on its face 
``potentially alarming,'' it is comparable historically with 
agricultural commodity markets).
---------------------------------------------------------------------------

c. Absence of Consensus on ``Price Bubbles''
    There are several published studies on the effect of speculation on 
prices and price volatility, as well as studies on speculation 
generally. These studies employ various statistical methodologies. Some 
of these find the existence of ``price bubbles,'' meaning somehow 
artificially high prices that last longer than they should. These 
studies are analyzed below, but there is no academic consensus on what 
a ``price bubble'' is and how it can be detected. Thus many of the 
interpretations set forth in the ``price bubble'' studies are not the 
only plausible explanation for their statistical findings.
    As further detailed below, there is no broad academic consensus on 
the economic definition of ``excess speculation'' or ``price bubble'' 
in commodity futures markets. There is also no broad academic consensus 
on the best statistical model to test for the existence of excess 
speculation. There is open skepticism in many economic quarters that 
there can even exist a significant ``price bubble'' in commodity 
futures markets.\1493\
---------------------------------------------------------------------------

    \1493\ Dwight R. Sanders & Scott H. Irwin, A speculative bubble 
in commodity futures prices? Cross-sectional evidence, 41 
Agricultural Economics 25-32 (2010) (arguing that while ``bubble'' 
explanations ``are deceptively appealing, they do not generally 
withstand close examination''). Because commodity index fund buying 
is very predictable, it seems highly unlikely that in ordinary 
market environment traders would fail to trade against an index fund 
if the fund were driving prices away from fundamental values.
---------------------------------------------------------------------------

    A large measure of the difficulty stems from the difficulties of 
second-guessing the market's determination of the price of a commodity 
contract:

    Experts may express opinions about what the fundamental price 
should be, given current supply and demand conditions, but

[[Page 96896]]

a basic axiom of classical economics is that free markets do a 
better job of weighing information and determining prices that any 
group of experts.\1494\
---------------------------------------------------------------------------

    \1494\ D. Andrew Austin & Mark Jickling, Hedge Fund Speculation 
and Oil Prices (1 ed. 2011).

Nonetheless, there are statistical techniques, and theoretical models, 
that economists have employed to attempt to discern whether recent 
behavior in the nation's commodity futures markets has deviated from 
what can be reasonably ascribed to the fundamentals of supply and 
demand.
d. The Project: Studying Whether Speculative Positions Causing 
Unwarranted Price Moves
    In order to test for the presence of ``excessive'' speculation, 
many of these economic studies look to whether the existence of 
substantial positions by speculative traders causes price volatility or 
a semi-permanent change in price. The idea underlying these studies is 
that if the presence of sufficiently large positions can induce such 
price behavior, it is ``excessive.'' Economists use various statistical 
tools, including correlation analysis, to determine whether there is 
price behavior caused by speculative positions that is ``unwarranted.'' 
``Unwarranted'' price movements are those not associated with 
fundamentals of supply and demand, the inherent volatility of market 
prices, or other factors independent of position.
    In these studies, economists discuss whether positions have caused 
movements in price. Technically, economists will study ``price 
returns'' for a class of commodity, rather than just ``price'' (the 
nominal price level). Price return gives one the change in price over 
time, divided by price.\1495\
---------------------------------------------------------------------------

    \1495\ P is price and t is a particular time, with t+1 being the 
point in time that is one fixed increment away over which the return 
is being computed.
[GRAPHIC] [TIFF OMITTED] TP30DE16.040

Price return measures price changes over the scale of the underlying 
price. That is, different commodities may have entirely different 
scales for prices; by dividing by the underlying price, price returns 
put different commodity classes on the same percentage scale for 
comparison purposes.
    The conclusions of these various economic analyses, discussed in 
detail in Section III below, have achieved a reasonable measure of 
academic consensus on some subsidiary matters bearing on the ultimate 
question of whether excessive speculation has had an impact on the 
commodity futures markets. However, there is no academic consensus on 
the ultimate question of the extent and breadth of the impact, and 
there is no singular economic study of compelling persuasiveness.
2. Dearth of Compelling Empirical Studies on the Effect of Position 
Limits on Prices or Price Volatility
    There are not many compelling, peer-reviewed economic studies 
engaging in quantitative, empirical analysis of the impact of position 
limits on prices or price volatility, and thus on whether position 
limits are useful in curbing excessive speculation.\1496\ The 
limitations that inhere in empirical analysis of this complex question 
are set forth below.
---------------------------------------------------------------------------

    \1496\ As noted above, however, CEA section 4a(a) reflects the 
underlying assumption that position limits may be useful for that 
purpose.
---------------------------------------------------------------------------

a. Trader Identity and Role: Incomplete Data
    As many economic researchers observe in their studies, there is no 
decisive accounting on whether a particular trade or set of trades is 
speculative or hedging. In practice, researchers often use a rough 
proxy based on the nature of the trader: Whether they are commercial or 
non-commercial. However, in both practice and theory, this proxy may 
fail: Commercial traders may speculate and non-commercial traders may 
well hedge. For example, a commercial trader might speculate and take 
an outsize position, in the sense that it exceeds a given hedging 
business need, in a commodity on the belief that the price will go up 
and down. Thus ``traders sometimes may be misclassified between 
commercial and noncommercial positions, and some traders classified as 
commercial may have speculative motives.'' \1497\
---------------------------------------------------------------------------

    \1497\ International Monetary Fund, IMF Global Financial 
Stability Report: Financial Stress and Deleveraging: Macrofinancial 
Implications and Policy (Oct. 2008).
---------------------------------------------------------------------------

    Further compounding these classification problems, the publicly 
available data also aggregates traders' positions across maturity dates 
for futures contracts, while the price for any given commodity futures 
contract is not aggregated by maturity.\1498\ In addition, section 8 of 
the Commodity Exchange Act limits the distribution of detailed trade 
positon data to academic researchers. The identity of individual 
traders for specific trades, and their position in the market at the 
time of name, is not disseminated publicly to economic 
researchers.\1499\ Thus, even when a position limit breach occurs, it 
is difficult to measure the impact on individual participants in the 
marketplace.
---------------------------------------------------------------------------

    \1498\ Id.
    \1499\ Julien Chevallier, Price relationships in crude oil 
futures: new evidence from CFTC disaggregated data, 15 Environmental 
Economics and Policy Studies 135 (2012).
---------------------------------------------------------------------------

    Even when an economic researcher can find detailed information on 
specific trades and the nature of the traders, that might not be 
sufficient to characterize an individual trade as hedging or 
speculative. A market participant may have business needs it hedges 
with derivatives and also engage in speculative trading. Thus the 
identity of the market participant purchasing the commodity futures 
contracts alone does not accurately capture the motivation for or 
purpose of the trade. Thus, an economic researcher faces significant 
data constraints in reliably characterizing trades as speculative or 
hedging, making it difficult to determine whether position limits are 
useful in curbing certain speculative activity.
b. Limitations on Studying Markets With Pre-Existing Position Limits
    Designing an economic study of the effect of position limits is 
complicated by the fact that for many commodity markets, position 
limits are already in place. There is therefore not reliable empirical 
data for how certain modern commodity futures markets would operate in 
the absence of position limits. For all the agricultural commodities 
referenced in the rule, the futures markets have already had in place 
spot-month position limits at least as strict as those proposed in the 
rule. For energy commodities such as crude oil, there have been pre-
existing ``accountability levels,'' meaning an exchange has the option 
(but not the requirement) to ask a trader to reduce its position if it 
exceeds a certain level. For crude oil, the current all-months-combined 
accountability level is 20,000 contracts. The position limit in the 
proposed rule for the all-months-combined limit is 109,200 contracts.
    The existence of binding position limits in agricultural 
commodities and accountability levels in the energy markets does not 
mean that traders do not transgress these limits in current markets and 
take outsized market positions for speculative reasons. But the 
existence of current limits does make the economist's task of measuring 
position limit impact more difficult. When an economist studies an 
agricultural futures market and attempts to assess the economic 
advantages and disadvantages of imposing position limits, he or she 
does not have a dataset of market prices in a marketplace

[[Page 96897]]

without position limits. Thus economists are dependent upon economic 
models and model interpretation when they attempt to describe how a 
marketplace without position limits would function. Many economic 
studies do not account in their models for pre-existing position limits 
or accountability levels. In fact, many economic studies that bear on 
the rulemaking do not endeavor to reach the ultimate question of the 
impact of position limits on prices and market dynamics at all.
    There may be fewer instances of dramatic, large-scale ``excessive 
speculation'' because position limits have been in place in many of 
these commodity futures markets since 1938. There have thus been few 
opportunities to study the effect of the imposition of a position 
limits rule.\1500\
---------------------------------------------------------------------------

    \1500\ CFTC, A Study of the Silver Market, Report To The 
Congress In Response To Section 21 Of The Commodity Exchange Act, 
Part Two, 123 (May 19, 1981) (observing that the imposition of a 
position limit in silver futures contracts by the Chicago Board of 
Trade in 1979 did not raise prices); id. at 123-24 (observing that 
price reaction to position limits involves a variety of factors and 
``it is not possible to predict in advance the effect of imposition 
of position limits'').
---------------------------------------------------------------------------

c. Inherent Difficulties of Modelling Complex Economic Phenomena
    There is no singularly persuasive study, because these studies use 
economic models that are, by nature, simplifications of a complex 
reality. Each of the various models and statistical methods used in 
these diverse studies has advantages and disadvantages, but they deploy 
imperfect market data to answer ambitious and complex economic 
questions. Given the data and modeling limitations, it is unreasonable 
to expect an economic model that is fulsome (extending to position 
limits and market speculation), accurate (accommodating and reflecting 
economic history), and predictive. This is particularly true in the 
context of market data involving volatile and complex events.
    Some studies are better-designed and better-executed than others, 
which means that they used defensible models with transparent source 
data. These are discussed throughout this review. Much of the analysis 
below highlights the flexibility of model design choices and the 
sensitivity of the results to these modelling choices.
3. Staff-Level Congressional Determinations
    There have been findings by policymakers that excessive speculation 
exists in various commodity futures markets, as the Commission observed 
in its notice of proposed rulemaking. For example, the Staff of the 
Permanent Subcommittee on Investigations of the Homeland Security and 
Government Affairs found \1501\ that excessive speculation has had 
``undue'' influence on wheat price movements,\1502\ the natural gas 
market,\1503\ and oil prices.\1504\ Congress itself found ``excessive 
speculation'' in futures contracts to be ``an undue and unnecessary 
burden on interstate commerce.'' \1505\
---------------------------------------------------------------------------

    \1501\ See Analysis, Section III(B), infra (discussing an 
economic analysis of these reports).
    \1502\ Permanent Subcomm. on Investigations of the U.S. Senate, 
Comm. on Homeland Sec. & Governmental Affairs, Excessive Speculation 
in the Wheat Market, (2009), available at http://hsgac.senate.gov/public/_files/REPORTExcessiveSpecullationintheWheatMarketwoexhibitschartsJune2409.pdf.
    \1503\ Permanent Subcomm. on Investigations of the U.S. Senate, 
Comm. on Homeland Sec. & Governmental Affairs, Excessive Speculation 
in the Natural Gas Market, (2007), available at http://www.hsgac.senate.gov//imo/media/doc/REPORTExcessiveSpeculationintheNaturalGasMarket.pdf?attempt=2.
    \1504\ Permanent Subcomm. on Investigations of the U.S. Senate, 
Comm. on Homeland Sec. & Governmental Affairs, The Role of Market 
Speculation in Rising Oil and Gas Prices: A Need to Put the Cop Back 
on the Beat, at 19-32 (2006) available at http://www.hsgac.senate.gov//imo/media/doc/REPORTExcessiveSpeculationintheNaturalGasMarket.pdf?attempt=2 
(finding increased speculation in energy commodities and an effect 
of speculation on prices).
    \1505\ 7 U.S.C. 6a(a)(1).
---------------------------------------------------------------------------

    These studies, like all the studies analyzed here, were undertaken 
in an absence of definitive economic definitions and tests for 
excessive speculation; limitations on data quality and availability; 
and the inherent difficulty of modelling complex phenomena.

Discussion

1. Empirical Studies: Economic Studies with Statistical Analysis 
Bearing on Speculative Positions in the Commodity Markets or 
Speculation Generally
    Economic studies presented in the context of this rulemaking may 
involve theoretical models; statistical analysis based upon market 
data; and, most commonly, a combination of both. The economic studies 
using statistical methods can be categorized into basic statistical 
methods, such as models of fundamental supply and demand (and related 
methods), Granger causality, or other methods. The economic studies 
presented or cited in the comment letters in this rulemaking are best 
grouped and analyzed by the statistical method they employ, for there 
are advantages and disadvantages particular to each statistical method.
    This discussion evaluates 244 papers in connection with the 
position limits rule: 133 studies submitted as comments or mentioned in 
the December 2013 Position Limits Proposal; over 100 additional studies 
or articles listed in the Henn Letter; and ten additional studies 
submitted by commenters not included in the above sets.
    This group of 244 papers can be categorized below by statistical 
methodology: 36 Granger causality analyses; 25 comovement or 
cointegration analyses; 46 studies creating models of fundamental 
supply and demand; 8 switching regressions or similar analyses; 3 
studies using eigenvalue stability analysis; 26 papers presenting 
theoretical models; and 73 papers that were primarily surveys of the 
economic literature, perhaps with some aspect of empirical testing or 
analysis.\1506\
---------------------------------------------------------------------------

    \1506\ The remaining 27 papers fall into two groups. Two 
additional papers presented unique methodologies involving 
volatility are interwoven into the analysis below. The remaining 
twenty-five papers were not ultimately susceptible to meaningful 
economic analysis. These papers included pure opinion pieces, 
studies written in foreign languages, press releases, background 
documents on basic points of economics or law, studies unavailable 
due to broken hyperlinks that could not be resolved, or studies 
founded on methodologies too suspect to warrant extensive 
discussion. In the latter category, for example, was an unpublished 
study purported to use a ``novel source of information''--Google 
metrics involving user searches--as a proxy for the demand 
associated with ``corn price dynamics.'' Massimo Peri, Daniela 
Vandone & Lucia Baldi, Internet, noise trading and commodity futures 
prices, 33 International Review of Economics & Finance 82-89 (2014) 
(cited by Henn Letter). See also, Letter from Markus Henn, World 
Economic, Ecology & Development, to CFTC (Feb. 10, 2014). See also, 
Markus Henn, Evidence on the Negative Impact of Commodity 
Speculation by Academics, Analysis and Public Institutions, (Nov. 
26, 2013).
---------------------------------------------------------------------------

a. Granger ``Causality''
i. Overview of the Granger Method
    Below is a discussion of the 36 analyses employing the ``Granger'' 
or ``Granger causality'' method of statistical analysis. This 
discussion includes a description of the method and its advantages and 
disadvantages.
    The Granger method seeks to find whether a linear correlation 
exists between two sets of data that are known as ``time series.'' An 
example of a time series would be a pair of numbers constituting future 
prices and time, with the time between the different future prices 
being a fixed amount of time. This fixed time is known as the ``time 
step.'' The Granger method takes two time series, such as Series A 
(futures price returns, each for a different time, for a fixed time 
step) and Series B

[[Page 96898]]

(changes in speculative positions over the same time step). It then 
seeks to determine whether there is a linear correlation between Series 
A and Series B. This is done by using position data that is lagged over 
time.
    For example, for the time of 12:00 p.m. and the price of $20 for a 
May cotton futures contract, the researcher using Granger ``causality'' 
would associate a position in May cotton futures from a set time prior 
to 12:00 p.m. If the time step were one minute, that time would be 
11:59 a.m. The researcher performs a regression analysis on these two 
time series (price and time on the one side of the equation, and 
position and lagged time on the other). They estimate the correlation 
(technically, they look at the coefficient of the regression) through 
this analysis to come to a conclusion of whether, over that minute-
interval, it can be said that there is a linear correlation between 
futures prices and positions.
    While the Granger test is referred to as the ``Granger causality 
test,'' it is important to note that, notwithstanding this shorthand, 
``Granger causality'' does not establish an actual cause-and-effect 
relationship. What the Granger method gives as a result is evidence of 
the existence of a linear correlation between the two time series or a 
lack thereof.
    Moreover, the Granger method only tests for linear correlations. It 
cannot exclude causation associated with other statistical 
relationships.
    The persuasiveness of a Granger study often turns on the soundness 
of the modelling choices, as discussed further in subsection 3 
below.\1507\
---------------------------------------------------------------------------

    \1507\ See generally Grosche, Limitations of Granger Causality 
Analysis To Assess the Price Effects From the Financialization of 
Agricultural Commodity Markets Under Bounded Rationality, at 2-5 
(Agricultural and Resource Economics 2012).
---------------------------------------------------------------------------

ii. Advantages of the Granger Method
    At the highest level, the Granger method is based on well-
credentialed statistical methodology. It has been used for several 
decades by economists and its properties are well-established and well-
debated in the economic literature. In that sense, unlike some of the 
other methods employed in this context, it has stood the test of time. 
It has been deployed in macroeconomics and financial economics.
    The Granger test has several advantages. It is auditable in the 
sense that it can be fully replicated by a third party. The method is 
relatively simple to apply. It need not depend on complex mathematics. 
The method's straightforward approach permits a great deal of 
transparency in analyzing both inputs and results. Although the results 
can be highly sensitive to modelling choices, the modelling choices are 
made explicitly. That is, the equations that are used for the linear 
regression can easily be viewed together with the definitions for the 
variables.
iii. Disadvantages of the Granger Method
    Not all statistical methods apply well to all situations. In the 
particular context of speculation and positions limits, application of 
the Granger methodology has some disadvantages and causes for concern. 
While the statistical answers are, by their nature, fairly precise, the 
drafting of the question and the economic interpretation of the results 
can cause problems. This limitation of the Granger method of course is 
shared with some other statistical methods. However, we discuss below 
why this is particularly true of Granger in the context of these 
studies on speculation and prices. Many of the potential problems in 
these studies do not so inhere so much in the method itself as in the 
modelling choices, other operational choices such as the length of time 
step and time lag, and the interpretation of the results.\1508\ Below, 
we analyze why this is so.
---------------------------------------------------------------------------

    \1508\ See, e.g., Grosche, Limitations of Granger Causality 
Analysis To Assess the Price Effects From the Financialization of 
Agricultural Commodity Markets Under Bounded Rationality 
(Agricultural and Resource Economics 2012); Williams, Dodging Dodd-
Frank: Excessive Speculation, Commodities Markets, and the Burden of 
Proof, Law & Policy Journal of the University of Denver (2015).
---------------------------------------------------------------------------

    First, the typical application of the Granger method in the studies 
review assumes a linear relation between the variables of interest: For 
example, prices and positions. The technique is useful for describing 
statistical patterns in data among variables ordered in time. But 
Granger does not claim to discuss simultaneous events. It is a 
statistical test which, in rough terms, says that if event A typically 
precedes event B, then event A ``Granger-causes'' event B. Granger is a 
statistical method for analyzing data for correlations, and ``Granger 
causation'' is not ``causation'' per se. It does not illustrate the 
method and means of actual causation nor does it claim to establish 
actual causation in reality.
    For example, the Granger method cannot explain what causal 
mechanism links two events, events A and B, and a Granger model cannot 
detect all real-world causation. For example, an individual Granger 
model cannot conclude whether there is a relation between event A and 
event B that is ``hidden'' because the time step chosen is so long that 
the events look to occur simultaneously over the observed interval (be 
it a day or a week).
    A second disadvantage concerns the sensitivity of the test to the 
time period studied. Especially in the context of the Granger method, 
the selection of the particular time internal is important to obtain 
the most useful results: Selection of too large a time period may hide 
correlations. Some of the position studies use daily price data, while 
others use weekly price data. When commodity prices are quite volatile, 
and positions are more gradual in changes, daily time steps may have 
greater unexplained variation in the commodity prices than when the 
time series for price data is constructed based on weekly sampling. A 
study by International Monetary Fund economists, using weekly data, 
observed that this time interval ``may hamper the identification of 
very short-run effects, given that the transmission from positions to 
prices may happen at higher frequency. Indeed, some market participants 
anecdotally suggest that there are short-run effects that may last only 
a matter of days.'' \1509\
---------------------------------------------------------------------------

    \1509\ Antoshin, Canetti, and Miyajima, IMF Global Financial 
Stability Report: Financial Stress and Deleveraging: Macrofinancial 
Implications and Policy, Annex 1.2, Financial Investment in 
Commodities Markets at p. 65 (October 2008) (footnote and citation 
omitted).
---------------------------------------------------------------------------

    Another potential problem is picking a time lag that is too short 
to detect possible market phenomenon. ``[K]nowing whether price changes 
lead or lag position changes over short horizons (a few days) is of 
limited value for assessing the price pressure effects of flows into 
commodity derivatives markets.'' \1510\
---------------------------------------------------------------------------

    \1510\ Singleton, The 2008 Boom/Bust in Oil Prices, at 15 
(working paper March 23, 2011) (``Of more relevance is whether flows 
affect returns and risk premiums over weeks and months.'') (footnote 
omitted).
---------------------------------------------------------------------------

    In the statistical calculations underlying the Granger method, this 
greater volatility may lead to a larger denominator in what is called 
the ``t-statistic,'' and that will in turn lead to a lower t-statistic 
(in absolute value). The t-statistic is used in the Granger method to 
assess how well a variable, such as positions, explains another 
variable, such as commodity prices. In this way, the selection of the 
time interval can easily affect the strength of the Granger method 
result.
    A third disadvantage of Granger inheres in the selection of the 
time lag. A Granger analysis will not capture an effect that is delayed 
beyond the length of the time lag. And a Granger analysis with too long 
a time lag may not detect

[[Page 96899]]

price changes during periods of price volatility. The Granger technique 
does not guide the selection of the time lag. There are some heuristic 
techniques to help determine the time lag based on the ``goodness-of-
fit'' \1511\ of regressions, but these supplemental techniques may 
yield time lags that do not have a strong theoretical footing.\1512\
---------------------------------------------------------------------------

    \1511\ Roughly speaking, ``goodness-of-fit'' analyses examine 
how well the data fits the model. Using a goodness of fit criteria 
allows the data to select the number of lags that empirically fits 
the data the best.
    \1512\ See generally Williams, Dodging Dodd-Frank: Excessive 
Speculation, Commodities Markets, and the Burden of Proof, Law & 
Policy Journal of the University of Denver (2015) at 136-38 
(discussing problems associated with Granger test's assumptions and 
parameters).
---------------------------------------------------------------------------

    In such ways, and others, the authors of such study have wide 
license in modelling design. The results can be highly dependent upon 
and sensitive to model design choices. Key design decisions of 
seemingly little import, such as the selection of time steps, can in 
fact make a substantial difference in the study's result. While such 
flexibility can be useful, this flexibility also permits Granger 
results to be sensitive to modelling assumptions. Such sensitivity, 
especially in the particular context of the volatile commodity prices, 
is problematic. Volatility in commodity prices is a complex phenomenon, 
with possibly overlapping effects of short- and long-term volatility 
and many exogenous variables that can affect prices. In short, ``care 
must be taken not to overstate the interpretive power'' of Granger 
causality studies.\1513\
---------------------------------------------------------------------------

    \1513\ Id. at 138.
---------------------------------------------------------------------------

    Finally, the method cannot discern the true cause of something when 
event A and B occur almost simultaneously. Granger cannot say whether A 
caused B or whether C causes A and then C causes B with a brief time 
lag. In this way, Granger correlation analysis is fundamentally 
incapable of establishing a cause and effect relationship.
    There can also be limitations with regard to the data used in 
Granger studies on position limits, the majority of which used 
Commission data. There is a problem which inheres in this data in the 
particular context of position limit studies. The trade data used 
identifies the entity doing the trade as ``commercial'' or ``non-
commercial.'' The data does not identify whether a particular trade is 
a hedge or a speculative gamble.\1514\ While the studies' authors may 
infer that a trader's identity as a commercial trader is strongly 
associated with hedging (or at least non-speculative trades), in 
practice that may be far from the case.
---------------------------------------------------------------------------

    \1514\ There are other difficulties in the CFTC dataset that 
complicate empirical analysis of herding activity. See Acharya, 
Ramadorai, and Lochstoer, Limits to Arbitrage and Hedging: Evidence 
from the Commodity Markets, at 19 (Journal of Financial Economics 
2013).
---------------------------------------------------------------------------

    There is also the statistical concept of ``robustness,'' meaning 
roughly that the results of a study are not qualitatively different 
based on different applications (different data sets, different tweaks 
of assumptions). In several ways, application of the Granger method in 
this particular context offers grounds for caution for study authors 
seeking statistical robustness. First, for a given time step and 
commodity, the particular time interval chosen may affect the result. 
Second, a Granger method is, by its nature, very sensitive to which 
particular dataset is chosen. Once again, a study's author(s) have wide 
discretion in the selection of which datasets to study, and Granger 
methodology will be highly sensitive to this selection.
    There is the related problem of economic robustness. For example, 
because of individual market characteristics, a study limited to a 
particular commodity or time period may fail to detect patters that 
would be detectable applying the same method in to other time periods 
of commodities. Applying Granger analysis to commodity prices presents 
special challenges in this context because many commodity prices can be 
quite volatile, especially in the short-term. That is, the Granger 
method may have low ``statistical power'' in this context. In 
mathematical terms, high volatility in one of the Granger variables can 
lead to large standard errors for regression coefficients for the t-
statistic.\1515\
---------------------------------------------------------------------------

    \1515\ See Bahattin B[uuml]y[uuml]k[scedil]ahin and Jeffrey H. 
Harris, The Role of Speculators in the Crude Oil Futures Market 
(working paper 2009) (later published in The Energy Journal, Vol. 
32, No. 2, 167-202 (2011) under the title Do Speculators Drive Crude 
Oil Futures Prices?).
---------------------------------------------------------------------------

    A modelling choice to include other variables can further reduce 
the statistical power of the statistical test used in the Granger 
method.\1516\ Other economic variables in the regression analysis, if 
not properly chosen, can compromise the Granger ``causality'' test. For 
instance, explanatory variables may not be uncorrelated to the 
speculative position or position change variables. To the extent that 
the variables are correlated to speculative positions, they may, in the 
estimation of the regression, wash out the price effect. The t-
statistic of the regression coefficient remains small because the 
standard error estimate of the coefficient is large due to common 
correlation between explanatory variables.\1517\
---------------------------------------------------------------------------

    \1516\ These test statistics is a t-test for one lag in the 
relevant variable or an F-test for multiple lags.
    \1517\ This argument is also correct for F-tests (a 
multivariable extension of t-tests).
---------------------------------------------------------------------------

    Authors of Granger method studies may add ``control variables'' in 
order to reflect other factors that may be affecting or relevant to the 
two main variables of primary interest (such as price and position). 
The introduction of control variables will help to discount spurious 
corrections between the variables of primary interest by studying 
whether another variable could be correlated to (and thus ``Granger 
causing'') variables such as price and position. Adding extra variables 
can, on the one hand, affect for third factors which may be relevant. 
On the other hand, the introduction of the third factors may compromise 
the statistical power of the primary question of interest.
    Finally, there are also economic studies casting doubt on the 
suitability of commodities data for meaningful Granger tests, given 
volatility in commodities price data.\1518\ This is because volatility 
increases the standard error of the estimated coefficient for the 
lagged variable(s). Thus, Granger tests examining commodities data may 
lack statistical power to detect Granger causality.
---------------------------------------------------------------------------

    \1518\ David Frenk, Review of Irwin and Sanders 2010 OECD 
Report, at p. 6 (Better Markets June 20, 2010) and citations 
therein, cited in Henn Letter at 6-7.
---------------------------------------------------------------------------

iv. Comparison of Strengths and Weaknesses
    Granger techniques provide great flexibility. This flexibility also 
provides great license to economists on selection of critical factors 
such as the length of the time lag and the time step. The ultimate 
conclusions of such studies may be influenced by model design. 
Unsurprisingly, different economists reach different results. In this 
sense, the conclusions of Granger-based papers are vulnerable to 
criticism.
v. Analysis of Studies Reviewed That Use Granger Methodology
    Overall, when the Granger studies find a correlation (in the sense 
of a lead-lag relationship) between speculative positions and price 
returns, they do so not with respect to price returns as a whole, but 
the risk premium component of price returns. The risk premium is the 
portion of expected return of a futures contract associated with 
holding the contract. It is not an express term of the contract, but an 
amount that can be derived from economic analysis as the difference 
between the futures price return and a hypothesized price return

[[Page 96900]]

for a futures contract. The risk premium is the return required to bear 
the undiversifiable risk on the relevant side of a futures 
contract.\1519\
---------------------------------------------------------------------------

    \1519\ In theory, if the futures contract at expiration is a 
perfect substitute for the spot commodity, then the expiring futures 
price should converge to the spot price. It is important to note 
that many expiring futures contracts are imperfect substitutes for 
the spot commodity and this might prevent convergence. Moreover, the 
risk premium decreases to zero as the futures contract approaches 
expiration. Thus, the risk premium has no effect on the final 
convergence of the futures to the spot price at expiration of the 
futures contract, but could, in theory, impact the rate of 
convergence (although any impact may be negligible).
---------------------------------------------------------------------------

    There are also Granger studies that analyze speculative positions 
with respect to price returns as a whole or price volatility; these do 
not find a statistically significant correlation. Moreover, those 
studies that do find a lead-lag correlation using the Granger 
methodology in the risk premium context are limited to studies in 
particular markets in particular time frames: Studies using weekly, not 
daily, price data and analyzing crude oil and ethanol-related 
commodities (including wheat, which is an economic substitute for corn) 
during the 2007-2010 timeframe.
    There are 36 primarily Granger-based economic studies in the 
administrative record. For analysis purposes, these papers are grouped 
according to whether they discuss primarily crude oil or other energy 
derivatives (8 studies); the possible impact of commodity index funds 
across multiple commodities (13); and agricultural commodities (15).
Crude Oil and Other Energy Derivatives
    There was a substantial increase in crude oil prices through July 
2008, followed by a significant price collapse from July 2008 through 
March of 2009.\1520\ Several Granger analyses have looked at price 
returns and/or price volatility in the crude oil markets, or the energy 
markets generally, in the 2007-2009 timeframe.\1521\
---------------------------------------------------------------------------

    \1520\ Bahattin B[uuml]y[uuml]k[scedil]ahin and Jeffrey H. 
Harris, The Role of Speculators in the Crude Oil Futures Market at 2 
(working paper 2009).
    \1521\ See, e.g., Goyal and Tripathi, Regulation and Price 
Discovery: Oil Spot and Futures Markets (working paper 2012); Irwin 
and Sanders, Energy Futures Prices and Commodity Index Investment: 
New Evidence from Firm-Level Position Data (working paper 2014); 
Kaufmann and Ullman, Oil Prices, Speculation, and Fundamentals: 
Interpreting Causal Relations Among Spot and Futures Prices, Energy 
Economics, Vol. 31, Issue 4 (July 2009); Kaufman, The role of market 
fundamentals and speculation in recent price changes for crude oil, 
Energy Policy, Vol. 39, Issue 1 (January 2011); Mobert, Do 
Speculators Drive Crude Oil Prices? (2009 working paper); Sanders, 
Boris, and Manfredo, Hedgers, Funds, and Small Speculators in the 
Energy Futures Markets: An Analysis of the CFTC's Commitment of 
Traders Reports, Energy Economics (2004); Singleton, Investor Flows 
and the 2008 Boom/Bust in Oil Prices (working paper March 23, 2011) 
(published in final form in Management Science in 2013); Singleton, 
The 2008 Boom/Bust in Oil Prices (working paper May 17, 2010).
---------------------------------------------------------------------------

    Professor Kenneth Singleton found evidence that speculative 
positions Granger-caused risk premium on weekly time intervals during 
the 2007 to 2009 period when studying the crude oil futures 
markets.\1522\ Part of Singleton's results were replicated in part in a 
paper by Hamilton and Wu using a different methodology than Granger 
causality analysis.\1523\ Professor Singleton found a link between the 
volume of speculative positions and an increase in risk premium. 
Because risk premium is a component of price returns and hence price, 
he thus found a link--Granger causal link--between speculative 
positions and price. However, because risk premium is just a relatively 
small component of price, this study does not purport to explain 
entirely the large 2008 changes in crude oil prices.
---------------------------------------------------------------------------

    \1522\ Kenneth J. Singleton, Investor Flows and the 2008 Boom/
Bust in Oil Prices, SSRN Electronic Journal 15 (2011) 18. (Equation 
6, lagged correlation analysis that is, functionally, a Granger 
analysis).
    \1523\ Hamilton and Wu, Risk Premia in Crude Oil Futures Prices, 
Journal of International Money and Finance (2013) (replicating 
Singleton's result using a different methodology, a two-factor 
linear model of fundamental supply and demand).
---------------------------------------------------------------------------

    In the case of index funds, many funds take long positions. The 
presence of large index funds positions raises an issue of whether what 
economists would call this ``heterogeneity of views'' can affect 
marketplace health. Singleton presents, with his Granger-like analysis, 
a discussion of heterogeneity in this context. He conjectures--without 
supporting empirical analysis--that learning about economic 
fundamentals with heterogeneous views may induce excessive price 
volatility, drift in commodity prices, and a tendency towards booms and 
busts. He asserts that under these conditions the flow of financial 
index investments into commodity markets may harm price discovery and 
thus social welfare.\1524\
---------------------------------------------------------------------------

    \1524\ Kenneth J. Singleton, Investor Flows and the 2008 Boom/
Bust in Oil Prices, SSRN Electronic Journal 15 (2011) 5-8.
---------------------------------------------------------------------------

    Another paper using Granger analysis concluded that speculators did 
have an impact on price volatility in the crude oil market.\1525\
---------------------------------------------------------------------------

    \1525\ Jochen M[ouml]bert, Deutsche Bank Research, Dispersion in 
beliefs among speculators 9-10 (2009). This paper concluded that as 
net long positions increased, volatility increased. This paper was 
inconclusive of the impact of speculation on price levels (id. at 8-
9), and observed caveats on the difficulty of accurate modelling in 
the complex crude oil market (id. at 11).
---------------------------------------------------------------------------

    Some commenters have suggested that using a weekly, not a daily, 
time interval for a Granger analysis in this context is a better choice 
because speculative positions change gradually and there is, on a daily 
basis, substantial price volatility, especially in the crude oil 
market.\1526\ The common sense explanation for this may be that prices 
change more often and more rapidly than position sizes, as a general 
rule. A weekly time interval is a good way to filter out price changes 
that speculative position changes cannot explain.\1527\
---------------------------------------------------------------------------

    \1526\ Frenk, Review of Irwin and Sanders 2010 OECD Report, at 6 
(Better Markets June 10, 2010).
    \1527\ There are not many other economic studies in the 
administrative record duplicating the results of Singleton and 
Hamilton and Wu. A few others reached similar conclusions regarding 
the crude oil market using Granger analysis, but these are 
relatively modest or narrowly constructed studies that are not often 
cited by economic peers. See Goyal and Tripathi, Regulation and 
Price Discovery: Oil Spot and Futures Markets (working paper 2012) 
(concluding that regulations of the nation of India, including 
position limits, may have mitigated short duration ``bubbles'').
---------------------------------------------------------------------------

    Other Granger analyses of the crude oil market use shorter time 
intervals and do not find Granger-causality between speculative 
position changes and either price returns, price changes or price 
volatility.\1528\ The academic literature contains a divergence of 
views on whether the existence of ``excess speculation'' in the crude 
oil market would necessarily result in something that is easy to 
measure, like increases in oil inventories. Some economists argue 
against the role of ``excess speculation'' in crude oil, observing that 
when there was a run-up in prices of certain commodities, there was no 
noticeable increase in inventories.\1529\ This assumes that a 
fundamental shock in the oil prices, for example, is likely to increase 
or decrease inventories, as hedgers in the physical market anticipate 
future price increases or decreases. However, other economists have 
explained that, at least in theory, speculation can affect spot oil 
prices without causing substantial increases in inventory (providing 
the price elasticity of oil demand is small).\1530\
---------------------------------------------------------------------------

    \1528\ Kaufmann and Ullman, Oil Prices, Speculation, and 
Fundamentals: Interpreting Causal Relations Among Spot and Futures 
Prices, Energy Economics, Vol. 31, Issue 4 (July 2009); Kaufman, The 
role of market fundamentals and speculation in recent price changes 
for crude oil, Energy Policy, Vol . 39, Issue 1 (January 2011); 
Sanders, Boris, and Manfredo, Hedgers, Funds, and Small Speculators 
in the Energy Futures Markets: An Analysis of the CFTC's Commitment 
of Traders Reports, Energy Economics (2004).
    \1529\ Irwin and Sanders, Index Funds, Financialization, and 
Commodity Futures Markets, at 14-15, Applied Economic Perspectives 
and Policy (2010).
    \1530\ Hamilton, Causes and Consequences of the Oil Shock of 
2007-2008, Brookings Paper on Economic Activity (2009); Parsons, 
Black Gold & Fool's Gold: Speculation in the Oil Futures Market at 
82, 106-107 (Economia 2009) (if oil prices were driven above the 
level determined by fundamental factors of supply and demand by 
forces such as speculation, storage would not necessarily increase, 
for ``successful innovations in the financial industry made it 
possible for paper oil to be a financial asset in a very complete 
way''); accord Lombardi and Van Robays, Do Financial Investors 
Destabilize the Oil Price?, at 21-22, European Central Bank Working 
Paper Series No. 1346 (June 2011). The ability drawdown or stock 
pile inventory is limited by storage capacity. Further, since it is 
expensive to store oil above ground, buy and hold strategies are 
only a loose constraint on prices.

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

[[Page 96901]]

    Irwin and Sanders conclude that there is no Granger-causation 
between positions in a particular commodity index fund and price 
returns in four energy commodity markets.\1531\ Irwin and Sanders' 
paper contains a fairly robust Granger analysis which analyzes several 
models in conjunction with their standard model equation for position 
and price. However, all of the equations that they test for Granger 
causation contain a possible prejudice: The use of variables that may 
be correlated with price other than the position variable, thus masking 
the power of the position variable. Moreover, their paper fails to show 
that the particular index fund data they used was generally 
representative of index funds by statistical testing.\1532\
---------------------------------------------------------------------------

    \1531\ Dwight R. Sanders & Scott H. Irwin, Energy Futures Prices 
and Commodity Index Investment: New Evidence from Firm-Level 
Position Data, 46 Energy Economics (working paper 2014).
    \1532\ In this paper, Irwin and Sanders critiqued Singleton's 
results, concluding that Singleton found Granger causation because 
he improperly calculated positon data. This debate cannot be 
resolved definitively. In the absence of better daily data on 
position in both swaps and position markets, it is unclear who is 
correct here.
---------------------------------------------------------------------------

    There is an earlier paper by Sanders, Boris, and Manfredo that has 
a similar result.\1533\ However, this 2004 paper uses variables that 
may be correlated with price other than position data, and so, in the 
Granger analysis, the price equation used for Granger testing may mask 
some or all of the impact of positions on price (if any).\1534\ As 
discussed, Irwin and Sanders' 2014 paper is also not completely free 
from this masking problem. However, it has only one, not several, 
variables that could mask correlation between position changes and 
price returns: A lagged price return variable. Irwin and Sanders, aware 
of the possibility of this masking of correlation, present a defense of 
their choice to include a lagged price return variable in their model. 
They argue that one does not know whether positions will affect just 
current price returns or both current and lagged price returns, and in 
this way it is not necessarily the case that there is a masking effect.
---------------------------------------------------------------------------

    \1533\ Dwight R. Sanders, Keith Boris & Mark Manfredo, Hedgers, 
funds, and small speculators in the energy futures markets: An 
analysis of the CFTC's Commitments of Traders reports, 26 Energy 
Economics 425-445 (2004).
    \1534\ Id. at 439, Equation 5.
---------------------------------------------------------------------------

    This argument does not prove that there is no masking effect. There 
is at least the concern that the Irwin and Sanders model, as 
constructed, masks possible Granger-causality between position changes 
and price returns. Theoretically, one could learn more by examining the 
linear correlation between explanatory variables (lagged price returns 
and changes in position) by performing additional diagnostic 
regressions. These regressions would estimate correlations between 
explanatory variables and resolve the open question of whether the 
price equation is significantly ``masking'' Granger-causality between 
position changes and price returns.
    Selecting between competing models with divergent results becomes 
more of a judgment call than a science. Irwin and Sanders' 2014 paper 
is well-done, as are papers with opposite conclusions, which find an 
empirical relationship between position changes and price returns (risk 
premia), such as the Singleton Granger analysis discussed above, and a 
paper by Hamilton and Wu based on a different statistical method 
discussed below.\1535\
---------------------------------------------------------------------------

    \1535\ James D. Hamilton & Jing Cynthia Wu, Risk premia in crude 
oil futures prices, 42 Journal of International Money and Finance 9-
37 (2014).
---------------------------------------------------------------------------

    It is impossible to easily discern who is correct or what accounts 
for the difference in result. It could be the ``masking'' issue in the 
Irwin and Sanders model. It could also be the focus in the Irwin and 
Sanders work on price returns, as opposed to the focus in both 
Singleton's as well as Hamilton and Wu's on just a component of price 
returns, risk premia. Irwin and Sanders, by focusing on price returns, 
are doing Granger-causality testing with a model less sensitive to 
changes in just risk premia. The differing results could also be due to 
the different time horizons (weekly versus daily time increments) used 
in the competing studies.
    This clash of well-executed studies is on an important issue--the 
dramatic changes in crude oil prices in 2006-2009. The study by Kaufman 
is not directly on point.\1536\ He finds Granger-causation between 
different types of crude oil contracts, but does not look to positions 
or whether positions Granger-cause changes in price returns.
---------------------------------------------------------------------------

    \1536\ Robert K. Kaufmann, The role of market fundamentals and 
speculation in recent price changes for crude oil, 39 Energy Policy 
105-115 (2011).
---------------------------------------------------------------------------

    Kaufmann also finds that far-out futures contracts and spot crude 
oil are not correlated and he concludes that the reason for this lack 
of correlation is speculation in the crude oil market. However, there 
are gaps in this inference. Kaufmann assumes there should be a long-run 
equilibrium between the spot and the futures price but cannot discern a 
supply and demand reason for the lack of correlation. There are many 
factors of supply and demand that would lead to differences between 
far-out futures prices and spot prices in the crude oil market during 
the time period studied--1986-2007. These factors include the depletion 
of oil fields; variability in economic growth; discovery of new oil 
sources and better modes of extraction; adaption of oil 
infrastructure.\1537\
---------------------------------------------------------------------------

    \1537\ Cf. Kaufmann and Ullman, Oil Prices, Speculation, and 
Fundamentals: Interpreting Causal Relations Among Spot and Futures 
Prices, 31 Energy Economics (July 2009) (concluding that there is 
Granger-price causation between different types of crude oil). This 
study does not look for causation between position and price and so, 
again, is of marginal relevance in the position limits context.
---------------------------------------------------------------------------

Index Funds Generally
    Some economists have used the Granger methodology to study a group 
of commodity markets and to analyze, overall, the effect, or lack 
thereof, of commodity index fund investments on both energy and 
agricultural commodity prices.\1538\ These relatively few Granger 
studies on the ``financialization'' effect vary in their conclusions. 
Overall, as a group, the Granger studies on the effect of index funds 
across a swath of

[[Page 96902]]

commodity futures prices do not agree.\1539\
---------------------------------------------------------------------------

    \1538\ See, e.g., Antoshin, Canetti, and Miyajima, IMF Global 
Financial Stability Report: Financial Stress and Deleveraging: 
Macrofinancial Implications and Policy, Annex 1.2, Financial 
Investment in Commodities Markets (October 2008); Jeffrey H. Harris 
and Bahattin B[uuml]y[uuml]k[scedil]ahin, The Role of Speculators in 
the Crude Oil Futures Market (working paper 2009); Brunetti and 
B[uuml]y[uuml]k[scedil]ahin, Is Speculation Destabilizing? (working 
paper 2009); Frenk, Review of Irwin and Sanders 2010 OECD Report 
(Better Markets June 10, 2010); Gilbert, Speculative Influences on 
Commodity Futures Prices, 2006-2008, UN Conference on Trade and 
Development (2010) (page citations are to the 2009 working paper 
version placed in the administrative record); Gilbert, Commodity 
Speculation and Commodity Investment (powerpoint presentation 2010); 
Irwin and Sanders, The Impact of Index and Swap Funds on Commodity 
Futures Markets: A Systems Approach, Journal of Alternative 
Investments (2011); Irwin and Sanders, The Impact of Index and Swap 
Funds on Commodity Futures Markets: Preliminary Results (working 
paper 2010); Mayer, The Growing Interdependence Between Financial 
and Commodity Markets, UN Conference on Trade and Development 
(discussion paper 2009); Stoll and Whaley, Commodity Index Investing 
and Commodity Futures Prices (working paper 2010); Tse and Williams, 
Does Index Speculation Impact Commodity Prices?, Financial Review, 
Vol. 48, Issue 3 (2013); Tse, The Relationship Among Agricultural 
Futures, ETFs, and the US Stock Market, Review of Futures Markets 
(2012). A fairly late submission by Williams, Dodging Dodd-Frank: 
Excessive Speculation, Commodities Markets, and the Burden of Proof, 
Law & Policy Journal of the University of Denver (2015), studies 
generally the limitations of Granger causality.
    \1539\ There are many more studies using the comovement or 
cointegration analysis, discussed in Section I(B) below, that look 
at the financialization questions.
---------------------------------------------------------------------------

    Gilbert concluded that commodity index fund positons did Granger-
cause price increases in certain commodity futures markets during the 
2006-2008 time period.\1540\ Gilbert, a Professor of Economics at the 
University of Trento, Italy, found that this price impact appeared to 
be lasting or ``permanent.'' \1541\
---------------------------------------------------------------------------

    \1540\ Christopher L. Gilbert, Speculative Influences on 
Commodity Futures Prices, 2006-2008 (2010).
    \1541\ Id. at 23; see also id. at 24, Table 6 (average price 
impact by commodity, including a maximum price impact of over 16 
percent for crude oil during 2006-2008 time period).
---------------------------------------------------------------------------

    Gilbert's study is based upon a composed proxy for commodity fund 
index investments. The index data they use is not explained in 
sufficient detail in the paper and the results derived from this index 
are therefore not replicable.\1542\ The price equation he uses for 
testing is problematic.\1543\
---------------------------------------------------------------------------

    \1542\ Several statements about the index in the paper indicate 
a lack of economic rigor, or at least major inferential leaps, in 
the assumption that the index approximates commodity index funds. 
Id. at 18, 21.
    \1543\ See id. at 22 (Equation 4) (complex equation that 
subtracts logarithmic prices without detailed economic justification 
for the destructive of data though subtraction).
---------------------------------------------------------------------------

    Gilbert's numerical results on price impact are dramatic, finding 
substantial average impact in various commodities due to speculation, 
with average impact in parts of 2008 of over 10 percent for aluminum, 
copper, nickel, wheat, and corn.\1544\ Yet he provides little detail on 
how he arrived at these percentages other than to say that they are 
``estimates'' that he inferred from the statistical results set forth 
in his Table 5.\1545\ Because his findings are not well-documented and 
contain unexplained inferences, his paper is unreliable.
---------------------------------------------------------------------------

    \1544\ Id. at 24, Table 6.
    \1545\ See id. at 23-24 (little or no statistical assessment of 
how the results of Table 4 and 5 results translate into the large 
price impact percentages in Table 6).
---------------------------------------------------------------------------

    By contrast, the Granger analysis of Stoll and Whaley concludes 
that inflows and outflows from commodity index funds to the commodity 
markets do not have Granger-caused price changes in the commodity 
futures market.\1546\ The authors of this study did find a fleeting 
price impact from when commodity index funds roll over to another 
contract month. (This fleeting rollover impact finding may be outdated; 
markets have learned to anticipate and account for index fund 
rollovers.) \1547\
---------------------------------------------------------------------------

    \1546\ Hans R. Stoll & Robert E. Whaley, Commodity Index 
Investing and Commodity Futures Prices (working paper 2010).
    \1547\ Stoll and Whaley also found a divergence of futures and 
cash prices in wheat in 2006-2009 period, especially in 2008 period, 
but concluded that there were limited negative impacts on market 
functioning associated with this failure to diverge. This result 
should not be used to suggest that divergence is not a costly 
phenomenon. Stoll and Whaley's analysis is limited to CME's wheat 
futures contract. It failed to converge for a period of time because 
storage was mispriced in the contract during this time period, and 
market participants knew this and prices reflected this difference. 
CME eventually changed the wheat contract to charge a more 
appropriate amount for storage and the divergence phenomenon 
dissipated. So this example of divergence is associated with 
economic differences between the spot and futures contracts. It not 
an example of divergence associated with market manipulation, with 
attendant social welfare costs. See Frank Easterbrook, Monopoly, 
Manipulation, and the Regulation of Futures Markets, S118, Journal 
of Business (1986) (``When the closing price on a futures contract 
significantly diverges from the price of the cash commodity 
immediately before and after, this is strong evidence that someone 
has reduced the accuracy of the market price and inflicted real 
economic loss on participants in the market.'').
---------------------------------------------------------------------------

    Stoll and Whaley's analysis does not account for the possibility 
that there could be a delayed effect on futures price changes 
associated with a delay in laying off, in the futures markets, risks 
acquired in commodity index swap contracts. In practices, dealers may 
do this, acquiring risk in multiple markets within acceptable limits as 
they manage their portfolio risk.\1548\ Moreover, a paper by Tse and 
Williams criticizes Stoll and Whaley's approach for using ``low 
frequency data'' and failing to use ``sufficiently granular data to 
capture fast futures markets dynamics.'' \1549\ Using intraday, shorter 
time intervals to analyze the possible effect of commodity fund 
investments in the futures markets, Tse and Williams conclude that 
there was ``transmission'' of price impacts from futures contracts in a 
particular commodity fund index (the GSCI index) to commodities that 
were not in the index. However, this Granger-causation result does not 
necessarily establish any price impact associated with excessive 
speculation. Other factors may lead to this result, such as time delay 
in illiquid markets, the role of the GSCI index as a price influencing 
mechanism, or the more rapid market response that tends to occur with 
more liquid markets.\1550\
---------------------------------------------------------------------------

    \1548\ See Frank Easterbrook, Monopoly, Manipulation, and the 
Regulation of Futures Markets S124, Journal of Business (1986) (in 
the specific context of position limits, ``Offenses may be harder to 
detect when they involve more than one market.'').
    \1549\ Yiuman Tse & Michael R. Williams, Does Index Speculation 
Impact Commodity Prices? An Intraday Analysis, 48 Financial Review 
365-383 (2013).
    \1550\ Stoll and Whaley also observed that commodity index funds 
should not be thought of as speculators because they participated in 
these markets to diversify their returns (relative to equity 
holdings). In Tse, The Relationship Among Agricultural Futures, 
ETFs, and the US Stock Market, Review of Futures Markets (2012), Tse 
concluded that there were now positive correlations between 
agricultural ETF returns and S&P 500. This result suggests that the 
diversification benefit has at least decreased. In this paper, Tse 
also found, using 5-minute, intraday returns, that agricultural ETF 
price returns are Granger-caused by some of the underlying commodity 
futures market. This result is a rare result finding causation from 
the futures prices to financial or institutional traders.
---------------------------------------------------------------------------

    While both the Stoll and Whaley and the Gilbert papers are often 
cited in the literature, they both have limitations in scope and 
approach. Other studies do not fully resolve this academic debate. In a 
paper by James W. Williams, the limitations of Granger causality 
analysis in the position limits context is discussed.\1551\
---------------------------------------------------------------------------

    \1551\ James W. Williams, Dodging Dodd-Frank: Excessive 
Speculation, Commodities Markets, and the Burden of Proof, 37 Law & 
Policy 135-38 (2015). (sensitivities of Granger studies to 
parameters, including time-sensitivity to time intervals, makes 
``Granger-inspired studies of excessive speculation . . . 
problematic,'' a problem compounded by the volatile nature of the 
commodity markets).
---------------------------------------------------------------------------

    The general findings of Irwin and Sanders support Stoll and 
Whaley's conclusions.\1552\ Irwin and Sanders analyzed weekly CFTC 
price data over a number of years and found that there was neither 
Granger-causation between index fund positions and futures price 
returns or Granger-causation between changes in fund positions and 
futures price volatility. Utilizing a Working's T-index, Irwin and 
Sanders also find that there was not excessive speculation in these 
markets.
---------------------------------------------------------------------------

    \1552\ Dwight R Sanders & Scott H Irwin, The Impact of Index 
Funds in Commodity Futures Markets: A Systems Approach, 14 The 
Journal of Alternative Investments 40-49 (2011).
---------------------------------------------------------------------------

    Frenk criticizes Irwin and Sanders for (1) both their specific 
methodology, arguing that they used incorrect proxies for hedging 
volumes and (2) rehearsing the general disadvantages of using Granger 
analysis.\1553\ Frenk identifies difficulties in Irwin and Sanders' 
data and underlying assumption.
---------------------------------------------------------------------------

    \1553\ David Frenk, Better Markets, Inc., Speculation and 
Financial Fund Activity and The Impact of Index and Swap Funds on 
Commodity Futures Markets 6 (2010). Some of Frenk's critiques fall 
short of the mark. For example, he criticizes Irwin and Sanders for 
using a one-week interval for their testing. Id. at 7. This is not a 
flaw in the Irwin and Sanders paper and in fact using a one-week 
time interval helps to ameliorate another problem Frenk identifies: 
The difficulty of applying Granger analysis to highly volatile data 
such as commodity prices.
---------------------------------------------------------------------------

    There is a significant problem with the Irwin and Sanders paper. 
The price formula used for Granger testing in their paper is complex, 
incorporating many lagged price returns and lagged positions, and risks 
masking correlation due to the possible interdependence of

[[Page 96903]]

variables.\1554\ In a model designed to test whether there is Granger-
causation between position changes and price return, additional 
variables may diminish the statistical power of the position change 
variable in the testing equation by masking the effect of positon on 
price returns. The inclusion of these lagged price returns and position 
change variables in the model design may well diminish the statistical 
power of the position change variable.\1555\ In this way it may also 
mask a possible correlation between position changes and price 
returns.\1556\
---------------------------------------------------------------------------

    \1554\ Dwight R Sanders & Scott H Irwin, The Impact of Index 
Funds in Commodity Futures Markets: A Systems Approach, 14 The 
Journal of Alternative Investments 40-49 (2011).
    \1555\ In Table 54 of the Irwin and Sanders paper, the price 
return equation used for the Granger correlation analysis diminishes 
the potential impact of positions on current price returns. Irwin 
and Sanders use this equation to test for Granger-causation between 
price returns and position changes, but inclusion of lagged price 
returns in the equation is problematic. Within the workings of the 
Granger statistics, placing lagged price returns and change of 
position data in the same equation can mask the impact of change of 
positions on price. That is because price returns and lagged price 
returns may have common correlation; a statistician would say that 
lagged price return data and change in positions are competing for 
common correlation with price returns in the Table 4 equation. In 
this way, the explanatory power of the change in position variable 
in this Irwin and Sanders paper is diminished by introduction of the 
lagged price return variables.
    \1556\ See James W. Williams, Dodging Dodd-Frank: Excessive 
Speculation, Commodities Markets, and the Burden of Proof, 37 Law & 
Policy 137-138 (2015) (Granger methodology may be problematic in 
analysis of position limits, because there may be nonlinear 
relationships between economic variables).
---------------------------------------------------------------------------

    Other studies doing Granger testing for the effects of commodity 
index funds on prices arrive at conflicting results.\1557\ Then-CFTC 
economists who were able to access non-public, daily market data to do 
Granger-based economic analysis of the possible impact of commodity 
index funds have added to this debate.\1558\ A battery of Granger tests 
discussed in a paper prepared by Bahattin B[uuml]y[uuml]k[scedil]ahin 
and Jeffrey H. Harris lead to the conclusion that there was no Granger-
causation between swap dealer positions (a proxy for commodity index 
fund positions) and returns in the crude oil or natural gas 
futures.\1559\ This finding stayed consistent across tests using 
different time periods within 2000 to 2008 and different lag periods. 
Rather, B[uuml]y[uuml]k[scedil]ahin and Harris found price changes 
Granger-cause changes in position. This study performs an additional 
Working T analysis and concludes that this measure of speculative 
positions was not Granger causing price changes in the crude oil or 
natural gas markets.
---------------------------------------------------------------------------

    \1557\ Compare J[ouml]rg Mayer, United Nations Conference on 
Trade and Development, The Growing Interdependence Between Financial 
and Commodity Markets (2009).
    \1558\ Those studies reflect the views of the individual 
economists, and, not necessarily of the Commission. Compare Mayer, 
The Growing Interdependence Between Financial and Commodity Markets, 
UN Conference on Trade and Development (discussion paper 2009) 
(finding financial investment in commodity trading Granger-cause 
price changes in soybeans, soybean oil, copper, crude oilTable 4) 
with IMF Global Financial Stability Report: Financial Stress and 
Deleveraging: Macrofinancial Implications and Policy, Annex 1.2, 
Financial Investment in Commodities Markets (October 2008) (not 
providing specifications or background on study, but reporting 
results finding an absence of Granger causation between position and 
price in all but the copper markets).
    \1559\ See Bahattin B[uuml]y[uuml]k[scedil]ahin and Jeffrey H. 
Harris, The Role of Speculators in the Crude Oil Futures Market 
(working paper 2009).
---------------------------------------------------------------------------

    The study by Brunetti and B[uuml]y[uuml]k[scedil]ahin is also an 
important contribution to the literature.\1560\ Brunetti and 
B[uuml]y[uuml]k[scedil]ahin consider price returns and positions in 
several markets (crude oil, natural gas, corn, Eurodollar, and mini-
Dow) and find no Granger causation between position and price returns 
for any of these commodity markets during a time period when commodity 
index funds were participating in these markets. This study also finds 
that speculators in these markets during the time period are 
decreasing, not increasing, volatility.
---------------------------------------------------------------------------

    \1560\ Celso Brunetti & Bahattin Buyuksahin, Is Speculation 
Destabilizing?, SSRN Electronic Journal. The Commission cited this 
study in particular in its December 2013 Position Limits Proposal. 
See also Letter from CME Group, Inc., to CFTC (Mar. 28, 2011).
---------------------------------------------------------------------------

    These CFTC-staff studies have the advantage of using non-public, 
daily data. However, such studies are subject to the same limitations 
that are inherent in Granger analysis in this context: The open 
question of whether the proper time lag was selected, the ad hoc 
assumption of the time step selected to compute the volatility, and the 
inclusion in both studies of variables such as lagged price returns 
that may inadvertently mask correlation. The inherent limitations of 
Granger analysis may well bear on the conflicting results of these 
Granger papers.
Agricultural Commodities
    The final set of Granger papers concern the agricultural commodity 
markets. These include a series of papers by Irwin and Sanders and co-
authors not finding Granger causation between positions and price 
returns.\1561\ A few papers arrive at nuanced or inconclusive results, 
but generally cannot find significant Granger causation between 
position and price in the agricultural commodity markets.\1562\
---------------------------------------------------------------------------

    \1561\ See, e.g.,Irwin and Sanders, The ``Necessity'' of New 
Position Limits in Agricultural Futures Markets: The Verdict from 
Daily Firm-Level Position Data (working paper 2014); Irwin and 
Sanders, The Performance of CBOT Corn, Soybean, and Wheat Futures 
Contracts after Recent Changes in Speculative Limits (working paper 
2007); Sanders, Irwin, and Merrin, Smart Money? The Forecasting 
Ability of CFTC Large Traders, Journal of Agricultural and Resource 
Economics (2009); Sanders, Irwin, and Merrin, A Speculative Bubble 
in Commodity Futures? Cross-Sectional Evidence, Agricultural 
Economics (2010); Irwin, Sanders, and Merrin, Devil or Angel: The 
Role of Speculation in the Recent Commodity Price Boom, Journal of 
Agricultural and Applied Economics (2009); Sanders, Irwin, and 
Merrin, The Adequacy of Speculation in Agricultural Futures Markets: 
Too Much of a Good Thing?, Applied Economic Perspectives and Policy 
(2010). An additional paper is, for the most part, in accord with 
Irwin and Sanders' work. Aulerich, Irwin, and Garcia, Bubbles, Food 
Prices, and Speculation: Evidence from the CFTC's Daily Large Trader 
Data Files (NBER Conference 2012) (concluding overall that buying 
pressure from financial index investment in recent years did not 
cause massive price ``bubbles'' in agricultural futures prices, and 
any such evidence of price increase is weak evidence of small and 
fleeting price impact).
    \1562\ See, e.g., Borin and Di Nino, The Role of Financial 
Investments in Agricultural Commodity Derivatives Markets (working 
paper 2012) (finding ``sparse'' evidence of Granger causation 
between traders' investment decisions and futures prices and also 
``scarce evidence of hearing behavior except in the cotton 
market''); Grosche, Limitations of Granger Causality Analysis to 
Assess the Price Effects From the Financialization of Agricultural 
Commodity Markets Under Bounded Rationality, Agricultural and 
Resource Economics (2012); Gilbert, How to Understand High Food 
Prices, Journal of Agricultural Economics (2008); Robles, Torero, 
and von Braun, When Speculation Matters (working paper 2009) 
(speculative trading may have influenced agricultural commodity 
prices ``but the evidence is far from conclusive'').
---------------------------------------------------------------------------

    There are studies (some are more properly categorized as articles) 
that do purport to find Granger causation between positions and price 
returns.\1563\ The papers finding substantial price impacts caused by 
speculative positions in the commodity futures markets are not 
published in academic, peer-reviewed economic or agricultural 
journals.\1564\
---------------------------------------------------------------------------

    \1563\ See, e.g., Algieri, Price Volatility, Speculation and 
Excessive Speculation in Commodity Markets: Sheep or Shepherd 
Behaviour? (working paper 2012) (``excessive speculation'' has 
driven price volatility for maize, rice, soybeans, and wheat for a 
particular timeframe); Cooke and Robles, Recent Food Prices 
Movements: A Time Series Analysis (working paper 2009) (concluding 
that financial activity in futures market and proxies for 
speculation can help explain observed changes in international food 
prices for corn, wheat, rice, and soybeans); Timmer, Did Speculation 
Affect World Rice Prices?, UN Food and Agricultural Organization 
(working paper 2009) (concluding that the price of rice was not 
affected by financial speculators, but run-ups in wheat and corn 
prices ``was almost certainly caused by financial speculators''); 
Varadi, An Evidence of Speculation in Indian Commodity Markets 
(working paper 2012) (inferring the unexplained price increases must 
be due to speculation).
    \1564\ Other limitations arise from fairly cryptic inferential 
reasoning that the cause of any price-run up must be due to 
speculation. See, e.g., Timmer, Did Speculation Affect World Rice 
Prices?, 38, UN Food and Agricultural Organization (working paper 
2009) (regarding theory that financial speculators are the cause for 
price run-ups, the paper states that ``[t]hese conclusions are 
reached mostly by eliminating the other explanations and by logical 
reasoning''); Varadi, An Evidence of Speculation in Indian Commodity 
Markets (working paper 2012) (asserting author's ``estimations'' 
that speculation has played a ``decisive role'' in creating 
commodity price bubbles in Indian commodity markets, without 
provision of a theoretical framework to reach this conclusion).

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

[[Page 96904]]

    Gilbert, in a 2008 paper, reaches a different result with respect 
to agricultural commodities.\1565\ Gilbert performs Granger testing on 
other variables that could explain (in the sense of Granger-causing) 
run-ups in agricultural commodity futures prices. Specifically, he 
looks at macroeconomic and financial factors that affected the price of 
many commodities during the 2005-2008 time period.\1566\ Gilbert 
obtains results suggesting that the main determinants in agricultural 
commodity futures prices during this time period are macroeconomic 
(such as GDP growth) and financial factors (such as the value of the 
dollar and interest rates).\1567\ Gilbert concludes that (1) there is 
little Granger-causation evidence that speculation by commodity index 
funds caused the run-up in agricultural commodity prices during this 
time period; and (2) moreover, there is evidence that macroeconomic 
factors other than ``excessive speculation'' might have caused the 
price run-up. Gilbert's work does not purport to show that 
macroeconomic and financial factors account for all price changes. 
Moreover, his 2008 piece is difficult to reconcile with his 2010 work, 
which does find price impacts from speculation using Granger analysis 
for some agricultural commodities.\1568\
---------------------------------------------------------------------------

    \1565\ Christopher J. Gilbert, How to Understand High Food 
Prices, Journal of Agricultural Economics (2008).
    \1566\ Id.
    \1567\ Id. at 27-28.
    \1568\ Gilbert, Speculative Influences on Commodity Futures 
Prices, 2006-2008, 24 (Table 4), UN Conference on Trade and 
Development (2010) (referencing price impacts in wheat, corn, and 
soybean).
---------------------------------------------------------------------------

    The work of Gilbert, as well as Irwin and Sanders, also suggest a 
cautious approach is warranted in concluding how sizeable or lasting 
any price impact associated with ``excessive speculation'' can be, at 
least when employing a Granger analysis. One paper authored by Irwin 
emphasized that the only evidence of Granger-causation between 
positions and price returns in the agricultural market was weak 
evidence of temporary changes in price.\1569\
---------------------------------------------------------------------------

    \1569\ Aulerich, Irwin, and Garcia, Bubbles, Food Prices, and 
Speculation: Evidence from the CFTC's Daily Large Trader Data Files, 
22 (NBER Conference 2012) (finding some weak evidence of temporary 
changes in price Granger-caused by positions, but observing that the 
``size of the estimated system impact is too small'' to be 
consistent with the commodity index funds causing a huge run-up in 
prices).
---------------------------------------------------------------------------

    The debate is hard to resolve, including for the fairly technical 
reasons provided in Grosche.\1570\ Grosche observes that index trading 
and other financial investment may be based on a mixture of speculative 
and hedging motives in the agricultural sphere.\1571\ The interaction 
between the physical and financial contracts in the agricultural 
commodity sphere is under-researched and the possible ``spillover'' 
effects from financial to agricultural markets is unknown.\1572\
---------------------------------------------------------------------------

    \1570\ Grosche, Limitations of Granger Causality Analysis to 
Assess the Price Effects from the Financialization of Agricultural 
Commodity Markets Under Bounded Rationality, Agricultural and 
Resource Economics (2012).
    \1571\ Id. at 18.
    \1572\ Id. at 17. See also Williams, Dodging Dodd-Frank: 
Excessive Speculation, Commodities Markets, and the Burden of Proof, 
Law & Policy Journal of the University of Denver (2015).
---------------------------------------------------------------------------

b. Comovement, Cointegration and ``Financialization''
i. Description
    These studies employ a statistical method that can be viewed 
mathematically as a special case of Granger causality, a method 
frequently referred to as comovement. This method looks for whether 
there is correlation that is contemporaneous and not lagged. (This is 
effectively similar to a Granger analysis where the type period of lag 
is set to zero.) Like Granger causality, this method employs linear 
regression to establish correlation between market prices or price 
returns and speculative positions. When the time step is set to zero, 
the economist can no longer seek to establish an inference of cause and 
effect between prices or price returns and positions. Instead, the 
economist is using a Granger-type analysis to establish whether there 
is a correlation that is contemporaneous. A subset of these comovement 
studies uses a technique called cointegration for testing correlation 
between two sets of data, to see if there is a statistical relationship 
notwithstanding the ``white noise'' of price data.\1573\
---------------------------------------------------------------------------

    \1573\ Two time series of price data are said to be cointegrated 
if the error term in the modeling of their statistical correlation 
is a term that is, among other things, independent of time. In 
layperson's terms, the two streams of price data each roughly follow 
a random walk through time. (In more technical terms, cointegration 
means there is a linear connection between the two streams of data 
where the difference is ``white noise'' (Brownian motion) or a 
random walk. There is some cointegrating vector of coefficients that 
can be used to form a linear combination of the two time series.)
---------------------------------------------------------------------------

    This technique can be used to ferret out unexpected divergences in 
prices. For example, many economists perform cointegration tests 
comparing futures and spot prices, which generally should constrain 
each other by staying within reasonable bands of each other. If they 
find a discrepancy, they consider whether excess speculation or a price 
``bubble'' could explain this price discrepancy.
ii. Advantages and Disadvantages
    Such approaches are useful to compare commodity markets with other 
markets in seeking a correlation over time between these sets of 
prices. For example, a study may look at a price index for commodities 
for one time series and a price index for equities for another time 
series. In rough terms, studying the linear regressions of these price 
data over time establishes whether there is a confluence of price 
trends in these two markets. It may capture correlations that a Granger 
causality approach may miss if the latter uses too large a time lag. In 
this way, comovement analyses may be stronger than Granger analyses at 
finding correlations, avoiding the problem of correlations being hidden 
by the improper selection of length of time lag.
    But the complementary disadvantage is that a comovement result 
cannot establish even weak, Granger-style causation. In the particular 
context of position limits, this disadvantage is significant. As 
further explained below in the discussion of specific studies, 
correlations between prices or price returns and positions can be 
caused by external factors such as broad macroeconomic trends. In 
particular, using comovement to try to establish a ``price bubble'' 
over time ranges that are short-term (months) or medium-term (18 months 
to two years) is problematic because of the impact macroeconomic or 
other external factors (wars, recessions, etc.) can have on short-term 
prices. A comovement study showing a correlation between two sets of 
data--crude oil futures and spot prices--over just a year or two years 
is, all else being equal, a fairly weak basis to infer a price bubble. 
There can be other factors that cause decoupling of prices over such a 
time period.
iii. ``Financialization''
    Many of the papers in this category focus on a documented 
correlation between returns to commodity futures and the financial 
(including equity) markets that has increased strongly in

[[Page 96905]]

recent years.\1574\ This is often called comovement between the 
commodity and financial markets. The many factors that have driven 
explosive growth in commodity derivatives trading in recent years are 
well-documented in a study by Basu and Gavin.\1575\ There has been 
substantial growth in commodity index investments; this includes 
commodity exchange-traded funds and other commodity indices that fund 
managers and other financial investors use. Both the number of such 
indices, and the volume of trading involving them, has grown 
substantially in the last decade. There have also been significant 
changes in the long positions held in commodity futures index funds 
during the financial crisis:\1576\
---------------------------------------------------------------------------

    \1574\ Tang and Xiong, Index Investment and Financialization of 
Commodities, Financial Analysts Journal (2012).
    \1575\ Basu and Gavin, What Explains the Growth in Commodity 
Derivatives?, Federal Reserve Bank of St. Louis (2011).
    \1576\ Id. at 40.
    [GRAPHIC] [TIFF OMITTED] TP30DE16.001
    
    Figure 1B. Over-the-counter trading in commodity derivatives by 
swap dealers has also increased over time, with a pronounced spike 
during the 2007-2008 time period.\1577\
---------------------------------------------------------------------------

    \1577\ Id. at 41.
    [GRAPHIC] [TIFF OMITTED] TP30DE16.002
    
    Figure 2B. The factors driving this growth include the desire of 
institutional portfolio managers to hedge against stock risk, based on 
the belief by some academic and industry economics that there were 
negative correlations between returns on equity and commodity 
futures.\1578\ This belief may not be economically justifiable.\1579\ 
Investors also sought higher yields in a low-yield environment.\1580\
---------------------------------------------------------------------------

    \1578\ Id. at 38, 44-45.
    \1579\ See id. at 44 (however, following the collapse of 
commodity prices in the summer of 2008 and subsequent financial 
panic in September of 2008, the correlation between commodity prices 
and equities became highly and positively correlated). Use of 
commodities to hedge equity or business cycle risk is controversial. 
Basu and Gavin, What Explains the Growth in Commodity Derivatives?, 
at 44 Federal Reserve Bank of St. Louis (2011), citing 
B[uuml]y[uuml]k[scedil]ahin, Haigh, and Robe (2008) (unconditional 
correlation between equity and commodity futures returns is near 
zero).
    \1580\ Id. at 38, 44.

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

[[Page 96906]]

iv. The Masters Hypothesis
    One variation on this financialization theme is the Masters 
``hypothesis.'' Michael W. Masters, a hedge fund manager, is a leading 
proponent of the view that commodity index investments have been a 
major driver of increases in the commodity futures prices. In brief, 
his views are expressed in the following statement:

    Institutional Investors, with nearly $30 trillion in assets 
under management, have decided en masse to embrace commodities 
futures as an investable asset class. In the last five years, they 
have poured hundreds of billions of dollars into the commodities 
futures markets, a large fraction of which has gone into energy 
futures. While individually these Investors are trying to do the 
right thing for their portfolios (and stakeholders), they are 
unaware that collectively they are having a massive impact on the 
futures markets that makes the Hunt brothers pale in comparison. In 
the last 4\1/2\, years assets allocated to commodity index 
replication trading strategies have grown from $13 billion in 2003 
to $317 billion in July 2008. At the same time, the prices for the 
25 commodities that make up these indices have risen by an average 
of over 200%. Today's commodities futures markets are excessively 
speculative. . . .\1581\
---------------------------------------------------------------------------

    \1581\ M.W. Masters, A.K. White, The Accidental Hunt brothers: 
How Institutional Investors Are Driving up Food and Energy Prices, 
www.accidentalhuntbrothers.com (2008). Mr. Masters, Portfolio 
Manager for Masters Capital Management, LLC, has often referred to 
these large investors as ``passive'' investors. ``Passive 
speculators are an invasive species that will continue to damage the 
markets until they eradicated.'' Masters Statement, CFTC March 2010 
hearing at 5. According to Barclay's, index fund investment fund in 
commodities reached $431 billion as of July 2011. Algieri, A Roller 
Coaster Ride, 5 (working paper 2011).

    Statements are not, in themselves, rigorous economic studies, nor 
do they purport to be. Several economists have attempted to formalize 
and study rigorously the ``Masters hypothesis'' or related conjectures 
using comovement or cointegration methods. These studies are discussed 
below.
v. Discussion of Specific Studies
    There are 25 papers that use some form of comovement or 
cointegration analysis, broadly defined. Former and current economists 
within the Office of Chief Economist have used this method repeatedly 
(7 papers); \1582\ several government and policy researchers deploy 
this method (4 papers); \1583\ and other academicians have used this 
method (14 papers).\1584\
---------------------------------------------------------------------------

    \1582\ See, e.g., Boyd, B[uuml]y[uuml]k[scedil]ahin, and Haigh, 
The Prevalence, Sources, and Effects of Herding (working paper 
2013); B[uuml]y[uuml]k[scedil]ahin and Robe, Does it Matter Who 
Trades Energy Derivatives?, Review of Env't, Energy, and Economics 
(2013); B[uuml]y[uuml]k[scedil]ahin and Robe, Speculators, 
Commodities, and Cross-Market Linkages (working paper 2012); 
B[uuml]y[uuml]k[scedil]ahin and Robe, Does ``Paper Oil'' Matter? 
(working paper 2011); B[uuml]y[uuml]k[scedil]ahin, Harris, and 
Haigh, Fundamentals, Trader Activity, and Derivatives Pricing 
(working paper 2008); Cheng, Kirilenko, and Xiong, Convective Risk 
Flows in Commodity Futures Markets (working paper 2012); and Haigh, 
Harris, and Overdahl, Market Growth, Trader Participation and 
Pricing in Energy Futures Markets (working paper 2007).
    \1583\ See, e.g., Baffes and Haniotos, Placing the 2006/08 
Commodity Boom into Perspective, World Bank Policy Research Working 
Paper 5371 (2010); Belke, Bordon, and Volz, Effects of Global 
Liquidity on Commodity and Food Prices, German Institute for 
Economic Research (2013); Kawamoto, Kimura, et al., What Has Caused 
the Surge in Global Commodity Prices and Strengthened Cross-market 
Linkage?, Bank of Japan Working Papers Series No.11-E-3 (May 2011); 
and Pollin and Heintz, How Wall Street Speculation is Driving Up 
Gasoline Prices Today (AFR working paper 2011).
    \1584\ See, e.g., Ad[auml]mmer, Bohl and Stephan, Speculative 
Bubbles in Agricultural Prices (working paper 2011); Algieri, A 
Roller Coaster Ride: An Empirical Investigation of the Main Drivers 
of Wheat Price (working paper 2013); Babula and Rothenberg, A 
Dynamic Monthly Model of U.S. Pork Product Markets: Testing for and 
Discerning the Role of Hedging on Pork-Related Food Costs, Journal 
of Int'l Agricultural Trade and Development (2013); Basu and Miffre, 
Capturing the Risk Premium of Commodity Futures: The Role of Hedging 
Pressure, Journal of Banking and Risk (2013); Hoff, Herding Behavior 
in Asset Markets, Journal of Financial Stability (2009); Tang and 
Xiong, Index Investment and Financialization of Commodities, 
Financial Analysts Journal (2012); Creti, Joets, and Mignon, On the 
Links Between Stock and Commodity Markets' Volatility, Energy 
Economics (2010); Bichetti and Maystre, The Synchronized and Long-
lasting Structural Change on Commodity Markets: Evidence from High 
Frequency Data (working paper 2012); Bunn, Chevalier, and Le Pen, 
Fundamental and Financial Influences on the Co-movement of Oil and 
Gas Prices (working paper 2012); Coleman and Dark, Economic 
Significance of Non-Hedger Investment in Commodity Markets (working 
paper 2012); Dorfman and Karali, Have Commodity Index Funds 
Increased Price Linkages between Commodities? (working paper 2012); 
Korniotis, Does Speculation Affect Spot Price Levels? The Case of 
Metals With and Without Futures Markets (working paper, FRB Finance 
and Economic Discussion Series 2009) (also submitted as a comment by 
CME); Le Pen and S[eacute]vi, Futures Trading and the Excess 
Comovement of Commodity Prices (working paper 2012); and Windawi, 
Speculation, Embedding, and Food Prices: A Cointegration Analysis 
(working paper 2012).
---------------------------------------------------------------------------

The Example of Oil Prices 2006-2008
    One of the key challenges for application of the Masters hypothesis 
is reconciliation of a supposed speculative price with what is 
happening in the physical market. The debate within academia, 
practitioners and policymakers on this topic has been considerable, 
especially given the run-up in prices in certain commodities, such as 
the 2006-2008 rise in crude oil prices. ``Dramatic swings in crude oil 
prices have led Congress to examine the functioning of the markets 
where prices are set.'' \1585\ The correlation of oil with economic 
trends is not necessarily evidence that they are causing increases in 
oil prices. As a Congressional Research Study observed, this might 
suggest that certain traders with ``better information on macroeconomic 
trends, which strongly influence energy demand, take more aggressive 
positions, which would then influence oil prices.'' \1586\
---------------------------------------------------------------------------

    \1585\ Jickling and Austin, Hedge Fund Speculation and Oil 
Prices 1 (Congressional Research Service R41902 June 29, 2011).
    \1586\ Id. at 16, (Congressional Research Service R41902 June 
29, 2011).
---------------------------------------------------------------------------

    The economics of the crude oil market are a good example of the 
dangers of applying comovement or cointegration methods over short- and 
medium-term. Short-term crude oil prices are less elastic than longer-
term prices. This means, in the short term, changes in price do not 
affect the supply of crude oil as much as long-term price changes do. 
There are many reasons why this is so, having to do with the cost of 
storing crude oil above ground and the cost of starting and stopping 
crude oil extraction. So it is unsurprising that there are short- and 
medium-term divergences in price between spot and longer-term futures 
contracts in the crude oil markets.
    On the supply side of crude oil market economics, a short-term 
shock to supply (wars, embargoes, or other events) will not necessarily 
translate into a long-term change in prices, even though it may cause 
substantial short-term price changes and volatility. Similarly, on the 
demand side of crude oil market economics, short-term changes to demand 
can impact short-term crude oil prices without causing lasting long-
term price impact.\1587\
---------------------------------------------------------------------------

    \1587\ This is true for a variety of reasons, including the fact 
that refining production is expensive to change on short notice. See 
generally Hamilton, Causes and Consequences of the Oil Shock of 
2007-2008, at 17-23, Brookings Paper on Economic Activity (2009) 
(while oil prices may have been ``too high'' in July 2009, ``low 
price elasticity of demand, and the failure of physical production 
to increase'' are more likely the predominant causes than 
``speculation per se'').
---------------------------------------------------------------------------

    For such reasons, comovement and cointegration studies of crude oil 
prices over medium time frames are unpersuasive.\1588\ 
B[uuml]y[uuml]k[scedil]ahin and Robe showed that correlations between 
equity and energy commodity investments increased massively after 
Lehman's

[[Page 96907]]

collapse in 2008.\1589\ As explained in another paper by 
B[uuml]y[uuml]k[scedil]ahin and Robe, this raises the question of 
whether hedge fund and index fund inflows are transmitting financial 
shocks to commodity prices.\1590\ However, as 
B[uuml]y[uuml]k[scedil]ahin and Robe's survey of Granger and comovement 
economic literature demonstrate, it does not appear that index traders 
and hedge funds had an impact on crude oil prices during this time 
period.\1591\ Further, Celso Brunetti and Bahattin 
B[uuml]y[uuml]k[scedil]ahin separately found that hedge funds exert a 
calming influence on crude oil prices by lowering oil price 
volatility.\1592\
---------------------------------------------------------------------------

    \1588\ Pollin and Heintz, How Wall Street Speculation is Driving 
Up Gasoline Prices Today, at 10, Americans for Financial Reform 
(working paper 2011) (``Lagged values of both gasoline prices and 
crude oil prices can affect current gas prices. This implies that 
past speculative pressures are carried over, at least for several 
months, to current prices.''); Bunn, Chevalier, Le Pen, and Sevi, 
Fundamental and Financial Influences on the Co-movement of Oil and 
Gas Prices, at 18 (working paper 2012) (``we find significant 
evidence that speculation, with its focus on index trading, 
increases the correlation between oil and gas'').
    \1589\ B[uuml]y[uuml]k[scedil]ahin and Robe, Does ``Paper Oil'' 
Matter? (working paper 2011).
    \1590\ B[uuml]y[uuml]k[scedil]ahin and Robe, Does it Matter Who 
Trades Energy Derivatives?, Review of Env't, Energy, and Economics 
(2013).
    \1591\ Id. at 5.
    \1592\ Celso Brunetti and Bahattin B[uuml]y[uuml]k[scedil]ahin, 
Is Speculation Destabilizing? (working paper 2009). See also Haigh, 
Harris, and Overdahl, Market Growth, Trader Participation and 
Pricing in Energy Futures Markets (working paper 2007) 
(participation of swap dealers and arbitrageurs has assisted in 
improved price efficiency--price converge--in crude oil futures 
contracts, with nearby, one, and two-year crude oil futures 
contracts statistically cointegrated through the period studied, 
July 2004 to mid-2006).
---------------------------------------------------------------------------

    Cointegration results suggest that financial traders' influence of 
crude oil futures prices is desirable. For example, then-CFTC 
economists, B[uuml]y[uuml]k[scedil]ahin, Harris, and Haigh show how the 
increased presence of swap dealers, hedge funds, and other financial 
traders have led to the cointegration of various crude oil futures 
contracts (the nearby contract, the one-year contract, and the two-year 
contract).\1593\ This co-integration result by these economists 
suggests that there was a long-term relation between the strength of 
price cointegration and the market activities of financial 
traders,\1594\ but this result does not suggest any harm to the 
marketplace or price discovery from the cointegration of various crude 
oil contracts. The authors conjecture that the greater market activity 
by these traders can ``enhance market quality'' through ``enhance[d] 
linkages among various futures prices'' that make these commodity 
markets ``more informationally efficient.'' \1595\
---------------------------------------------------------------------------

    \1593\ B[uuml]y[uuml]k[scedil]ahin, Harris, and Haigh, 
Fundamentals, Trader Activity, and Derivatives Pricing (working 
paper 2008).
    \1594\ Id. at 3.
    \1595\ Id. at 4-5.
---------------------------------------------------------------------------

    Both research papers \1596\ are correct that, respectively, there 
is increased comovement between crude oil prices with financial 
investments and cointegration between nearby, one-year, and two-year 
crude oil futures contracts. At least for the crude oil market, these 
price linkages exist. However, one cannot obtain, using comovement and 
cointegration techniques, decisive evidence on whether this effect 
improves market efficiency; such a conclusion involves interpreting the 
informational linkages between the markets. To the extent that the 
paper by B[uuml]y[uuml]k[scedil]ahin, Harris, and Haigh moves beyond 
establishing the linkage to inferring that the linkage has salutary 
effects on commodity markets, that conclusion was not empirically 
tested, because it was not modelled explicitly. At most, these studies 
establish the existence of such price linkages.
---------------------------------------------------------------------------

    \1596\ B[uuml]y[uuml]k[scedil]ahin and Robe, Does it Matter Who 
Trades Energy Derivatives?, Review of Env't, Energy, and Economics 
(2013); B[uuml]y[uuml]k[scedil]ahin, Harris, and Haigh, 
Fundamentals, Trader Activity, and Derivatives Pricing (working 
paper 2008).
---------------------------------------------------------------------------

Financialization Comovement Literature
    Some studies have examined ``financialization'' by using comovement 
analysis to ask whether increased investment flows into commodity 
indices (typically composed with substantial long futures positions) 
are correlated with increases in futures prices or the volatility of 
commodity futures prices across many different types of studies. Some 
of these financializaton comovement studies have looked to whether 
these investment flows decrease the risk premium for holding a long 
futures contract, thereby causing a non-transient increase in the long 
futures contract price (which, in turn, may increase the price of the 
underlying commodity).
    There is consensus in the economic literature that equities and 
commodities no longer exhibit the strong negative correlations that 
index fund investment managers may have sought in hedging their 
portfolios. In recent years there has been an increased positive 
correlation between equity and commodity prices since 2008.\1597\ There 
is also substantial consensus among economists who study this issue 
that risk premiums for holding long futures contracts have decreased 
due to financialization.\1598\
---------------------------------------------------------------------------

    \1597\ E.g., Basu and Gavin, What Explains the Growth in 
Commodity Derivatives?, at 44 Federal Reserve Bank of St. Louis 
(2011) (commodity and equity prices highly and positively correlated 
in February 2010); Tang and Xiong, Index Investment and 
Financialization of Commodities, Financial Analysts Journal (2012); 
Inamura, Kimata, et al., Recent Surge in Global Commodity Prices 
(Bank of Japan Review March 2011).
    \1598\ Hamilton and Wu, Risk Premia in Crude Oil Futures Prices, 
Journal of International Money and Finance (2013).
---------------------------------------------------------------------------

    However, there is a divergence of views among economists on the 
impacts, if any, on the large positions taken by index funds on 
commodity futures prices or price volatility.\1599\ These hypothesized 
effects of financialization are debated among academics, practitioners, 
and policymakers. Results of studies that test for a bubble component 
in commodity futures prices--regardless of the cause--are decidedly 
mixed.\1600\
---------------------------------------------------------------------------

    \1599\ See Irwin and Sanders, Index Funds, Financialization, and 
Commodity Futures Markets, at 15, Applied Economic Perspectives and 
Policy (2010) (surveying literature in support and against the idea 
of a speculative bubble in prices arising from commodity index fund 
participation in the futures market). Compare Gilbert, Speculative 
Influences on Commodity Futures Prices, 2006-2008, UN Conf. On Trade 
Development (2010); Einloth, Speculation and Recent Volatility in 
the Price of Oil (working paper 2009), and Tang and Xiong, Index 
Investment and Financialization of Commodities, Financial Analysts 
Journal (2012) with Bahattin B[uuml]y[uuml]k[scedil]ahin and Jeffrey 
H. Harris, The Role of Speculators in the Crude Oil Futures Market 
(working paper 2009); Brunetti and B[uuml]y[uuml]k[scedil]ahin, Is 
Speculation Destabilizing? (working paper 2009); Stoll and Whaley, 
Commodity index Investing and Commodity Futures Prices, Journal of 
Applied Finance (2010), Irwin and Sanders (multiple studies).
    \1600\ See, e.g., B[uuml]y[uuml]k[scedil]ahin and Robe, 
Speculators, Commodities, and Cross-Market Linkages (working paper 
2012); Irwin and Sanders, Index Funds, Financialization, and 
Commodity Futures Markets, at 15, Applied Economic Perspectives and 
Policy (2010), citing, inter alia, Phillips and Yu, Dating the 
Timeline of Financial Bubbles During the Subprime Crisis, 
Quantitative Economics (2011); and Kilian and Murphy, The Role of 
Inventories and Speculative Trading in the Global Market for Crude 
Oil, Journal of Applied Econometrics (2010).
---------------------------------------------------------------------------

    Commission-affiliated economists have confirmed a general decrease 
in volatility associated with financialization, a salutary effect 
associated with increased liquidity.\1601\ In theoretical models 
outside the comovement methodology, competition from index investment 
reduces the risk premium that accrues to long position holders, and 
this can have the net effect of lowering the cost of hedging to 
traditional physical market participants.\1602\ Some economists rely 
upon the efficient market hypothesis that market prices fully 
incorporate all the available public ``information'' into prices--in 
support of conclusion that financialization provides benefits such as 
better price discovery, liquidity, and transfer of risks to entities 
better

[[Page 96908]]

prepared to assume it.\1603\ Comovement and cointegration analyses are 
some of the statistical tools used to test whether these purported 
benefits of greater market participation hold true under particular 
market conditions.
---------------------------------------------------------------------------

    \1601\ Brunetti and B[uuml]y[uuml]k[scedil]ahin, Is Speculation 
Destabilizing? (working paper 2009) (finding that hedge funds in the 
commodity markets take the opposite position to other market 
participants, therefore providing liquidity to the market in various 
commodity market places studied, including crude oil, natural gas, 
corn, and two financial contracts).
    \1602\ Acharya, Ramadorai, and Lochstoer, Limits to Arbitrage 
and Hedging: Evidence from Commodity Markets, Journal of Financial 
Economics (2013) (existence of financial commodity index trading 
will tend to decrease risk premium, thereby generally making it 
cheaper for producers to hedge through short futures contracts).
    \1603\ Filimonov, Bicchetti, and Maystre, Quantification of the 
High Level of Endogeneity and of Structural Regime Shifts in 
Commodity Markets, at3 and citations therein (working paper 2013).
---------------------------------------------------------------------------

    While competition and increased trading volume can generally help 
markets, inflows do not universally benefit market welfare. In a paper 
by Cheng, Kirilenko, and Xiong, the authors use comovement methodology 
to conclude that in times of distress, financial traders reduce their 
net long position, causing risk to flow from financial traders to 
commercial hedgers.\1604\ ``[J]ust when the uncertainty in the economy 
was rising, the number of futures contracts used by commercial hedgers 
to hedge their risk was going down.'' \1605\
---------------------------------------------------------------------------

    \1604\ Cheng, Kirilenko, and Xiong, Convective Risk Flows in 
Commodity Futures Markets (working paper 2012).
    \1605\ Id. at 2 (citing papers on a growing body of theoretical 
work indicating that at times of financial crisis, funding and risk 
constraints may force financial traders to unwind positions, which, 
in turn, forces hedgers to reduce their hedging positions).
---------------------------------------------------------------------------

    Cheng, Kirilenko, and Xiong argue that tests such as Granger, which 
look to whether financial traders' positions and futures prices are 
negatively correlated when they trade to accommodate hedgers, overlook 
an important lesson from the distressed financial literature.\1606\ 
When financial entities trade in response to their own financial 
distress, their trades may be correlated positively to futures price 
changes. These correlations may net out, so that any significant 
correlation between their positions and price changes may be masked by 
trading during financial distress.\1607\
---------------------------------------------------------------------------

    \1606\ Id. at 3.
    \1607\ Id. See also Acharya, Ramadorai, and Lochstoer, Limits to 
Arbitrage and Hedging: Evidence from the Commodity Markets, Journal 
of Financial Economics (2013) (decreases in financial traders' risk 
capacity should lead to increases in hedgers' hedging cost, all else 
being equal).
---------------------------------------------------------------------------

    Using cointegration techniques and non-public trading data, then-
CFTC economists, B[uuml]y[uuml]k[scedil]ahin and Robe demonstrate that 
the correlations between equity indices and commodities increase with 
greater participation by financial speculators.\1608\ There is no such 
effect for other types of traders. In concert with the work of Cheng, 
Kirilenko, and Xiong, they find that this cointegration effect, the 
price linkages between equity indices and investible commodities, is 
lower during times market stress.
---------------------------------------------------------------------------

    \1608\ B[uuml]y[uuml]k[scedil]ahin and Robe, Speculators, 
Commodities, and Cross-Market Linkages (working paper 2012).
---------------------------------------------------------------------------

    Another comovement study provided an empirical link between 
commodity index investment and futures price movements, including 
increased price volatility.\1609\ Tang and Xiong find that the 
increasing presence of index traders in commodity futures markets 
improves risk sharing in these markets with concomitant volatility 
spillover from outside markets. This study finds evidence of volatility 
spillovers from the financial crisis in the 2006-2009 time period, 
spillovers that may have been a key driver of recent commodity price 
volatility.\1610\
---------------------------------------------------------------------------

    \1609\ Tang and Xiong, Index Investment and Financialization of 
Commodities, Financial Analysts Journal (2012).
    \1610\ Of course, the spillover effect may not be limited to 
domestic markets. Cf. UN Food and Agricultural Org., Price 
Volatility in Agricultural Markets. Economic and Social Perspectives 
Policy Brief 12 (2010) (citing financialization as a possible basis 
for short-term volatility and observing that international 
integration of markets can propagate price risks to domestic markets 
quicker than before).
---------------------------------------------------------------------------

    This Tang and Xiong finding of volatility ``spillovers'' is 
frequently cited by commenters in support of position limits. However, 
some academics are skeptical of their results. Irwin and Sanders 
concede that the Tang and Xiong paper ``appears to offer concrete 
evidence'' of some form of financialization, but offers several reasons 
to view these findings with caution.\1611\
---------------------------------------------------------------------------

    \1611\ Irwin and Sanders, Index Funds, Financialization, and 
Commodity Futures Markets, 15, Applied Economic Perspectives and 
Policy (2010) (questioning the small magnitude of correlation and 
suggesting that Tang and Xiong may not have adequately controlled 
for fundamental factors affecting price).
---------------------------------------------------------------------------

    Tang and Xiong's results do not necessarily point to lasting 
difficulties associated with the integration of financial and commodity 
markets. Instead, they argue that commodity markets were not integrated 
with financial markets prior to the development of commodity index 
funds. In their paper, Tang and Xiong view financialization as a 
``process'' which helps explain ``the synchronized price boom and bust 
of a broad set of seemingly unrelated commodities'' during the 2006-
2008 time period.\1612\
---------------------------------------------------------------------------

    \1612\ Tang and Xiong, Index Investment and Financialization of 
Commodities, Financial Analysts Journal (2012).
---------------------------------------------------------------------------

    A problem with this line of reasoning that critics have identified 
is that there could be other factors which lead to increased 
correlation between equities and futures during this time period. After 
all, 2006-2009 was an eventful time where broad macroeconomic factors 
held sway and could have led to large positive correlations between 
these markets. According to many, one of the factors leading to the 
influx of investment funds in during the 2006-2008 time period was 
negative correlations between commodities returns and equities returns. 
Yet this factor is less prevalent today. ``The positive correlation 
between the agriculture ETFs and S&P 500 suggests that the 
diversification benefits of using an agricultural index have 
decreased.'' \1613\
---------------------------------------------------------------------------

    \1613\ Tse, The Relationship Among Agricultural Futures, EFTs, 
and the US Stock Market, at 16, Review of Futures Markets (2012). 
Indeed, this decreased correlation may be due, in part, to ethanol, 
an economic substitute for gasoline as an additive to reformulated 
blend stock, being manufactured with corn and other grains.
---------------------------------------------------------------------------

    Some commenters have pointed to studies such as Tang and Xiong's in 
support of the position limits rule.\1614\ However, most financial 
investors' exposure to commodities through commodity index funds or 
ETFs would not be prevented by position limits. Studies on the price 
returns or price volatility effect of commodity index funds are thus 
not directly relevant to the placement of position limits on individual 
commodities contract.\1615\ Moreover, commodity index funds are not the 
only large investors whose activities may affect commodity futures 
prices.\1616\
---------------------------------------------------------------------------

    \1614\ See generally Henn Letter.
    \1615\ See December 2013 Position Limits Proposal at 75740 n.483 
(``The speculative position limits that the Commission proposes 
apply only to transactions involving one commodity or the spread 
between two commodities . . . . They do not apply to diversified 
commodity index contracts involving more than two commodities . . . 
. [C]ommenters assert that such contracts, which this proposal does 
not address, consume liquidity and damage the price discovery 
function of the marketplace'').
    \1616\ Irwin and Sanders, Index Funds, Financialization, and 
Commodity Futures Markets, at 26, Applied Economic Perspectives and 
Policy (2010) (emergency evidence that ``other traders, such as 
broker-dealers and hedge funds, play key roles in transmitting 
shocks to commodity futures markets from other sectors''), citing, 
inter alia B[uuml]y[uuml]k[scedil]ahin and Robe, Does it Matter Who 
Trades Energy Derivatives?, Review of Env't, Energy, and Economics 
(2013); Haigh, Hranaiova, and Overdahl, Hedge Funds, Volatility, and 
Liquidity Provisions in the Energy Futures Markets, Journal of 
Alternative Investments (Spring 2007); Basu and Gavin, What Explains 
the Growth in Commodity Derivatives?, Federal Reserve Bank of St. 
Louis (2011) (documenting increased participation in commodity 
trading by swap dealers).
---------------------------------------------------------------------------

    A paper by Korniotis contains an important caveat in the 
financialization debate: The effects of financialization may vary 
widely depending on the type of commodity.\1617\ Crude oil is an 
important component of the S&P Goldman-Sachs Commodity Index

[[Page 96909]]

(GSCI), more so than industrial metals. Federal Reserve Board economist 
George Korniotis found that there was cointegration between metals with 
and without futures contracts that did not weaken as financial 
speculation increased in the marketplace and the spot prices for 
industrial metals were unrelated to the GSCI.
---------------------------------------------------------------------------

    \1617\ Korniotis, Does Speculation Affect Spot Price Levels? The 
Case of Metals With and Without Futures Markets (working paper, FRB 
Finance and Economic Discussion Series 2009).
---------------------------------------------------------------------------

    With the exceptions discussed in detail above, many of the studies 
in this vein do not warrant detailed discussion. Even well-executed 
economic studies using comovement methodology that do not focus on 
position limits may be of little or marginal relevance.\1618\
---------------------------------------------------------------------------

    \1618\ See Baffes and Haniotos, Placing the 2006/08 Commodity 
Boom into Perspective, World Bank Policy Research Working Paper 5371 
(2010); Kawamoto, Kimura, et al., What Has Caused the Surge in 
Global Commodity Prices and Strengthened Cross-market Linkage?, Bank 
of Japan Working Papers Series No.11-E-3 (May 2011); Coleman and 
Dark, Economic Significance of Non-Hedger Investment in Commodity 
Markets (working paper 2012); Dorfman and Karali, Have Commodity 
Index Funds Increased Price Linkages between Commodities? (working 
paper 2012); Le Pen and S[eacute]vi, Futures Trading and the Excess 
Comovement of Commodity Prices (working paper 2012); Creti, Joets, 
and Mignon, On the Links Between Stock and Commodity Markets' 
Volatility, Energy Economics (2010); Bichetti and Maystre, The 
Synchronized and Long-lasting Structural Change on Commodity 
Markets: Evidence from High Frequency Data (working paper 2012).
---------------------------------------------------------------------------

Herding
    There are other possible ways in which additional trading volume 
may not be an unalloyed benefit to the wellbeing of a marketplace. A 
few comovement studies attempt to test for the existence of 
``herding.'' This is a formalized version of price trending. The idea 
here is that traders may initiate a trade with the expectation that 
positive-feedback traders will purchase the traded instruments at a 
higher price later.\1619\ Some economists argue that financialization 
aggravates ``herding'' behavior and herding creates price 
bubbles.\1620\ Others dispute any such effect.\1621\
---------------------------------------------------------------------------

    \1619\ Boyd, B[uuml]y[uuml]k[scedil]ahin, and Haigh, The 
Prevalence, Sources, and Effects of Herding (working paper 2013); 
Hoff, Herding Behavior in Asset Markets, Journal of Financial 
Stability (2009). See also Froot, Scharfstein, and Stein, Herd on 
the Street: Informational Inefficiencies in a Market with Short Term 
Speculation (working paper 1990) (theoretical paper discussing 
herding); Weiner, Do Birds of A Feather Flock Together? Speculator 
Herding in the Oil Market (working paper 2006) (doing a herding 
analysis to conclude that there are subgroups within speculators 
that act in parallel, and this amplifies their effect on crude oil 
prices).
    \1620\ Hoff, Herding Behavior in Asset Markets, Journal of 
Financial Stability (2009); Mayer, The Growing Interdependence 
Between Financial and Commodity Markets, UN Conference on Trade and 
Development (discussion paper 2009) (Granger analysis).
    \1621\ E.g., Brunetti and B[uuml]y[uuml]k[scedil]ahin, Is 
Speculation Destabilizing?, at 5 n.3 (working paper 2009) (``the 
moderate level of herding in futures markets [among hedge funds] 
serves to stabilize prices'').
---------------------------------------------------------------------------

    Though the evidence for herding is meager, the underlying idea is 
consistent with accepted and theoretically plausible results on risk 
premia. Risk premiums rise with the volatility of the futures markets, 
and risk premiums depend in part on speculators' hedging pressure and 
inventory levels.\1622\
---------------------------------------------------------------------------

    \1622\ Basu and Miffre, Capturing the Risk Premium of Commodity 
Futures: The Role of Hedging Pressure, Journal of Banking and Risk 
(2013).
---------------------------------------------------------------------------

Agricultural Commodities and Financialization
    Agricultural economists have reached similarly conclusions on the 
cointegration of financial speculators and food prices. While there are 
respectable empirical results suggesting that financial speculation 
have affected some recent agricultural commodity price dynamics, there 
is no unanimity in the academic community on conclusive empirical 
evidence of the causal dynamics, breadth, and magnitude of such 
effects.\1623\
---------------------------------------------------------------------------

    \1623\ See Aulerich, Irwin, and Garcia, Bubbles, Food Prices, 
and Speculation: Evidence from the CFTC's Daily Large Trader Data 
Files, at 3 n.4, NBER Conference on Economics of Food Price 
Volatility (2012) (studies testing for the existence of price 
bubbles in agricultural futures markets have led to ``mixed 
results''). See also.Belke, Bordon, and Volz, Effects of Global 
Liquidity on Commodity and Food Prices, German Institute for 
Economic Research (2013); Ad[auml]mmer, Bohl and Stephan, 
Speculative Bubbles in Agricultural Prices (working paper 2011); 
Algieri, A Roller Coaster Ride: an Empirical Investigation of the 
Main Drivers of Wheat Price (working paper 2013); Babula and 
Rothenberg, A Dynamic Monthly Model of U.S. Pork Product Markets: 
Testing for and Discerning the Role of Hedging on Pork-Related Food 
Costs, Journal of Int'l Agricultural Trade and Development (2013); 
Windawi, Speculation, Embedding, and Food Prices: A Cointegration 
Analysis (working paper 2012).
---------------------------------------------------------------------------

c. Models of Fundamental Supply and Demand and Related Methods
i. Description
    Some economists have developed economic models for the supply and 
demand of a commodity. These models often include theories of how 
storage capacity and use affect supply and demand, often a critical 
factor in the case of physical commodities and their inter-temporal 
price (that is, their price over time). Using models of supply and 
demand, the economists then attempt to arrive at a ``fundamental'' 
price (or price return) for commodity based on the model. Specifically, 
the economists look at where the model is in equilibrium with respect 
to quantities supplied and quantities demanded to arrive at this price. 
The fundamental price given by such a model is then compared with 
actual prices. The economists look for deviations between the 
fundamental price, based on the model, and the actual price of the 
commodity. When pursuing this method, economists look for whether the 
price deviations are statistically significant. When there are 
statistically significant deviations of the actual price from market 
fundamentals, they infer that the price is not driven by market 
fundamentals.
    Many of these studies present a model for one particular commodity 
or set of commodities. Some looked at volatile markets. Others used at 
very predictable markets.
    We group together for analysis a diverse set of studies that fall 
within this broad category of economic models of fundamental supply and 
demand. Some asserted that their models generally could explain prices. 
Some papers were neutral. And some papers reached the conclusion that 
market fundamentals could not explain certain price data in the markets 
they studied.
ii. Advantages
    This methodology is well-recognized and accepted means for 
detecting price deviations. This is a centuries-old technique, as old 
as the quantification of economics. The model forces the economist to 
explain supply and demand. This requirement thus provides welcome 
transparency.
    Moreover, the models are auditable: When the fundamental price 
deviates from the actual price, the economists may well be able to look 
at the model and see which aspects of supply and/or demand created the 
deviation. If the economist cannot ascertain the source of the 
deviation, (1) the economist may seek to add additional variables to 
the models for supply or demand to better model supply and demand or 
(2) conclude that this unexplained deviation is empirical support for 
the existence of a non-fundamental price.
    Another advantage of this model is that the loose language of 
``bubble'' is replaced by the term ``non-fundamental price.'' The model 
supplies an economically motivated specification for the price of a 
commodity. This feature permits deeper economic analysis and debate on 
whether a non-fundamental price exists without a digression into 
debates about what the term ``bubble'' means.\1624\
---------------------------------------------------------------------------

    \1624\ Nobel laureates in economics cannot agree on whether 
bubbles exist or what the proper definition of a bubble is. Studies 
that focus on the causes of price formation avoid these definitional 
uncertainties. See Easterbrook, Frank, Monopoly, Manipulation, and 
the Regulation of Futures Markets, at S117, Journal of Business 
(1986) (it is not necessarily market manipulation to exploit an 
advantageous position in the marketplace in anticipation of changes 
in supply and demand.'')

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

[[Page 96910]]

iii. Disadvantages
    As applied to position limits, this approach has several drawbacks 
as well.
    First and foremost, the analyses and conclusions that flow from 
these studies are only as good as the models themselves. Specifically, 
the price benchmark is based on the model, and an analysis of deviation 
from the benchmark is only as strong as the model itself. These models 
incorporate many simplifying assumptions. Market behavior and the real 
world in general, are much more complicated.
    Moreover, these models do not function well when there is a supply 
shock or when demand falls precipitously. Another disadvantage is model 
construction using variables that are highly correlated with the price. 
If the correlation between price and a variable is too high, then using 
the variable in the model may permit the variable to function as a 
proxy for price. This will hobble the model's ability to detect price 
deviations.
    A substantial disadvantage of this model is the inherent difficulty 
of modelling fundamentals of supply and demand in a market of any 
complexity. Or even, in a model, in anticipating or measuring the 
impact of large macroeconomic trends. For example, economists have a 
notoriously bad track record of predicting economic recessions. Thus it 
is difficult to conclude that a model with a few variables, designed 
without this hindsight, would be successful in predicting how crude oil 
prices would behave during the advent of an economic recession. With 
hindsight, economists know now that September 2008 was at the outset of 
a substantial global recession, or at least a point of dramatic 
decrease in the output of the world economy. And with hindsight, it is 
apparent that the recession dramatically reduced the demand for crude 
oil. But at the outset of a recession, a model designed without 
knowledge of the recession (or of its severity) might confuse a 
statistically significant deviation of actual crude oil prices for the 
fundamental price derived from the model.
    In addition, while this statistical method replaces the loose 
language of ``bubbles'' with a statistically derived fundamental price, 
studies offering economic analysis of the fundamentals of price and 
demand do not eliminate all subjectivity in determining whether a non-
fundament price has occurred. An economist will often obtain from these 
models a ``price band,'' a band for which prices falling within that 
range remain reflective of fundamental supply and demand. Prices 
outside the price band are non-fundamental prices. Determining the 
height of the band depends on what is viewed as a statistically 
significant deviation, by definition. But determining what a 
statistically significant deviation is requires the economist to make 
an assumption that can be quite consequential. The economist must set a 
level of price changes that his or her model will ignore as 
attributable merely to chance. Nothing in underlying statistics of the 
price data will provide the economist with this level. If the level is 
fixed so that the price band is relatively tall, less prices are likely 
to be labelled statistically significant deviation by the test.
iv. Analysis of Specific Papers Using Fundamental Models
Crude Oil Models
    Even before 2007, there were suspicions about prices in the crude 
oil market. The Governor of the Federal Reserve Board said in 2004: 
``The sharp increases and extreme volatility of oil prices have led 
observers to suggest that some part of the rise in prices reflects a 
speculative component arising from the activities of traders in the oil 
markets.'' \1625\ Then the price of crude oil doubled from June 2007 to 
June 2008, and then rapidly declined in the second-half of 2008. Many 
economists thereafter published papers saying that the increase in 
demand up to June 2008 and/or the decrease in demand for September 2008 
crude oil could not be explained by market fundamentals. Many attempted 
to infer from this fact that speculative trading was causing changes in 
crude oil prices or price volatility.
---------------------------------------------------------------------------

    \1625\ Ben S. Bernake, Oil and the Economy, Remarks by then 
Governor Bernake at the Distinguished Lecture Series, Darton 
College, Albany, Georgia (2004).
---------------------------------------------------------------------------

    To understand these papers' strengths and weaknesses, it is 
important to appreciate a critical factor about crude oil market 
economics--storage.\1626\ Data on storage is often used to study crude 
oil prices for speculative price influences.
---------------------------------------------------------------------------

    \1626\ Brennan and Schwartz, Arbitrage in Stock Index Futures 
(Journal of Business 1990).
---------------------------------------------------------------------------

    Crude oil is storable, and so its price reflects, in particular, 
the demand for crude oil inventory. Speculators influence the spot 
price of crude oil by placing physical crude oil into storage when 
future prices are anticipated to be higher and out of storage when 
future prices are anticipated to be lower. Given this, some economists 
have studied crude oil storage to determine whether crude oil 
inventories could be contributing to the boom and bust in crude oil 
prices during the 2007-2008 time period. Specifically, using models of 
fundamental supply and demand, they study the elasticity of crude oil 
prices to determine whether the effect of speculators' trading on crude 
oil inventories could affect crude oil prices.
    Several economists have examined above-ground oil inventories in 
the United States during this 2007-2008 timeframe and examined the 
interplay of crude oil inventories and prices. They concluded that the 
short-term elasticity of crude oil demand would have had to have been 
unusually low--quite inelastic--for inventory demand to fully explain 
the unusual crude oil prices in 2007-2008. (Price inelasticity of 
demand means that the price of crude oil is sensitive to changes in 
quantity demand: A small decrease in demand is likely to cause a large 
drop in price, for example, when the short-term elasticity of demand is 
inelastic, all else being equal.) From this, they conclude that 
speculative traders' effect on inventory demand was unlikely to be a 
complete explanation for the 2007-2008 crude oil price swings. That is, 
it would be unlikely for speculators to be able to (at least easily) 
cause substantial movements in crude oil prices by speculators' 
influence on the amount of crude oil stored in above-ground crude oil 
inventories.\1627\
---------------------------------------------------------------------------

    \1627\ Byun, Speculation in Commodity Futures Market, 
Inventories and the Price of Crude Oil (working paper 2013); 
Hamilton, Causes and Consequences of the Oil Shock of 2007-2008, 
Brookings Paper on Economic Activity (2009); Kilian and Lee, 
Quantifying the Speculative Component in the Real Price of Oil: The 
Role of Global Oil Inventories (working paper 2013); Kilian and 
Murphy, The Role of Inventories and Speculative Trading in the 
Global Market for Crude Oil, Journal of Applied Econometrics (2010); 
Knittel and Pindyck, The Simple Economics of Commodity Price 
Speculation (working paper 2013).
---------------------------------------------------------------------------

    Nonetheless, inventories may still explain part of the unusual 
price behavior of crude oil in 2007-2008. Even if the short-term 
elasticity of demand would have to have been very small in absolute 
value, speculation may have also affected below-ground 
inventories.\1628\
---------------------------------------------------------------------------

    \1628\ Hamilton, Causes and Consequences of the Oil Shock of 
2007-2008, Brookings Paper on Economic Activity (2009) (below-ground 
inventories should also be considered and are not included in the 
data) (concluding that speculative trading did affect both the speed 
and magnitude of the price decline in 2008).
---------------------------------------------------------------------------

    Many economists conclude that there was a substantial demand shock 
to crude oil during this time period, a

[[Page 96911]]

demand arising from the onset of a global recession. As the deep 
recession of 2008 and 2009 began to set in, there was a decrease in 
demand for September 2008 crude oil in the crude oil futures market. It 
is unlikely that a demand shock associated with the recession was 
anticipated by the marketplace, including speculators, given the 
notorious difficulty of predicting recessions. Kilian and Murphy \1629\ 
assert, if a global recession causes the demand shock, the economics of 
the crude oil market suggests that there is little policymakers can do 
to prevent this kind of price bubble from appearing in the crude oil 
market at the outset of the recession.\1630\
---------------------------------------------------------------------------

    \1629\ Kilian and Murphy, The Role of Inventories and 
Speculative Trading in the Global Market for Crude Oil, Journal of 
Applied Econometrics (2010).
    \1630\ See id. at 6 & n. 8 (economic theory suggests a link 
between cyclical fluctuations in global real activity and the real 
price of oil).
---------------------------------------------------------------------------

    Several economists wrote papers suggesting that their results 
indicated that crude oil price changes during this time period 
reflected uneconomic or ``bubble-like'' behavior. Generally, these 
authors find that their models of supply and demand could not track 
well the run up in crude oil prices to around $145 in mid-2008 or the 
bust to close to $30 a barrel just a few weeks later, and they 
concluded that activity by speculators in these markets was or might be 
affecting the rapid crude oil price changes.\1631\
---------------------------------------------------------------------------

    \1631\ E.g., Cifarelli and Paladino, Oil Price Dynamics and 
Speculation: A Multivariate Financial Approach, at p.1, Energy 
Economics (2010) (``Despite the difficulties, we identify a 
significant role played by speculation in the oil market, which is 
consistent with the observed large daily upward and downward shifts 
in prices--a clear evidence that it is not a fundamental-driven 
market''); Einloth, Speculation and Recent Volatility in the Price 
of Oil (working paper 2009) (using convenience yields to conclude 
that speculation did not play a major role in rise of crude oil to 
$100 a barrel in March of 2008, did play a role in its subsequent 
rise to $140 a barrel, and did not play a role in subsequent 
decline); Hamilton, Causes and Consequences of the Oil Shock of 
2007-2008, Brookings Paper on Economic Activity (2009) (speculative 
trading increased the speed and magnitude of mid-2008 price 
collapse). Papers using this methodology reach a broad range of 
conclusions. See also Eckaus, The Oil Price Really is a Speculative 
Bubble (working paper 2008) (reject the hedging pressure hypothesis 
that inventory positions are an important determinant of risk 
premiums, and concludes that oil prices are speculative because he 
cannot perceive a reason for the prices based on supply and demand); 
Morana, Oil Price Dynamics, Macro-finance Interactions and the Role 
of Financial Speculation, at 206-226, Journal of Banking & Finance, 
Vol. 37, Issue 1 (Jan. 2013) (concluding that there is excessive 
speculation in the crude oil market that did lead to a substantial 
price impact in 2007-2008); Sornette, Woodard and Zhou, The 2006-
2008 Oil Bubble and Beyond: Evidence of Speculation, and Prediction, 
Physica A. (2009) (find evidence of a bubble, but only based upon an 
undocumented model largely presented by graphs); Stevans and 
Sessions, Speculation, Futures Prices, and the U.S. Real Price of 
Crude Oil, American Journal of Social and Management Science (2010) 
(contending that there is ``hoarding'' in the crude oil market and 
that elimination of the longer-term futures contracts would curb 
excessive speculation); Weiner, Speculation in International Crises: 
Report from the Gulf, Journal of Int'l Business Studies (2005) (a 
combination of political and market events, not speculation, was 
behind the price volatility in 1990-1991); Breitenfellner, Crespo, 
and Keppel, Determinants of Crude Oil Prices: Supply, Demand, 
Cartel, or Speculation?, at 134, Monetary Policy and the Economy 
(2009) (concluding ``it is conceivable'' that interaction between 
crude oil production and financial markets exacerbated pressure on 
crude oil prices, but finding no proof of this).
---------------------------------------------------------------------------

    These studies do not, in total, lead to consensus. There are 
distinctive differences and disagreement in the papers on the existence 
of excessive speculation in the crude oil market during 2007-2009. Even 
within the Federal Reserve system, there is disagreement, for instance, 
Plante and Y[uuml]cel, in Did Speculation Drive Oil Prices? Futures 
Market Points to Fundamentals,\1632\ and Juvenal and Petrella, in 
Speculation in the Oil Market.\1633\
---------------------------------------------------------------------------

    \1632\ Plante and Y[uuml]cel, Did Speculation Drive Oil Prices? 
Futures Market Points to Fundamentals (working paper Federal Reserve 
of Dallas 2011) (crude oil data for the 2007-2009 time period ``are 
consistent with how a well-functioning futures market would 
behave,'' and if speculation had been to blame, there would have 
been ``very large positive spreads . . . followed by significant 
increases in inventory'').
    \1633\ Juvenal and Petrella, Speculation in the Oil Market 
(working paper of Federal Reserve Bank of St. Louis 2012) 
(concluding that speculation played a ``significant role'' in both 
the price increases in 2008 and the subsequent collapse, but they 
did not carefully model ``excess speculation.'' Instead, they 
interpreted the second principle component as being ``excess 
speculation'' even though the second component may be assigned many 
other interpretations or even be deemed uninterpretable.).
---------------------------------------------------------------------------

    The methodology of fundamentals of supply and demand does not zero 
in precisely on causation and leaves room for interpretation of why a 
price does not follow modelled supply and demand behavior. Labelling 
prices ``bubbles'' caused by speculation simply because one does not 
understand or cannot otherwise account for price movements is 
problematic. One explanation for the failure of these models to track 
such fast-moving prices that is speculative activity is at work. But 
there are other explanations. On some level, there is a tautological 
error in labelling price changes as ``bubble-like'' simply because 
economists could not, as of a certain time and with certain model, 
otherwise explain or predict price movements. These models are trying 
to explain very complex phenomena and make difficult choices on how to 
use imperfect data.
    Some models performed better at modelling the real-world crude oil 
prices, using models of fundamental supply and demand, by selecting one 
of the stronger proxies for crude oil, such as the Dry Baltic Index or 
macroeconomic variables such as global gross domestic product as 
explanatory variables.\1634\
---------------------------------------------------------------------------

    \1634\ E.g., Kilian and Murphy, The Role of Inventories and 
Speculative Trading in the Global Market for Crude Oil, Journal of 
Applied Econometrics (2010). In the construction of his study, 
Kilian used a shipping index, the Dry Baltic Index. In shipping, a 
predominant factor in the cost of shipping is the cost of crude oil. 
By using the Dry Baltic Index to attempt to compose a model to 
explain crude oil prices, the economist chose a variable which would 
naturally be highly correlated to crude oil prices. However, by 
using a proxy, the effectiveness of the model is lessened. It is 
unclear whether the results are attributable to fundamentals driving 
crude oil prices or crude oil prices driving the Dry Baltic Index. 
See also Morana, Oil Price Dynamics, Macro-finance Interactions and 
the Role of Financial Speculation, pp. 206-226, Journal of Banking & 
Finance, Vol. 37, Issue 1 (Jan. 2013) (careful, large-scale modeling 
of the oil market macro-finance interface, finding the existence of 
``excess speculation'' in these markets using Workings T and other 
tests, and concluding that financial factors may have up to a 30 
percent contribution to oil price fluctuations). Id. at p.220 (using 
Working's T and model to conclude that there is a significant 
liquidity effect associated with non-fundamental financial shocks in 
the oil market, leading to a higher real oil price without affecting 
inventories); id. at 223-224 (macro-finance factors played a larger 
role than ``financial factors'' in the 2007-2009 crude oil ``price 
shock,'' but ``excessive speculation'' did have a price impact).
---------------------------------------------------------------------------

    One of the best studies in this area is Hamilton, Causes and 
Consequences of the Oil Shock of 2007-2008.\1635\ He concludes that 
fundamentals of supply and demand are responsible for most of the run-
up in prices, while speculative trading may have increased both the 
speed and absolute magnitude of the mid-2008 decline in prices. As to 
the first point, he concludes that while oil prices may have been ``too 
high'' in July 2008, ``low price elasticity of demand, and the failure 
of physical production to increase'' are more likely the predominant 
causes than ``speculation per se.'' \1636\ He acknowledges, however, 
that the speed and magnitude of the price decline in mid-2008 may have 
been induced, in part, by speculative trading.
---------------------------------------------------------------------------

    \1635\ Hamilton, Causes and Consequences of the Oil Shock of 
2007-2008, Brookings Paper on Economic Activity (2009).
    \1636\ See id. at 17-23.
---------------------------------------------------------------------------

    Given this mixed result, both proponents and opponents of position 
limits cite various aspects of this Hamilton study. His study follows 
the data closely; his model discusses key issues such as inventory. He 
does not leap to strained interpretations based on theoretical model 
assumptions. When his model does not provide a full explanation for 
price behavior based on supply and demand, he does not simply jump to 
the conclusion that speculation is at work. Instead, he offers measured

[[Page 96912]]

judgments on the possibility that speculation may have affected the 
precipitous mid-2008 crude oil price decline and presents statistical 
evidence that this may have occurred.
Other Studies Based on Supply and Demand Models
    A discussion of crude oil prices during the 2007-2008 timeframe is 
illustrative of other commodities during this time period. For example, 
there is considerable comovement between the real price of crude oil 
and the real price of other industrial commodities during times of 
major fluctuation in global real activity (such as global 
recessions).\1637\ All commodities during this time period were 
buffeted by macroeconomic factors, including a global recession, and a 
deep one at that during 2008 and 2009.
---------------------------------------------------------------------------

    \1637\ Kilian and Murphy, The Role of Inventories and 
Speculative Trading in the Global Market for Crude Oil, at p.7 n. 9, 
Journal of Applied Econometrics (2010).
---------------------------------------------------------------------------

    Outside of the crude oil context, there are some noteworthy studies 
of fundamental supply and demand that bear on the position limits 
rulemaking.
    Allen, Litov, and Mei, in Large Investors, Price Manipulation, and 
Limits to Arbitrage: An Anatomy of Market Corners,\1638\ examine 
historical corners and squeezes in security and commodity markets and 
conclude that a corner or squeeze may induce arbitragers to exit the 
market, since arbitragers will only take short positions when the 
prospect of profits is high enough. Two papers, Gorton, Hayashi, 
Rouwenhorst, The Fundamentals of Commodity Futures Returns,\1639\ and 
Ederington, Dewally, and Fernando, Determinants of Trader Profits in 
Futures Markets,\1640\ offer empirical support for the hedging pressure 
hypothesis: That the returns on long futures positions vary inversely 
with inventory and price volatility.\1641\ Haigh, Hranaiova, and 
Overdahl, in Hedge Funds, Volatility, and Liquidity Provisions in the 
Energy Futures Markets,\1642\ suggest that hedge funds supply liquidity 
and that there is little linkage between price volatility and hedge 
fund position change. They claim that hedge fund participation in 
futures markets, at least as of 2007, was not injecting unwarranted 
volatility into futures prices.\1643\
---------------------------------------------------------------------------

    \1638\ Allen, Litov, and Mei, Large Investors, Price 
Manipulation, and Limits to Arbitrage: An Anatomy of Market Corners, 
Review of Finance (2006).
    \1639\ Gorton, Hayashi, Rouwenhorst, The Fundamentals of 
Commodity Futures Returns, Review of Finance (2013).
    \1640\ Ederington, Dewally, and Fernando, Determinants of Trader 
Profits in Futures Markets (working paper 2013).
    \1641\ All else being equal, the more inventory available for 
delivery the less costly it is for shorts to hedge their exposure. 
Similarly, the more volatile the commodity prices are, the more 
price risk is being accepted by the longs (all else being equal). 
This means that in volatile markets hedgers that are short will pay 
higher risk premia to hedge.
    \1642\ Haigh, Hranaiova, and Overdahl, Hedge Funds, Volatility, 
and Liquidity Provisions in the Energy Futures Markets, Journal of 
Alternative Investments (2007).
    \1643\ See also Harrison and Kreps, Speculative Investor 
Behavior in a Stock Market With Heterogeneous Expectations, 
Quarterly Journal of Economics (1978) (differences in subjective 
beliefs induce trading and speculation); Manera, Nicolini and 
Vignati, Futures Price Volatility in Commodities Markets: The Role 
of Short-Term vs Long-Term Speculation (working paper 2013) (short-
term speculation, as estimated by daily volume divided by open 
interest, increases volatility while long term speculation, using a 
Working's T analysis, decreases it); Trostle, Global Agricultural 
Supply and Demand: Factors Contributing to the Recent Increase in 
Food Commodity Prices, USDA Economic Research Service (2008) 
(surveying supply and demand fundamentals explain a lot of the 
futures prices and price volatility: Slow growth in production 
relative to demand for biofuels, declining US dollar, rising oil 
prices, bad weather 2006 to 2007, growing holdings by foreign 
countries, and increased cost of production for agriculture in 
general).
---------------------------------------------------------------------------

    Other papers on the fundamentals of supply and demand do not bear 
directly on position limits. Some discuss matters far afield from the 
impact of positions on price or other matters bearing on position 
limits.\1644\ Others rest on unreliable model assumptions.\1645\
---------------------------------------------------------------------------

    \1644\ Chan, Trade Size, Order Imbalance, and Volatility-Volume 
Relation, Journal of Financial Economics (2000) (studying the equity 
market to determine the role that trade size has on volatility for 
equities); Chordia, Subrahmanyam and Roll, Order imbalance, 
Liquidity, and Market Returns, Journal of Financial Economics (2002) 
(show that order imbalances in either direction for equity markets 
affect daily returns after controlling for aggregate volume and 
liquidity); Doroudian and Vercammen, First and Second Order Impacts 
of Speculation and Commodity Price Volatility (working paper 2012) 
(claiming a ``second order'' price distortion caused by 
institutional investors); Frankel and Rose, Determinants of 
Agricultural and Mineral Commodity Prices (working paper 2010) (two 
macroeconomic fundamentals--global output and inflation--have 
positive effects on real commodities, but microeconomic variables 
have greatest overall effects, including volatility, inventories, 
and spot-forward spread); Girardi, Do Financial Investors Affect 
Commodity Prices? (working paper 2011) (during the late 2000s there 
was a positive, statistically significant and substantial 
correlation between hard red winter wheat price and the U.S. equity 
market, as well as a substantial correlation between hard red winter 
wheat prices and crude oil prices); Hong and Yogo, Digging into 
Commodities (working paper 2009) (investors use commodities to hedge 
market fluctuations, as evidenced by yield spread analysis); Kyle 
and Wang, Speculation Duopoly with Agreement to Disagree: Can 
Overconfidence Survive the Market Test?, Journal of Finance (1997) 
(theoretical model explaining how overconfidence by fund managers 
can lead to a persistence in market prices); Plato and Hoffman, 
Measuring the Influence of Commodity Fund Trading on Soybean Price 
Discovery (working paper 2007) (``finding that the price discovery 
performance of the soybean futures market has improved along with 
the increased commodity fund trading''); Westcott and Hoffman, Price 
Determination for Corn and Wheat: The Role of Market Factors and 
Government Programs (working paper 1999) (analysis of supply and 
demand fundamentals for wheat and corn that does not include 
position data); and Wright, International Grain Reserves and Other 
Instruments to Address Volatility in Grain Markets, World Bank 
Research Observer (2012) (about price limits, not position limits).
    \1645\ Bos and van der Molen, A Bitter Brew? How Index Fund 
Speculation Can Drive Up Commodity Prices, Journal of Agricultural 
and Applied Economics (2010) (most of the changes in spot prices can 
be attributed to shifts in demand and supply, and failure to account 
properly for these inputs in the coffee price generation process may 
lead to serious overestimation of the effects of speculation; 
nevertheless, asserting without detailed analysis that speculation 
is an important part of the coffee price generation process), Gupta 
and Kamzemi, Factor Exposures and Hedge Fund Operational Risk: The 
Case of Amaranth (working paper 2009) (trying to explain the 
behavior of Amaranth on the mistaken notion that a hedge fund should 
be diversified); Henderson, Pearson and Wang, New Evidence on the 
Financialization of Commodity Markets (working paper 2012) (analysis 
founded on questionable assumption that commodity link note 
investors are uninformed investors); Van der Molen, Speculators 
Invading the Commodity Markets (working paper 2009) (data handling 
problems: Dataset which covers twenty years, while the variable 
index speculators is only available for two to three years, and 
assumes that net position is in indication of index speculators).

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

[[Page 96913]]

d. Switching Regressions
i. Switching Regression Analysis Described
    In a switching regression analysis, an economist poses the 
existence of a model with more than one state. In the particular 
context of position limits, there are typically two states: (1) A 
normal state--where prices are viewed as what they theoretically should 
be following market fundamentals and (2) a second state--often 
described as a ``bubble'' state in these papers. Using price data, 
authors of these studies calculate the probability of a transition 
between these two states. The point of transition between the two 
states under this methodology is called a structural ``breakpoint.'' 
Examination of these breakpoints permits the researcher to date and 
time the existence of a second state, such as a bubble state.
    These authors sometimes find empirical support in the data for the 
existence of a second state by calculating the probability of 
breakpoints. When the probability is high enough, the research will say 
that there is evidence for a second state.
ii. Advantages
    A variant of this method was first published in 1973. It is fairly 
well-credentialed within academia. If there are two states of the 
world, it makes sense that distinct states would have different 
economic models. Because switching regressions uses at least a two-
state regression, this method satisfies the economist's view that 
different states would be better described using different models. A 
one-size-fits-all model, applied to varying economic states, could 
potentially be compromised in order to accommodate disparate states.
    This model is flexible, allowing for many different specifications 
(of model design) as explanatory variables of speculative positions and 
futures prices.
    When using this method, the economic researcher permits the data 
itself to choose the structural breakpoints. This differs from some 
other statistical methods, where the economic researcher may choose 
exogenously, based on interpretation of the data or historical 
knowledge, where and when a transition to a supposed bubble state 
occurs. The model's selection of the breakpoint permits data to be 
tested against known historical events and thus lend a measure of 
credence to the model's choices for structural breaks.
    The model also permits close study of particular time periods. An 
economist may well be aware of historical events that were market-
transition events such as ``bubbles,'' and this method permits the 
economist to zero-in on that time period and to investigate potential 
causes and/or confounding events associated with a suspected market 
transition.\1646\
---------------------------------------------------------------------------

    \1646\ This method is particularly good at ``accommodating'' 
abrupt shifts in market data. Some statistic methods, such as those 
based on linear regression, may have difficulty with volatile data 
or data discontinuity. This method is also particularly well-suited 
for studying policy changes. For example, if the Federal Reserve 
makes a policy change that is expected to have a long-term, but not 
necessarily an immediate, impact, this method will permit an 
economist to infer, based on the model, the duration of the lag 
before the policy change begins to affect the markets.
---------------------------------------------------------------------------

iii. Disadvantages
    This method has a significant disadvantage that is highlighted in 
the position limit context. This statistical technique tests for a 
second state. There could, however, be reasons for a non-normal state 
other than a ``bubble'' state. This method leaves quite a bit to 
economic interpretation of the model, not raw data analysis, to reach 
their inference that the second state is a ``bubble'' state.
    While the existence of a second state may indicate a ``bubble'' 
state and may indicate a problem with excessive speculation, this 
statistical method cannot definitively prove these inferences, even if 
position data were used in the analysis. The probability of the 
existence of second state in these studies in only circumstantial 
evidence of (1) a ``bubble'' state and (2) a ``bubble'' state caused by 
excessive speculation.
    Consider an example of why data alone cannot explain why a 
deviation from a normal market state is a bubble state: The case of 
feeder cattle. If there is a drought and feed becomes scarce and 
expensive, the cattlemen may sell off part of their herd. Prices of 
feeder cattle may then drop in the short term as well, because 
cattleman may sell young calves, too. But subsequently, because so many 
cattle have been slaughtered, there is a shortage of feeder cattle the 
next season and the prices of feeder cattle rise. So in this case, 
there is theoretical and empirical support for two states, but they 
correspond to non-drought and drought states and not normal and 
``bubble'' state. Switching regression analysis if applied to feeder 
cattle prices during a time period encompassing both drought and non-
drought state would not establish the existence of what we could 
typically view as a ``bubble'' in the post-drought price rise.\1647\ In 
any event, none of this price phenomenon can be viewed as a problem of 
``excessive speculation.'' One could still use the ill-defined word 
``bubble'' to describe the second state, but it would be a dearth of 
rainfall, not excessive speculation, which created this second state.
---------------------------------------------------------------------------

    \1647\ This example is taken from an academic paper not within 
the administrative record that found non-fundamental (or ``bubble'') 
prices in crude oil and feeder cattle markets. Brooks et al, Boom 
and Busts in Commodity Markets: Bubbles or Fundamentals? (working 
paper 2014).
---------------------------------------------------------------------------

    The theoretical level of the analysis, and in particular the lack 
of firm empirical data linking non-normal states to speculative 
``bubble'' markets, are weaknesses of this statistical method. The 
studies following this method do not provide categorical proof of the 
existence of speculative ``bubble'' markets and they do not provide 
statistical evidence of whether positions limits would be effective in 
ameliorating ``bubble'' markets.\1648\
---------------------------------------------------------------------------

    \1648\ These models are difficult to design well in this context 
for several other reasons. The economist is making an informed, 
probabilistic inference that a transition has occurred. This 
inference is more than a seat-of-the-pants determination, but it is 
less than a mathematical certainty. The result of this statistical 
method is also highly dependent upon what set of data the 
econometrician selects for analysis. An economic model founded on 
this method should be given more credence when it is applied to more 
than one dataset and the results are replicated with different data. 
Selection of controlling variables that would account for position 
data is a difficult task with this statistical model. The data-
driven nature of the model does not help in selection of proper 
controlling and explanatory variables. Ingenuity is required to 
design explanatory variables that would account well for position 
data.
---------------------------------------------------------------------------

iv. Analysis of Studies Reviewed That Used Switching Regression
    Five studies used a standard form of switching regressions 
analysis.\1649\

[[Page 96914]]

Three studies used a related methodologies, multi-state regressions or 
conditional correlations.\1650\
---------------------------------------------------------------------------

    \1649\ These are: Cifarelli and Paladino, Commodity Futures 
Returns: A non-linear Markov Regime Switching Model of Hedging and 
Speculative Pressures (working paper 2010) (concluding that 
speculation, not supply and demand factors, drive some daily price 
swings in certain energy futures); Chevallier, Price Relationships 
in Crude oil Futures: New Evidence from CFTC Disaggregated Data, 
Environmental Economics and Policy Studies (2012) (the influence of 
financial investors through the S&P GSCI Energy Spot may have 
contributed to price changes in the crude oil market) (discussed in 
ensuing text); Hache and Lantz, Speculative Trading & Oil Price 
Dynamic: A Study of the WTI Market, Energy Economics, Vol. 36, 340 
(March 2013) (cannot reject hypothesis that variations in the 
positions of non-commercial players may have played a 
``destabilising role in petroleum markets'' and ``speculative 
trading can be considered an important factor during market 
instability and `oil bubbling' process''); Lammerding, Stephan, 
Trede, and Wifling, Speculative Bubbles in Recent Oil Price 
Dynamics: Evidence from a Bayesian Markov Switching State-Space 
Approach, Energy Economics Vol. 36 (2013) (claims to find robust 
evidence of ``bubbles'' in oil prices associated with speculation); 
and Sigl-Gr[uuml]b and Schiereck, Speculation and Nonlinear Price 
Dynamics in Commodity Futures Markets, Investment Management and 
Financial Innovations, Vol. 77, pp. 59-73 (2010) (``short-run 
autoregressive behavior'' of commodity markets is driven not only by 
fundamentals but also by trading of speculators).
    \1650\ These are: Fan and Xu, What Has Driven Oil Prices Since 
2000? A Structural Change Perspective, Energy Economics (2011) 
(multi-state); Baldi and Peri, Price Discovery in Agricultural 
Commodities: The Shifting Relationship Between Spot and Futures 
Prices (working paper 2011) (multi-state); Silvernnoinen and Thorp, 
Financialization, Crisis and Commodity Correlation Dynamics, Journal 
of Int'l Financial Markets, Institutions, and Money (2013) 
(conditional correlations). All three of these papers are of mixed 
methodology, applying switching regression analysis to relationships 
between prices that are viewed by the papers' authors as 
cointegrated.
---------------------------------------------------------------------------

    Most of these studies are not helpful because they do not use 
position data or because they have technical issues.\1651\ It is 
difficult to perform these types of studies well. A study finding the 
existence of transitions between states can be unconvincing if it does 
not have solid theoretical and economic justifications for the data 
selected and the model's design. Many of the disadvantages of this 
methodology, discussed above, find expression in these papers.
---------------------------------------------------------------------------

    \1651\ For example, the study by Sigl-Gr[uuml]b and Schiereck 
employs a smooth transition (as opposed to an abrupt change) between 
states. Unfortunately, the study's model does not have a high 
goodness-of-fit values (all adjusted-R2 are below 0.05 
and most are below 0.01), nor fundamental economic explanatory 
variables (only lagged prices and speculative positions in the 
transition component between states). These are shortcomings. In 
particular, the latter omission may overstate the importance of 
speculative positions.
---------------------------------------------------------------------------

    However, there is one switching regression study worthy of further 
discussion in our view. It is well-executed and employs position data: 
Chevallier, Price Relationships in Crude oil Futures: New Evidence from 
CFTC Disaggregated Data.\1652\ Of course, it inherits all the 
difficulties of speculative position data, such as the difficulty 
separating hedgers from speculators. Yet Chevalier's effort does 
persuasively suggest the existence of two states in price structure 
during 2008 crude oil market price swings. His paper suggests that with 
highly inelastic supply and demand, the influence of financial 
investors through the S&P GSCI Energy Spot may have contributed to 
price changes in the crude oil market.
---------------------------------------------------------------------------

    \1652\ Chevallier, Price Relationships in Crude oil Futures: New 
Evidence from CFTC Disaggregated Data, Environmental Economics and 
Policy Studies (2012).
---------------------------------------------------------------------------

    Using switching regressions, Chevallier attempts to reconcile two 
strands of economic literature: Papers that posit the predominance of 
supply and demand fundamentals and other papers that investigate 
speculative trading. Chevallier employs macroeconomic variables, 
proxies for supply and demand fundamentals, and speculative positions 
(net open position of speculators) in his model specifications. Using 
switching regression analysis, he concludes that one cannot eliminate 
the possibility of speculation (a reason why the physical commodity may 
move into and out of storage) as one of the main reasons behind the 
2008 oil price swings.
    This is an important result. Other economic studies using models of 
supply and demand purport to explain the 2008 price swings in crude oil 
without incorporating speculation into demand. Chevallier's paper 
suggests that speculation cannot be ruled out as a cause. Specifically, 
using net speculative positions as one of his variables in his test, he 
found that this variable was statistically significant on crude oil 
futures natural logarithm of price returns during the 2008 time 
period.\1653\
---------------------------------------------------------------------------

    \1653\ Specifically, Chevallier found that in the first state, 
the coefficient of the logarithmic returns of net speculative 
positions is positive and significant (1 percent level). In the 
second state, this coefficient is negative and mildly significant 
(10 percent level). Chevallier's results show statistically 
significant relationships between the volume of speculative 
positions in particular and logarithmic price returns.
---------------------------------------------------------------------------

    This result posits that speculation may have played some role 
during the 2008 crude oil futures price swings. It suggests that 
studies that look only to supply and demand without incorporating 
speculative demand to explain the crude oil market in 2008 may be 
overlooking an important factor. The switching regression methodology 
in this context functions as a cross-check to determine whether models 
of fundamental supply and demand can, in fact, account for all the 
price swings in crude oil during this time. In at least this particular 
commodity market and timeframe, Chevallier's finding that net 
speculative positions are correlated with crude oil future prices 
suggests a price effect from net speculative positions.
e. Eigenvalue Stability
i. Description
    Some economists have run regressions on price and time-lagged 
values of price. They estimate the time-lagged regression over short 
time internals. They do this to detect, through examination of specific 
terms in their lagged price model, unusual price changes. In technical 
terms, they use a difference equation for lagged price with different 
estimated values (i.e., coefficients) for different time-lagged price 
variables. They then solve for the roots of that characteristic 
equation and look for the eigenvalues (latent values) with absolute 
value greater than one. They conclude that eigenvalue indicates that 
the price of the commodity is in an ``exploding'' state or a 
``bubble.'' \1654\
---------------------------------------------------------------------------

    \1654\ See, e.g., Goyal and Tripathi, Regulation and Price 
Discovery: Oil Spot and Futures Markets at 15-16 (working paper 
2012) (describing methodology in more detail).
---------------------------------------------------------------------------

ii. Advantages and Disadvantages
    This method can be applied after-the-fact to historical data to try 
to ascertain whether past price changes constituted a ``bubble.'' Or it 
can be applied to real-time data to predict whether a current state of 
affairs is a ``bubble.'' For these reasons, some economists perceive, 
as an advantage of this method, the ability through statistical means 
to date and time ``bubbles'' in prices.
    On the other hand, this method is based on a model and the results 
of any analysis are only as strong as the model. The model is limited 
to price data and a constant. Models using this technique do not permit 
the study authors to include other explanatory variables. This is a 
disadvantage because it is likely that there are variables of interest 
other than lagged prices when considering whether price instability 
exists. For example, someone interested in position limits would want 
to include an explanatory variable such as speculative positions in the 
regressions, but this technique does not permit this.
    Further, the model allows for wide discretion in the number of 
lagged prices used. The studies' authors often look at ``goodness of 
fit'' results to determine how many lags to select, seeking to set the 
model based upon the data. This step may make the model uniquely 
tailored to a particular dataset but not easily applicable to another. 
Put another way, selecting an important model feature based on testing 
of the data runs the risk of a selection that is not based on any 
theoretical or economic fact, but instead on ad hoc assumptions made by 
the modelers and any idiosyncrasies of the dataset.\1655\
---------------------------------------------------------------------------

    \1655\ Even if there were not such problems, the methodology has 
an insurmountable theoretical difficulty. The use of the ``unit 
root'' test, as a part of this eigenvalue methodology, is an 
inherently suspect way of identifying explosive price behavior. That 
is because the unit root tests rely upon a small a set of 
observations to approximate long-term price behavior.
---------------------------------------------------------------------------

iii. Analysis
    Economists using this methodology attempt to find the existence of 
price ``bubbles'' using eigenvalue stability methods. Three such papers 
were

[[Page 96915]]

submitted.\1656\ All the authors find ``evidence'' of various 
``bubbles.'' However, in none of these studies is there reasonable 
empirical evidence to support the inferential leap between instability, 
``bubbles,'' and excess speculation. In particular, for all of these 
studies, there is no link made in the data between price instability 
and positions. These studies do not use position data. The problem 
inheres in the method, which, while purporting to detect the existence 
of ``bubbles,'' does not permit the research to link supposed bubble to 
speculative positions.
---------------------------------------------------------------------------

    \1656\ These are: Phillips and Yu, Dating the Timeline of 
Financial Bubbles During the Subprime Crisis, Quantitative Economics 
(2011); Czudaj and Beckman, Spot and Futures Commodity Markets and 
the Unbiasedness Hypothesis--Evidence from a Novel Panel Unit Root 
Test, Economic Bulletin (2013); Gutierrez, Speculative Bubbles in 
Agricultural Commodity Markets, European Review of Agricultural 
Economics (2012) (Monte Carlo variant of eigenvalue stability 
approach).
---------------------------------------------------------------------------

    In modern markets, prices can change rapidly for many reasons. The 
``explosion'' of a price over a short time interval does not 
necessarily reflect uneconomic behavior or a price ``bubble.'' It could 
simply represent a ``shock.'' That shock need not come from speculative 
activity. The price path may not be smooth. For this reason, these 
models are conceptually flawed when applied to commodity prices and 
commodity futures prices.
    For example, in Gilbert, Speculative Influences on Commodity 
Futures Prices,\1657\ Gilbert uses a variant of this methodology in an 
early section of his paper to find ``clear evidence'' of ``bubble 
periods'' for copper and soybeans lasting days and weeks.\1658\ He 
finds unexplained price increases in crude oil for periods of time that 
are ``insufficient to qualify as bubbles.'' \1659\ Using just price 
data, and not positions, Gilbert's attribution of lingering price 
spikes cannot be attributed to speculative positions.\1660\
---------------------------------------------------------------------------

    \1657\ Gilbert, Speculative Influences on Commodity Futures 
Prices, 2006-2008, UN Conference on Trade and Development (2010).
    \1658\ Id. at 9 at ] iii.
    \1659\ Id. at ] ii.
    \1660\ This is perhaps why he proceeds to a Granger-based 
analysis using position data in the second half of his paper.
---------------------------------------------------------------------------

    There is a subtler disadvantage that inheres in the inference 
between the identification of price growth without bound and the 
existence of a bubble. To examine intervals where a price series is 
appearing to grow without bound and to infer that that implies a bubble 
is problematic. A time series for price of an asset is unlikely to tend 
to infinity because, eventually, this would likely lead to infeasible 
prices (generally, in the absence of hyperinflation). We do not expect 
the real price of an asset, which is the price is adjusted for 
inflation, to grow without bound.
2. Theoretical Models
    Some economic papers cited in this rulemaking perform little or no 
empirical analysis and instead, present a general theoretical model 
that may bear, directly or indirectly, on the effect of excessive 
speculation in the commodity marketplace. Within the 26 theoretical 
model papers in the administrative record, there is a subset of papers 
which may be viewed as generally supportive or disapproving of position 
limits. Because these papers do not include empirical analysis, they 
contain many untested assumptions and conclusory statements. In the 
specific context of academic analysis of position limits (as opposed to 
policy formulation) theories are useful but must be tested empirically.
Theoretical Papers Directly or Indirectly Support Position Limits
    Two studies presented theoretical models establishing the risk of 
price manipulation in the derivatives markets, including cash-settled 
contracts, suggesting that position limits might be particularly 
helpful in cash-settled contracts.\1661\ A few studies presented 
theoretical reasons why financial investors might increase or 
``destabilize'' commodity futures prices \1662\ or the spot 
price.\1663\
---------------------------------------------------------------------------

    \1661\ Kumar and Seppi, Futures Manipulation with ``Cash 
Settlement'', Journal of Finance (1992) (while, without physical 
delivery, corners and squeezes are infeasible, cash-settled 
contracts are still susceptible to cash-to-futures price 
manipulation, and this price manipulation transfers liquidity from 
futures to cash markets); Dutt and Harris, Position Limits for Cash-
Settled Derivative Contracts, Journal of Futures Markets (2005) 
(arguing that cash settled contracts appear to be particularly 
susceptible to manipulation, but appearing to conflate SEC options 
with CFTC-regulated commodity contracts).
    \1662\ Lombardi and van Robays, Do Financial Investors 
Destabilize the Oil Price? (working paper, European Central Bank, 
2011) (giving theoretical grounds for the ability of financial 
investors in futures to destabilize oil prices, but only in the 
short run); Vansteenkiste, What is Driving Oil Price Futures? 
Fundamentals Versus Speculation (working paper, European Central 
Bank, 2011); Liu, Financial-Demand Based Commodity Pricing: A 
Theoretical Model for Financialization of Commodities (working paper 
2011).
    \1663\ Schulmeister, Torero, and von Braun, Trading Practices 
and Price Dynamics in Commodity Markets (working paper 2009) 
(finding that price movements in crude oil and wheat are lengthened 
and strengthened by ``speculation'' in respective futures prices).
---------------------------------------------------------------------------

Theoretical Studies Indirectly Criticizing at Least Some Position 
Limits
    On the other hand, there were theoretical papers that reached 
conclusions which could be helpful to position limit skeptics, such as 
the power of the marketplace to ``self-discipline'' would-be excessive 
speculators.\1664\ Some papers offer theoretical grounds for the 
concern that more restrictive or ``extreme'' position limits might 
increase price volatility.\1665\
---------------------------------------------------------------------------

    \1664\ Pirrong, Manipulation of the Commodity Futures Market 
Delivery Process, Journal of Business (1993); Pirrong, The Self-
Regulation of Commodity Exchanges: The Case of Market Manipulation, 
Journal of Law and Economics (1995); Ebrahim and ap Gwilym, Can 
Position Limits Restrain Rogue Traders?, at 832 Journal of Banking & 
Finance (2013) (``Our results illustrate that excess speculation, 
with or without the intent to manipulate the futures markets, is not 
worthwhile for the speculator'' and concluding that position limits 
are ``counterproductive'' because excessive speculation enriches 
other market players at the expense of the speculator).
    \1665\ Pliska and Shalen, The Effects of Regulation on Trading 
Activity and Return Volatility in Futures Markets, at 148, Journal 
of Futures Markets (2006) (``[W]ell-meaning regulatory policies can 
be counterproductive by reducing the liquidity which is 
characteristic of futures markets,'' including policies such as 
``extreme margins and position limits''); Lee, Cheng and Koh, An 
Analysis of Extreme Price Shocks and Illiquidity Among Systematic 
Trend Followers (working paper 2010) (using an agent-based model and 
assuming trend-followers in the market, finds no reason to believe 
position limits will help as opposed to leading to erratic price 
behavior).
---------------------------------------------------------------------------

    Even these papers are not firm in their opposition. In The Self-
Regulation of Commodity Exchanges: The Case of Market Manipulation, 
Journal of Law and Economics (1995),\1666\ Craig Pirrong (an economic 
expert for ISDA/SIFMA in the position limits rulemaking) argues that 
there ``is no strong theoretical or empirical reason to believe that 
self-regulating exchanges effectively deter corners.'' \1667\ He simply 
disagrees that other forms of regulation such as position limits 
``could do better.'' \1668\ Pirrong does not discount the harm of price 
manipulation. Pirrong's Manipulation of the Commodity Futures Market 
Delivery Process,\1669\ documents these harms.\1670\
---------------------------------------------------------------------------

    \1666\ Pirrong, The Self-Regulation of Commodity Exchanges: The 
Case of Market Manipulation, Journal of Law and Economics (1995).
    \1667\ Id. at 143.
    \1668\ Id. (asserting that position limits are ``excessively 
costly'' and concluding that self-regulation, along with after-the-
fact civil and criminal penalties for manipulation, may be more 
efficient, but this assertion is unaccompanied by quantitative 
analysis or a detailed qualitative cost-benefit analysis).
    \1669\ Pirrong's Manipulation of the Commodity Futures Market 
Delivery Process, Journal of Business (1993).
    \1670\ Id. at 363 (futures market manipulations ``distorts 
prices and creates deadweight losses;'' ``causes shorts to utilize 
real resources to make excessive deliveries;'' and ``distorts 
consumption'').
---------------------------------------------------------------------------

Other Theoretical Papers
    A set of papers suggest that there can be excessive speculation in 
oil without

[[Page 96916]]

a significant increase in crude oil inventories.\1671\ The remaining 
theoretical papers in the administrative record focus on useful 
economic background on price manipulation; \1672\ comovement effects in 
the equity or options markets,\1673\ high-frequency trading,\1674\ or 
other matters of marginal relevance.\1675\
---------------------------------------------------------------------------

    \1671\ Avriel and Reisman, Optimal Option Portfolios in Markets 
with Position Limits and Margin Requirements, Journal of Risk (2000) 
(a theoretical model suggesting that speculation may push crude oil 
prices above the price level is justified by physical-market 
fundamentals without necessarily resulting in a significant increase 
in oil inventories); Pierru and Babusiaux, Speculation without Oil 
Stockpiling as a Signature: A Dynamic Perspective (working paper 
2010); Routledge, Seppi, and Spatt, Equilibrium Forward Curves for 
Commodities, Journal of Finance (2000) (important work on the theory 
of storage). See Parsons, Black Gold & Fool's Gold: Speculation in 
the Oil Futures Market at 82, 106-107 (Economia 2009) (not a 
theoretical model paper, but a survey piece, that indicates that if 
oil prices were driven above the level determined by fundamental 
factors of supply and demand by forces such as speculation, storage 
would not necessarily increase; an argument that this would occur 
``overlooks how paper oil markets have been transformed'' and 
``successful innovations in the financial industry made it possible 
for paper oil to be a financial asset in a very complete way'').
    \1672\ Kyle and Viswanathan, How to Define Illegal Price 
Manipulation, American Economic Review (2008); Westerhoff, 
Speculative Markets and the Effectiveness of Price Limits, Journal 
of Economic Dynamics and Control (2003) (discussing when price 
limits can be welfare-improving).
    \1673\ Dai, Jin and Liu, Illiquidity, Position Limits, and 
Optimal Investment (working paper 2009); Edirsinghe, Naik, and 
Uppal, Optimal Replication of Options with Transaction Costs and 
Trading Restrictions, Journal of Financial and Quantitative Analysis 
(1993); Shleifer and Vishney, The Limits of Arbitrage, Journal of 
Finance (1997).
    \1674\ Schulmeister, Technical Trading and Commodity Price 
Fluctuations (working paper 2012).
    \1675\ Morris, Speculative Investor Behavior and Learning, 
Quarterly Journal of Economics (1996); Kyle and Wang, Speculation 
Duopoly with Agreement to Disagree: Can Overconfidence Survive the 
Market Test?, Journal of Finance (1997); Leitner, Inducing Agents to 
Report Hidden Trades: A Theory of an Intermediary, Review of Finance 
(2012); Sockin and Xiong, Feedback Effects of Commodity Futures 
Prices (working paper 2012); Froot, Scharfstein, and Stein, Herd on 
the Street: Informational Inefficiencies in a Market with Short Term 
Speculation (working paper 1990) (theoretical paper discussing 
herding); Dicembrino and Scandizzo, The Fundamental and Speculative 
Components of the Oil Spot Price: A Real Option Value (working paper 
2012).
---------------------------------------------------------------------------

3. Surveys and Opinions
    The remaining 73 papers are survey pieces. Some of these papers 
provide useful background material.\1676\ But on the whole, these 
survey pieces offer opinion unsupported by rigorous empirical analysis. 
These papers, if they presented statistics at all, presented 
descriptive statistics. An inherent difficulty with this approach is 
that the facts that the author presents to support the author's theory 
may be incomplete and not fully representative of economic reality.
---------------------------------------------------------------------------

    \1676\ Basu and Gavin, What Explains the Growth in Commodity 
Derivatives?, Federal Reserve Bank of St. Louis (2011), provides an 
excellent analysis of the factors driving rapid increases in volume 
in commodity derivatives trading. See also Easterbrook, Monopoly, 
Manipulation, and the Regulation of Futures Markets, Journal of 
Business (1986); Pirrong, Squeezes, Corners, and the Anti-
Manipulation Provisions of the Commodity Exchange Act, Regulation 
(1994).
---------------------------------------------------------------------------

    While they may be useful for developing hypotheses, they often 
exhibit policy bias and are not neutral, reliable bases for judgments 
in the academic context (again, as opposed to the judgments of 
policymakers).\1677\
---------------------------------------------------------------------------

    \1677\ For example, a CME Group white paper, Excessive 
Speculation and Position Limits in Energy Derivatives Markets 
(undated), lacks empirical data or other economically valid 
supporting analysis. It also uses confusing terminology. For 
example, CME quotes a Wall Street Journal survey of economists, 
which in turn summarily concludes: ``[t]he global surge in food and 
energy prices is being driven primarily by fundamental market 
conditions, rather than an investment bubble.'' Id. at p.5. Even 
economists who find some price impact from outsized speculative 
positions would not disagree that, in the main, prices remain 
determined ``primarily'' by market fundamentals. And many of these 
economists finding price impact would not ascribe the result to an 
``investment bubble.''
---------------------------------------------------------------------------

    We have reviewed all 73 papers in this category and discuss below 
only those few that add marginal value to the empirical analyses 
discussed above.
a. Frenk and Turbeville (Better Markets)
    Frenk and Turbeville, in Commodity Index Traders and the Boom/Bust 
Cycle in Commodities Prices,\1678\ present a survey of economic 
literature that incorporates some empirical testing for the price 
impact of index fund ``rolling'' of commodity index fund positions. 
Rolling refers to the time when commodity index funds, such as those 
tracking a popular commodity index such as the Standard & Poor's 
Goldman Sachs Commodity Index (GSCI), must roll forward their expiring 
futures contracts to maintain their (typically long) positions.\1679\ 
Frenk and Turbeville argue that the index fund roll ``systematically 
distorts forward commodities futures price curves toward a contango 
\1680\ state, which is likely to contribute to speculative `boom/bust' 
cycles. . . .'' \1681\
---------------------------------------------------------------------------

    \1678\ Frenk and Turbeville, Commodity Index Traders and the 
Boom/Bust Cycle in Commodities Prices (Better Markets 2011).
    \1679\ See id. at 8-9 for a description of the mechanics of the 
roll. See also Mou, Limits to Arbitrage and Commodity Index 
Investment: Front-Running the Goldman Roll (working paper 2011).
    \1680\ See id. at 5-6 for a description of contango, an upward-
sloping forward price curve for a commodity. Market participants may 
view contango as evidence that commodity prices will increase in the 
future.
    \1681\ Id. at 2. See id. at 4 (focusing on crude oil and wheat 
price spreads before, during, and after the role from January 1983 
to June 2011).
---------------------------------------------------------------------------

    This set of inferences is problematic for several reasons. First, 
it depends on the current existence of a price impact from rolling. Yet 
the roll price impact is a market phenomenon that may no longer be as 
substantial as it once was. The market now has general knowledge of the 
influx of commodity index traders and their established rolling 
behavior. Moreover, many ETFs announce in their prospectus how they 
will trade, and most large exchange-traded funds now ``sunshine'' their 
rolls: To announce to the market in advance when and how they will 
roll.\1682\ These trends have lessened the price impact of the rolls.
---------------------------------------------------------------------------

    \1682\ Otherwise, other market participants may assume that the 
rolling activity reflects an informed trader reacting to market 
fundamentals and the roll could well impair the price discovery 
function of the commodities market. See Urbanchuk, Speculation and 
the Commodity Markets, at p. 12 (working paper 2011) (``traders can 
misinterpret an index inflow as a bullish statement by a trader with 
superior information''). While not every large institutional trader 
has to ``sunshine,'' those that announce their rolling timing in 
their prospectus are bound by SEC rules to follow their prospectus 
procedures.
---------------------------------------------------------------------------

    Moreover, the Frenk and Turbeville article ascribes the contango 
state of commodity futures prices to the price impact of roll without 
empirical analysis to support a causal link. There has historically 
been an alternation between contango and backwardation in the crude oil 
commodity market: This phenomenon has been attributed to changes in 
short-term supply or demand, increased market participation on the long 
side to earn the risk premium associated with going long, and other 
reasons, but not the technical aspects of commodity index rolls.\1683\ 
Frenk and Turbeville's article is unpersuasive in ascribing large boom/
bust cycles in price to waning and temporary price impacts of rolls.
---------------------------------------------------------------------------

    \1683\ See Parsons, Black Gold & Fool's Gold: Speculation in the 
Oil Futures Market, at 99-101, Economia (2009) (discussing crude oil 
market economics that explain why crude oil futures prices are 
sometimes in contango); id. at 101 (``Although oil futures fluctuate 
between backwardation and contango, on average they have been 
backwarded'').
---------------------------------------------------------------------------

    Several other survey papers posit the existence of a speculative 
bubble in price due to speculation along the lines of the Frenk and 
Tuberville article. But these studies also do not present an empirical 
analysis to support this conclusion.\1684\
---------------------------------------------------------------------------

    \1684\ See, e.g., Cooper, Excessive Speculation and Oil Price 
Shock Recessions: A Case of Wall Street ``D[eacute]j[agrave] vu all 
over again'', Consumer Federation of America (2011); Berg, The Rise 
of Commodity Speculation: From Villainous to Venerable (UN FAO 
2011); Eckaus, The Oil Price Really Is a Speculative Bubble, at p.8, 
MIT Center for Energy and Env'l Research (2008) (``there is no 
reason based on current and expected supply and demand that 
justifies the current price of oil''); Parsons, Black Gold & Fool's 
Gold: Speculation in the Oil Futures Market, Economia (2009) 
(explaining why, on a theoretical level, the absence of large crude 
oil inventories does not preclude a crude oil price bubble); Tokic, 
Rational destabilizing speculation, positive feedback trading, and 
the oil bubble of 2008, Energy Economics (2011) (survey with 
theoretical model adjunct). See also Urbanchuk, Speculation and the 
Commodity Markets, at 8-9 (working paper 2011) (observing that the 
share of corn futures held by commercial traders has fallen from 
more than 70 percent in January 2005 to about 40 percent in August 
2011); id. at 12 (arguing that speculators are a major factor behind 
the sharp increase in the level and volatility of corn prices in 
2011 because ``traders can misinterpret an index inflow as a bullish 
statement by a trader with superior information''); Inamura, Kimata, 
et al., Recent Surge in Global Commodity Prices (Bank of Japan 
Review March 2011) (contending that global monetary policies have 
tended to boost commodity prices).

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

[[Page 96917]]

b. Senate Reports
i. Senate Report on Oil and Gas Prices
    The U.S. Senate staff report on oil prices concludes that increased 
participation by speculators in the energy commodity futures markets 
has had an effect on energy prices.\1685\ Other survey pieces assert 
that market fundamentals fully explain commodity price spikes.\1686\ 
These survey articles do not present rigorous statistical models to 
support their competing conclusions.
---------------------------------------------------------------------------

    \1685\ The Role of Market Speculation in Rising Oil and Gas 
Prices: A Need to Put the Cop Back on the Beat, Permanent 
Subcommittee on Investigations of the U.S. Senate Committee on 
Homeland Security and Governmental Affairs at pp. 19-32 (June 27, 
2006) (``Senate Report on oil and gas prices'').
    \1686\ See, e.g., Plante and Y[uuml]cel, Did Speculation Drive 
Oil Prices? Futures Market Points to Fundamentals (Federal Reserve 
Bank of Dallas Econ. Ltr. Oct. 2011) (if speculating were the cause 
of crude oil spokes, it would ``leave telltale signs in certain 
data, such as inventories'').
---------------------------------------------------------------------------

    The Senate report points out that fundamental supply and demand 
were factors increasing energy prices.\1687\ But it determines that 
these factors ``do not tell the whole story.'' \1688\ It asserts that 
the large purchases of crude oil futures contractors by financial 
speculators ``have, in effect, created an additional demand for oil. . 
. .'' \1689\ The report acknowledges that the price effect is 
``difficult to quantify,'' and cites unspecified analysts on estimated 
price impact.\1690\
---------------------------------------------------------------------------

    \1687\ The Role of Market Speculation in Rising Oil and Gas 
Prices: A Need to Put the Cop Back on the Beat at p.12.
    \1688\ Id. at 13.
    \1689\ Id.
    \1690\ Id. at 14. See id. at 23.
---------------------------------------------------------------------------

    But in the general economics of the futures market, demand for 
futures contracts does not necessarily increase the demand for, or 
price of, the physical commodity. In the particular context of the 
crude oil markets, as discussed above, demand for ``paper oil'' may not 
directly translate into spot price impact due to storage 
economics.\1691\
---------------------------------------------------------------------------

    \1691\ See Parsons, Black Gold & Fool's Gold: Speculation in the 
Oil Futures Market, Economia (2009); n.1491, supra. Contra Senate 
Report on oil and gas prices at 13 (``As far as the market is 
concerned, the demand for a barrel of oil that results from the 
purchase of a futures contract by a speculator is just as real as 
the demand for a barrel that results from a purchase of a futures 
contract by a refiner'').
---------------------------------------------------------------------------

    Regarding price effect, the Senate report relies on anecdotal 
evidence because of the difficulty in quantification. The Senate report 
cites reports from energy industry participants that financial 
speculators have caused the price of oil to rise.\1692\ The report also 
acknowledges that analyses of the effect of speculation on these energy 
markets have reached divergent conclusions.\1693\
---------------------------------------------------------------------------

    \1692\ Senate Report on oil and gas prices at 22 (claiming that 
financial investors have created ``runaway demand''), 24 n. 128 
(traders assert cross-market arbitrage in energy between futures and 
over-the-counter markets may be driving speculative pressure).
    \1693\ Id. at 24, 26 (observing that Goldman Sachs issued a 
report concluding that speculators were impacting crude oil prices, 
peaking at $7 per barrel in the spring of 2004, and that industry 
traders and CFTC staff in a 2005 analysis disagreed as to whether a 
speculative price was caused by financial speculators).
---------------------------------------------------------------------------

    The Senate Report does not analyze how position limits would 
ameliorate the problem it identifies. While not all the speculators 
referenced in this report would be affected by a position limit rule, 
the Senate Report does list Brian Hunter, then a trader in natural gas 
for Amaranth Advisors hedge fund, among the top 2005 energy 
traders.\1694\ These reports, which include factual recitation and 
anecdotal evidence, contain no models or methods that can be audited by 
economists.
---------------------------------------------------------------------------

    \1694\ Id. at p.30.
---------------------------------------------------------------------------

ii. Senate Report on Wheat
    The Senate staff report concerning wheat \1695\ surveys economic 
literature and certain market data, but, like the Senate Report on oil 
and gas prices, this report does not use statistical or theoretical 
models to reach an economically rigorous conclusion. The Senate wheat 
report does include anecdotal evidence: Virtually all of the commercial 
traders interviewed by the Senate staff ``identified the large presence 
of index traders in the Chicago market as a major cause'' of a problem 
with price convergence in wheat in 2008.\1696\ The staff report states 
that the demand for wheat futures contracts has itself increased the 
price of wheat futures contracts relative to the cash market for wheat:
---------------------------------------------------------------------------

    \1695\ Excessive Speculation in the Wheat Market, Majority and 
Minority Staff Report, Permanent Subcommittee on Investigations of 
the U.S. Senate, Committee on Homeland Security and Governmental 
Affairs (June 24, 2009).
    \1696\ Excessive Speculation in the Wheat Market at 11-12.

    These index traders, who buy wheat futures contracts and hold 
them without regard to the fundamentals of supply and demand in the 
cash market for wheat, have created a significant additional demand 
for wheat futures contracts that has as much as doubled the overall 
demand for wheat futures contracts. Because this significant 
increase in demand in the futures market is unrelated to any 
corresponding supply or demand in the cash market, the price of 
wheat futures contracts has risen relative to the price of wheat in 
the cash market. The very large number of index traders on the 
Chicago exchange has, thus, contributed to ``unwarranted changes'' 
in the prices of wheat futures relative to the price of wheat in the 
cash market. These ``unwarranted changes'' have, in turn, 
significantly impaired the ability of farmers and other grain 
businesses to price crops and manage price risks over time, thus 
creating an undue burden on interstate commerce. The activities of 
these index traders constitute the type of excessive speculation 
that the CFTC should diminish or prevent through the imposition and 
enforcement of position limits as intended by the Commodity Exchange 
Act.\1697\
---------------------------------------------------------------------------

    \1697\ Id. at 12.

However, there are other reasons that can also explain this 2008 price 
divergence. The CME wheat contract was poorly designed to account for 
the cost of storage, and this has been cited as a reason for the price 
divergence between futures and spot wheat contracts during the 2008 
time period. When CME revised its wheat contract, this price divergence 
dissipated.\1698\
---------------------------------------------------------------------------

    \1698\ See supra note 1547. When CME revised its wheat contract, 
this price divergence dissipated. The futures wheat contract, at 
expiration, had a valuable real option to store the wheat at a 
below-market price. This may have been a primary reason why it was 
more valuable at expiration than spot wheat.
---------------------------------------------------------------------------

    That said, the more formal statistical studies discussed throughout 
establish rationales for concern with index traders that are grounded 
in more rigorous economic reasoning. There are circumstances when a 
large volume of financial index investment flows may causes market 
prices to deviate from fundamental values.\1699\ Alternatively, a

[[Page 96918]]

classical economist would argue that prices are still determined by 
supply and demand, but that the aggregate risk appetite for financial 
assets affects the demand for commodities through a more complicated 
process than previously envisioned.
---------------------------------------------------------------------------

    \1699\ See Aulerich, Irwin, and Garcia, Bubbles, Food Prices, 
and Speculation: Evidence from the CFTC's Daily Large Trader Data 
Files, at pp.2-3, NBER Conference on Economics of Food Price 
Volatility (2012) (summarizing that this could happen when (1) the 
futures market is insufficiently liquid to absorb large order flow, 
(2) the index traders are in effect noise traders who make arbitrage 
risky, or (3) large order flow on the long side of the market is 
seen erroneously as traders taking bullish positions based on 
valuable information about market fundamentals). See id. at pp.3-4 
(observing contrasting findings depending on impact of index trading 
depending on liquidity of the agricultural commodity market); 
Singleton, Investor Flows and the 2008 Boom/Bust in Oil Prices, at 
5-8 (March 23, 2011 working paper) (learning about economic 
fundamentals with heterogeneous information may induce excessive 
price volatility, drift in commodity prices, and a tendency towards 
booms and busts); Tang and Xiong, Index Investment and 
Financialization of Commodities, at p.30, Financial Analysts Journal 
(2012) (``the price of an individual commodity is no longer simply 
determined by its supply and demand''); id. at 29-30 (``Instead, 
prices are also determined by a whole set of financial factors such 
as the aggregate risk appetite for financial assets'').
---------------------------------------------------------------------------

    For reasons similar to the Senate Report on Oil and Gas Prices, the 
Senate Report on Wheat is less useful to an academic than it may be to 
policymakers.
iii. Senate Report on Natural Gas
    A similar analysis applies to the Senate report on natural gas, 
Excessive Speculation in the Natural Gas Market. The report, which 
focuses at length on Amaranth's natural gas trading, does not include a 
statistical analysis of empirical data and, as the minority report 
notes, some `` facts . . . support the conclusion that Amaranth's 
trading activity was the primary cause of'' natural gas price spikes,'' 
but other facts point to market fundamentals.\1700\
---------------------------------------------------------------------------

    \1700\ Id. at 135 (while price of natural gas declined after 
Amaranth's demise, ``this alone does not prove Amaranth's ability to 
elevate prices above supply and demand fundamentals'').
---------------------------------------------------------------------------

    The report does argue that if Amaranth's large-scale speculative 
trading was causing ``large jumps in the price differences'' and prices 
that were ``ridiculous,'' \1701\ the current regulatory regime would be 
unable to prevent this price disruption.\1702\
---------------------------------------------------------------------------

    \1701\ Id. at 3.
    \1702\ Id. at 3 (NYMEX exchange did not have routine access to 
Amaranth's trading positions on ICE, and therefore NYMEX could not 
have a complete and accurate view of whether ``a trader's position . 
. . is too large.'' In addition, there were no accountability limits 
on the ICE exchange).
---------------------------------------------------------------------------

4. Comments That Consist of Economic Studies or Discuss Economics in 
Depth
    Several comment letters perform substantial summary analysis of 
other economic studies bearing on position limits, present original 
economic analysis or formal economic studies. These submissions thus 
warrant individual analysis. The following submissions are summarized 
and analyzed in this section:
    (A) the February 10, 2014, comment letter by Markus Henn of World 
Economic, Ecology & Development, including, as an attachment, a 
November 26, 2013, list of studies entitled ``Evidence on the Negative 
Impact of Commodity Speculation by Academics, Analysis and Public 
Institutions'' (``Henn Letter''); \1703\
---------------------------------------------------------------------------

    \1703\ See Letter from Markus Henn, World Economic, Ecology & 
Development, to CFTC (Feb. 10, 2014), available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59628&SearchText=henn. See also, Markus Henn, 
Evidence on the Negative Impact of Commodity Speculation by 
Academics, Analysis and Public Institutions, (Nov. 26, 2013), 
available at http://comments.cftc.gov/PublicComments/ViewComment.aspx?id=59628&SearchText=henn.
---------------------------------------------------------------------------

    (B) the analysis of Philip K. Verleger of the economic consulting 
firm PKVerleger LLC, attached as Annex A to the February 10, 2014 
comment letter by the International Swaps and Derivatives Association 
(ISDA) and the Securities Industry and Financial Markets Association 
(SIFMA) (``2/10/14 ISDA/SIFMA Comment Letter'');
    (C) the analysis of Craig Pirrong, Professor of Finance at the 
University of Houston Business School, attached as Annex B to the 2/10/
14 ISDA/SIFMA Comment Letter;
    (D) two studies by Sanders and Irwin, The ``Necessity'' of New 
Position Limits in Agricultural Futures Markets: The Verdict from Daily 
Firm-Level Position Data (working paper 2014), and Energy Futures 
Prices and Commodity Index Investment: New Evidence from Firm-Level 
Position Data (working paper 2014);
    (E) two studies by Hamilton and Wu, Effects of Index-Fund Investing 
on Commodity Futures Prices, International Economic Review, Vol. 56, 
No. 1 (February 2015), and Risk Premia in Crude Oil Futures Prices, 
Journal of International Money and Finance (2013) (submitted as second 
paper in the same electronic comment submission); and
    (F) materials that CME Group submitted for inclusion in the 
administrative record, include 3 sets of materials submitted on March 
28, 2011 (first set, second set, and third set); an undated CME study 
on conditional spot-month limits; and a CME Group's white paper, 
Excessive Speculation and Position Limits in Energy Derivatives 
Markets.\1704\
---------------------------------------------------------------------------

    \1704\ The CME white paper, while technically not submitted 
formally by CME in the administrative record, warrants 
individualized analysis. It is cited in the Commission's December 
2013 Position Limits Proposal; it is posted on the CME Group's Web 
site; and it is cited in arguments by such commenters as MFA. (MFA 
February 9, 2014 comment letter at 11-12, n.26).
---------------------------------------------------------------------------

a. The Markus Henn List of Studies
    Markus Henn's February 10, 2014, comment letter acknowledges that 
there is an ongoing debate about whether speculators can dominate a 
marketplace and exacerbate market volatility and market prices. He 
nonetheless asks the Commission to take into account a list of studies 
he submits with his letter. He then presents numerous economic studies 
as well as media articles.
    As a group, this list of studies, opinion pieces, and news articles 
documents the existence of concern and suspicion about large 
speculative positions in commodity markets. Many of the studies cited 
by the Henn Letter look for evidence of financialization and in this 
sense suffer from interpretational bias.\1705\ As a group, these 
opinion pieces and studies do not consistently seek alternative 
explanations for their conclusions. As Markus Henn acknowledges in his 
cover letter, these papers are part of an ongoing debate among 
economists, not conclusive evidence of the harmful effects of excessive 
speculation.
---------------------------------------------------------------------------

    \1705\ Id.
---------------------------------------------------------------------------

    Three of the most persuasive papers, persuasive insofar as they 
employ well-accepted, defensible, scientific methodology, document and 
present facts and results that can be replicated, and are on point 
regarding issues relevant to position limits, cited in the Henn Letter 
involve the crude oil market during the financial crisis: Singleton, 
Investor Flows and the 2008 Boom/Bust in Oil Prices (March 23, 2011 
working paper); \1706\ Hamilton and Wu, Risk Premia in Crude Oil 
Futures Prices, Journal of International Money and Finance (2013) (an 
earlier working paper version is cited by Henn); and Hamilton, Causes 
and Consequences of the Oil Shock of 2007-2008, Brookings Paper on 
Economic Activity (2009). The first two conclude that there is a 
statistical link between the volume of speculative positions and a 
component of price, risk premium, at least for some commodities in some 
timeframes. Hamilton's Causes and Consequences of the Oil Shock of 
2007-2008 concludes that the oil price run-up was caused by strong 
demand confronting stagnating world production, but the price collapse 
was perhaps not driven by fundamentals.
---------------------------------------------------------------------------

    \1706\ Markus Henn cites the 2011 version of the Singleton 
paper, which is the only version of this paper in the administrative 
record. A subsequent May 2012 version is available from Professor 
Singleton's Stanford Web site at http://web.stanford.edu/~kenneths/.

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

[[Page 96919]]

b. Verleger's Analysis, Attached to ISDA/SIFMA Comment Letter
    Philip K. Verleger provided an analysis as a retained expert for 
ISDA. Annex A to the 2/10/14 ISDA/SIFMA Comment Letter. He contends, 
without quantitative modelling or empirical evidence, that in the 
energy markets ``unwarranted price fluctuations'' have historically 
been due to ``confluence of contributing factors'' such as weather, 
geopolitical events, or changes in industry structure. 2/10/14 ISDA/
SIFMA Comment Letter, Annex A at pp. 2-3. In passing, he opines, 
without analysis or citation, that the high energy prices in 2008 ``are 
attributable to environmental regulation.'' Id. Verleger also asserts 
that his expertise is in the energy markets, yet opines (contrary to 
many comment letters from other energy market participants) that the 
energy markets are ``subject to conditions and dynamics'' of other 
commodity markets. Id. at p.2. For these reasons, we view Verleger's 
analysis as weak and conclusory and lacking in economic rigor and 
empirical data.
    By way of further example, Verleger contends that if the position 
limits rule had been in effect in 2013, oil prices would have been $15 
per barrel higher and the cost to American consumers would have been 
roughly $100 billion. Annex A at p.3. He provides no quantitative 
reasoning in support of these numbers.\1707\
---------------------------------------------------------------------------

    \1707\ Verleger argues that limits in the non-spot month would 
have an especially chilling effect, ``very likely leading to, among 
other things, higher energy prices;'' and that position limits 
should not apply to cash-settled markets because traders holding 
cash-settled contracts do not have any ability to influence the 
physical market prices of commodities. Id. at 2-3. Pirrong also 
makes these arguments but provides further analysis, so we discuss 
this critique in subsection C below.
---------------------------------------------------------------------------

    Verleger also asserts that exploration for sources of energy has 
resulted in a large increase in oil supply in recent years, and states 
that these companies use swaps and futures to hedge their position. Id. 
at p.7. He then summarily asserts that independent companies exploring 
for and developing oil and gas production would ``not have achieved 
this success without hedging'' and that hedging would not have occurred 
if the Commission's position limits had been in place. Id. at p.8. 
Verleger overlooks several critical facts.
    First, companies actively engaged in oil and gas exploration might 
either qualify for bona fide hedging treatment or fall within the 
position limit. As to non-spot month limits, Verleger concedes that 
``it may be argued that the initial non-spot month position limits are 
high enough (109,000 contracts for crude as an example)'' to avoid 
liquidity impacts. Id. at 12.\1708\
---------------------------------------------------------------------------

    \1708\ See Berg, The Rise of Commodity Speculation: From 
Villainous to Venerable, at p.263 (UN FAO 2011) (former CBOT trader 
suggests that spot month limit positions should be in place for at 
least a few days in the non-spot months to lesson price distortions 
from the roll).
---------------------------------------------------------------------------

    Second, he argues that these exploration companies have ``benefited 
indirectly because passive investors such as retirement funds have 
taken long positions in commodities through the swap markets,'' and 
suggests that with position limits there would be an absence of non-
commercials to take positions opposite oil and gas development 
companies. Id. at 9. To the contrary, with the Commission's 
disaggregation exemption for managed funds (the independent account 
controller exemption), there is no basis to believe that there will be 
a shortage of long positions in the market. He presents no empirical 
evidence to support his thesis that position limits could thus 
``adversely affect[ ] investment in the oil and gas industry.'' \1709\
---------------------------------------------------------------------------

    \1709\ Id.
---------------------------------------------------------------------------

    Third, the way energy derivatives markets work, if there is demand 
on the short side of the market, this may create liquidity on the long 
side of the market to transact with at some price. Verleger himself 
notes the diversity of market participants--commodity-based exchange-
traded funds, hedge funds, retirement funds, and the like--and does not 
document that the exclusion of a particular long would reduce liquidity 
from the marketplace. For example, commodity-based exchange-traded 
funds trade intermediate long positions for their investors, and if the 
funds themselves could not take long positions in the market, there is 
no reason to assume that the investors might through other vehicles 
take long positions. Verleger has an expressed fear, not an analysis, 
that liquidity in markets will be harmed by position limits.\1710\
---------------------------------------------------------------------------

    \1710\ See, e.g., id. at 12 (after observing that non-spot month 
limits are high enough to perhaps not impact the market, stating 
that non-spot limits will ``adversely affect the ability of 
commercial participants to use some futures market'').
---------------------------------------------------------------------------

c. Pirrong's Analysis, Attached to ISDA/SIFMA Comment Letter
    Professor Pirrong agrees that the nation's commodity markets have 
been subject to significant and disruptive corners and squeezes, such 
as the Hunt Silver episode of 1979-1980.\1711\ He concedes that the 
``ability of position limits to prevent corners and squeezes could 
provide a justification for application of these limits during the spot 
month,'' at least in theory.\1712\ He concedes that in theory there is 
such a thing as ``sudden and unwarranted price fluctuations.'' \1713\ 
Subject to these concessions, Pirrong opposes many aspects of the rule. 
Overall, Pirrong argues that position limits are an undesirable 
solution to an economic problem that has not been proven to 
exist.\1714\ We analyze below his objections only when and to the 
extent that they rest on economic arguments.
---------------------------------------------------------------------------

    \1711\ CL-ISDA/SIFMA-59611, Annex B, at 2, ]] 6-9.
    \1712\ Id. at ] 7.
    \1713\ Id. at 6, ] 27.
    \1714\ Id. at pp. 3-10.
---------------------------------------------------------------------------

i. Amaranth and the Possible Utility of Position Limits in Non-Spot 
Months
    Pirrong states that the possibility of a corner or a squeeze 
``provides no justification of the necessity of imposing position 
limits outside the spot month.'' \1715\ Pirrong argues that Amaranth's 
market activity in 2006 is not evidence of the utility of position 
limits in the non-spot month. Id. at p.2, ] 7. In this context, Pirrong 
discusses corners and squeezes as the rationale for non-spot month 
position limits. Id. However, the Commission's December 2013 Position 
Limits Proposal discusses rationales other than corners and squeezes: 
Economic factors such as outsized market power, disorderly liquidation, 
and the ability to manipulate prices.
---------------------------------------------------------------------------

    \1715\ CL-ISDA/SIFMA-59611, Annex B, at p.2.
---------------------------------------------------------------------------

    In the context of non-spot month position limits, Pirrong focusses 
just on corners and squeezes. If that were the only regulatory concern, 
his analysis on this, see id. at ]] 27-30, would be largely correct. 
Many traders exit futures contracts before the spot month because they 
are there for the exposure, for price risk transfer, not to make or 
take delivery.
    One key reason why ETFs ``sunshine-trade'' their rolls--announcing 
in their prospectus when they will roll--is because rolling these large 
positions in non-spot months can have a price impact, apart from 
corners and squeezes.\1716\
---------------------------------------------------------------------------

    \1716\ Sanders and Irwin, The ``Necessity'' of New Position 
Limits in Agricultural Futures Markets: The Verdict from Daily Firm-
Level Position Data, at p.19 (working paper 2014) (preannounced 
trades can have a ``sunshine trading'' effect of increasing 
liquidity and lowering trading costs). See, e.g., Frenk and 
Turbeville, Commodity Index Traders and the Boom/Bust Cycle in 
Commodities Prices (Better Markets 2011) (very large institutional 
players rolls have had a temporary price impact that is expensive to 
the ETF investors).
---------------------------------------------------------------------------

    A good example of the risk of price impact in non-spot months from 
outsized positions, apart from corners

[[Page 96920]]

and squeezes, is Amaranth. Amaranth's position was so large that it may 
have impacted price by virtue of its outsized market position in not 
just the spot month, but other months. Amaranth may have influenced 
prices not just upon liquidation, not just when banging the close in 
the spot month, but also well before then, according to a congressional 
study cited in the Commission's December 2013 Position Limits 
Proposal.\1717\
---------------------------------------------------------------------------

    \1717\ There have been other examples of price manipulations 
that extended over a period of months. See CFTC staff, A Study of 
the Silver Market, Report To The Congress In Response To Section 21 
Of The Commodity Exchange Act, Part One at 2-4, 9-10 (May 29, 1981) 
(price of silver rose and fell over a period of months, with long 
futures positions in silver held by members of the Hunt family in 
the summer and fall of 1979 and prices peaking in late January 1980, 
and prices falling though the first quarter of 1980); id., Part Two 
at p.100 (``behavior of silver prices during 1979-80 appears 
consistent with, but is not entirely explained by, fundamental 
developments in the silver market over this period''); p.112 (Hunt 
family acquired actual and potential control of approximately 18 
percent of world silver market and stood for delivery on a 
significant portion of their futures contracts, causing silver 
prices to rise significantly).
---------------------------------------------------------------------------

    An economist could argue that because the commodity futures price 
should reflect all demand, Amaranth's very large positions in the non-
spot month was appropriately incorporated in market prices. After all, 
at a given point in time and price, demand is defined as the quantity 
desired by all those who are willing and able to hold a commodity 
futures position. Prof. Pirrong's approach does conceive of the 
possibility that outsized market power in the non-spot month or the 
price impact of Amaranth's positions could have deleterious effects on 
the marketplace. From a classical economical perspective, Amaranth's 
outsized market position in the non-spot months is just an input into 
price demand.
    However, outsized market power may have economic outcomes that are 
undesirable. Outsized market power permits a player to do more than 
``bang the close,'' and Amaranth's natural gas trading is an example of 
this. One could influence prices in the swaps market through such 
aggregation of market powers or one could manipulate related markets. 
Amaranth's exercise of market power may have been real and substantial. 
Even after it left the natural gas market, its activities may have left 
a lasting price effect. That is, prices of the underlying commodity, 
natural gas, may have been higher when Amaranth was in the market 
(including in the non-spot months), and prices were substantially less 
for a substantial time period after Amaranth left the market.\1718\ 
Pirrong's discussion of Amaranth does not address this economic history 
or its possible relevance to non-spot position limits. Although Pirrong 
criticizes the Commission for not engaging in a ``rigorous empirical 
analysis'' of Amaranth (2/10/14 ISDA/SIFMA Comment Letter, Annex B, at 
p.2, ] 10), the establishment of outsized market power in economics is 
more straight forward in the case of Amaranth. The question is whether 
the disappearance of an Amaranth from the market with its formerly 
outsized position led to a significant decline in price.
---------------------------------------------------------------------------

    \1718\ This observation presumes no other confounding events 
such as the occurrence of warmer winter. Unfortunately, we do not 
know whether or not the lower price resulted from the exit of 
Amaranth, the warmer winter, something else, or some combination of 
the preceding.
---------------------------------------------------------------------------

    By focusing simply on Amaranth's activities in the spot month, 
Prof. Pirrong does not discuss the potential for harm arising from 
Amaranth's outsized positions in the non-spot month. If someone is 
exerting market power, they can cause a negative externality for other 
purchases of natural gas if they, for example, bid up the price of 
natural gas. A higher price for a natural gas purchaser due to another 
entity's trading may simply be an example of a healthy market at work. 
However, there is definite harm to purchasers of natural gas if the 
price they pay is higher for reasons that are associated with another 
market participant's price influence though the exertion of market 
power.
    Pirrong does not provide a direct factual rebuttal to the Senate 
investigative report finding that Amaranth's speculative activity 
affected overall price levels in natural gas. He argues that the 
Commission's reliance upon a Senate investigatory report would not be 
``accepted as evidence of causation in any peer reviewed academic 
work.'' \1719\ Id. at 2, ] 9. Prof. Pirrong is correct that the 
Commission has not, in the case of Amaranth, shown causation: That it 
was Amaranth's departure from the markets that caused the natural gas 
price decline in substantial part, as opposed to confounding factors 
(such as, in the case of natural gas, evidence that the upcoming winter 
would be warmer than expected). However, proof of causation is not 
required for publication in peer reviewed journals in a case such as 
this.
---------------------------------------------------------------------------

    \1719\ Id. at 2, ] 9.
---------------------------------------------------------------------------

    To establish evidence of causation, one would need a theoretical 
model and empirical evidence to support it. There have been peer-
reviewed studies on Amaranth such as one cited in the Commission's 
December 2013 Position Limits Proposal.\1720\ That study observed that 
not just a Senate investigatory committee, but one of the exchanges 
that Amaranth was trading on, was alarmed by their exercise of market 
power in months prior to the spot months. The New York Mercantile 
Exchange (NYMEX) on August 9, 2006: \1721\
---------------------------------------------------------------------------

    \1720\ See Ludwig Chincarini, Natural Gas Futures and Spread 
Position Risk: Lessons from the Collapse of Amaranth Advisors LLC, 
Journal of Applied Finance (2008).
    \1721\ Id. at p.24.

called Amaranth with continued concern about the September 2006 
contract and warned that October 2006 was large as well and they 
should not simply reduce the September exposure by shifting 
contracts to the October contract. In fact, by the close of business 
that day, Amaranth increased their October 2006 position by 17,560 
---------------------------------------------------------------------------
positions and their ICE positions by 105.75

    This study documents that even though many of the Amaranth 
positions were not with NYMEX, and instead with ICE, these positions 
were extremely large relative to the average daily trading volume of 
the largest natural gas futures exchange. ``In some cases, the 
positions are hundreds of times the 30-day average daily trading 
volume.'' \1722\
---------------------------------------------------------------------------

    \1722\ Id. at p.22.
---------------------------------------------------------------------------

    Pirrong also argues as a normative matter that the costs exceed the 
benefits. While he concedes that it is ``plausible'' that a sudden 
liquidation of a large position by a trader facing distress'' could 
``cause sudden and unwarranted price fluctuations,'' he argues that 
there is ``no evidence that this problem occurs with sufficient 
frequency, or has sufficiently damaging effects, to warrant 
continuously imposed constraints on risk transfer.'' Id. at 6, ] 27. 
The Commission considers the costs and benefits formally elsewhere in 
this release.
ii. The Possible Harms of Corners and Squeezes
    Pirrong also questions the extent of harm associated with 
activities such as the Hunt brothers. 2/10/14 ISDA/SIFMA Comment 
Letter, Annex B, at pp. 2-3. He downplays the harms of corners and 
squeezes. Id. at ]] 11-12, 38-43.
    Prof. Pirrong is incorrect in asserting that the Commission's view 
was groundless. In the December 2013 Position Limits Proposal, the 
Commission did ground its concern about outsized speculative positions 
in particular examples. The Commission did present evidence of 
inefficient resource allocation with respect to the Hunt brothers. It 
is as much a public

[[Page 96921]]

policy matter as an economic matter how position limits fare as a 
solution to the question of these negative externalities. Even if one 
assumes away the existence of market imperfections, as Pirrong does, 
one is still left to contend with the consequences of what Pirrong 
assumes to be natural market events. In the case of the Hunt brothers, 
the Commission gave multiple examples of negative externalities in the 
broader economy. People sold their silverware which was melted down 
into silver bars. A photo supply company dependent on silver supply 
went out of business.\1723\
---------------------------------------------------------------------------

    \1723\ December 2013 Position Limits Proposal 78 FR at 75680, 
75689.
---------------------------------------------------------------------------

    Pirrong's assumption that persons act optimally at any given moment 
does not mean, across time, that resources have been allocated 
efficiently. While much of economic analysis is static, dynamic effects 
over time can have inefficient allocation of resources, 
intertemporally. It may have been optimal for a possessor of silverware 
to melt down their silver into silver bars during the Hunt silver 
market disruption, but just a few months later a possessor of 
silverware would likely prefer silverware to silver bars. See Pirrong's 
Manipulation of the Commodity Futures Market Delivery Process, at p. 
383, Journal of Business (1993) (futures market manipulations 
``distorts prices and creates deadweight losses;'' ``causes shorts to 
utilize real resources to make excessive deliveries;'' and ``distorts 
consumption'').
    Pirrong thus errs in asserting that the Commission does not provide 
an ``empirical basis'' for ``inefficient allocation of resources.'' 2/
10/14 ISDA/SIFMA Comment Letter, Annex B, at p.3.
iii. Claim That the Spot-Month Limits Are Arbitrary
    Pirrong claims that spot month limits are set too low at 25 percent 
of deliverable supply. Id. at p.8, ]] 38-40. He contends that a single 
long trader has to control over 50 percent of deliverable supply to 
perfect a corner. Id. at ] 40. He is incorrect. Assuming, quite 
reasonably, that long commercials are going to stay in the market and 
consume, because it would be very expensive for them to leave the 
market, a certain percentage of deliverable supply is ``locked up'' in 
this sense. For example, a natural gas utility needs to deliver natural 
gas for its customers to heat their homes (among other things) and 
would therefore still take delivery of a substantial percentage of the 
deliverable supply of natural gas.
    Pirrong says that ``[f]ive or more perfectly colluding traders each 
with positions at the 25 percent level might be able to manipulate the 
market.'' Id. at p.8, ] 41. However, these five traders do not all need 
to collude in order to permit one of them to manipulate price. Some of 
these traders may simply be those who value the commodity highly, much 
higher than the market price, and therefore will not let go of their 
contractual right to delivery. Such commercials may be willing to stay 
and pay a higher price, even when a corner is in effect, because the 
cost, for example, of not providing natural gas to customers to heat 
their homes is substantially more.
    Many exchanges, including CME, set position limits lower than 25 
percent. It is hard for Pirrong to argue that 25 percent is excessively 
low when it is higher than CME limits for all of the 19 CME-traded 
commodities covered by the proposed CFTC position limits.
    Pirrong's final critique of spot month limits is his assertion that 
application of the same limits to short and long positions is 
arbitrary. Id. at p.9, ]] 42-43. The reasons he gives for this are 
problematic and not well-developed. Pirrong states that for storable 
commodities, manipulation by long traders is more likely than with 
short traders. Id., ] 42. It may well be more difficult to manipulate 
price through a corner or squeeze as a short because there is generally 
a fixed limit for deliverable supply (unless one creates the impression 
that there is more deliverable supply than there is). Moreover, shorts 
may well have a bona fide hedging exemption anyway. However, for shorts 
as well as longs, position limits help to ensure an orderly exit and a 
smoother delivery process. For example, a short trader with a large 
position might take a partially offsetting long position in an illiquid 
market in the spot month; this might cause unwarranted price volatility 
due to the price impact of establishing the offsetting long position.
    Pirrong criticizes the depth of the Commission's basis for treating 
short and long positions symmetrically, he also does not suggest an 
alternative or explain how a proper ratio should be calculated.\1724\
---------------------------------------------------------------------------

    \1724\ Pirrong argues that the Commission's cost-benefit 
analysis fails to identify, let alone analyze, important potential 
costs. 2/10/14 ISDA/SIFMA Comment Letter, Annex B, at 4-6. The 
Commission addresses all commenter criticisms in the cost-benefit 
section of this release. Pirrong also argues that the Commission's 
bona fide hedging exemptions are unnecessarily narrow and critiques 
the Commission's decision to establish different position limits for 
cash-settled (as opposed to delivery-settled) contracts. The 
Commission addresses such comments in the relevant sections of this 
release.
---------------------------------------------------------------------------

iv. Whether Position Limits Cause Economic Harm
    Pirrong contends that commodity ETFs, pension funds, and other 
``real money'' investors would be harmed by position limits and that 
this is unfair because not all such market participants impose the same 
risks. 2/10/14 ISDA/SIFMA Comment Letter, Annex B, at pp.3-4, ]] 16-18. 
The claim that it is ``unfair'' to impose limits on all market players 
uniformly is a policy argument, not an economic argument.
d. Hamilton/Wu Papers on Risk Premia and Effects of Index Fund 
Investing
    Professors James Hamilton and Jing Cynthia Wu of the University of 
California at San Diego and University of Chicago Business School, 
respectively, authored a well-executed set of papers (well-executed 
because they used reasonably defensible models with relatively 
transparent assumptions and data sources) that examine the effect of 
positions on prices.
    Their paper, Hamilton and Wu, Risk Premia in Crude Oil Futures 
Prices, Journal of International Money and Finance (2013), is a well-
reasoned explanation for how outsized speculative futures positions 
could impact risk premium, the return for accepting undiversifiable 
risk, a component of the return of holding a commodity futures 
contract. Examining the crude oil futures market, they find that crude 
oil risk premia fundamentally changed in response to financial investor 
flows into the crude oil market. Id. at p.31.
    Hamilton and Wu found that, for crude oil futures, risk premiums, 
post-2005, were smaller than they were in the pre-2005 sample. This 
study contains an important conclusion founded in the interplay of 
positions and prices in the crude oil markets:

    While traders taking the long position in near contracts earned 
a positive return on average prior to 2005, that premium decreased 
substantially after 2005, becoming negative when the slope of the 
futures curve was high. This observation is consistent with the 
claim that historically commercial producers paid a premium to 
arbitrageurs for the privilege of hedging price risk, but in more 
recent periods financial investors have become natural 
counterparties for commercial hedgers.

    Hamilton and Wu, Risk Premia in Crude Oil Futures Prices, at p.10, 
Journal of International Money and Finance (2013).
    Their paper tests the idea that risk premia have been bid down by 
long, speculative investments in the crude oil market. That is, they 
test the idea that the futures price has become higher as

[[Page 96922]]

it has been bid up by long speculators, so the return from holding the 
long futures contract has been lowered. In theory, this phenomenon 
would make hedging cheap for the short side of the market, but would 
also increase the price of the futures, all else being equal.
    Hamilton and Wu use a two-factor model for price: The futures 
contract price less the rational expectation of the futures price 
equals the risk premium, the component of price associated with holding 
the price risk of the futures contract. A commodity that is more likely 
to be affected by long passives in this way is crude oil, because (1) 
crude oil as a commodity dominates these indices--substantial portion 
of the GSFI for example; (2) the economics of storage.
    All else being equal, if outsized market positions affect price, we 
should expect risk premium to be the component of price that would be 
affected when market participants take outsized positions. That is 
because risk premium is a return for taking on undiversifiable risk. A 
risk premium does not include that portion of risk that can be easily 
diversified through other instruments. Through the workings of market, 
a participant who takes on a price exposure will expect to be 
compensated through a premium for bearing this risk. For a futures 
commodity contract, there are many components of the return, and the 
risk premium is only one of them. It can be a fairly small component, 
although the fraction depends on the commodity and other the market 
conditions.
    Hamilton and Wu construct a theoretical price return: The return of 
holding a long futures contract based on a rational expectations model. 
Hamilton and Wu, Risk Premia in Crude Oil Futures Prices, Journal of 
International Money and Finance (2013). Their risk premium is the 
difference between futures return and theoretical price return. They 
find that risk premiums for crude oil decreased over time and became 
more volatile. While Hamilton and Wu listed many assets in the paper's 
introductory discussion of the theoretical model, in their empirical 
analysis they use two factors, that involve only futures price data. 
This omission fails to take into account potentially relevant data 
about the level of various commodities in storage \1725\ and 
observations about other financial assets.\1726\ Consequently, there 
may be some disconnect between their theoretical and their empirical 
model. This may mean that the study's theoretical price return is on 
less sound theoretical footing than it may first appear. Nevertheless, 
the benchmark rational expectation return may still be a suitable 
approximation.
---------------------------------------------------------------------------

    \1725\ Risk premia may vary based on the amount of a commodity 
in storage at any given time. While discussing storage as a 
component of risk premia seems overly technical, in many of these 
papers, including the Hamilton and Wu paper, it might play an import 
role. One could go long a crude oil futures contract, or one could 
buy crude oil and storage it. If you do the latter, you could draw 
down the physical commodity available for near-term use. Also, the 
storing of the physical commodity has a real option component to it 
(one can take the crude oil out of storage and consume it relatively 
quickly). The value of the real option depends on how much society 
might need crude oil in storage, and that value depends on how much 
crude oil is stored elsewhere.
    \1726\ The papers discussed in the financialization section 
suggest that the returns of financial assets may affect commodity 
returns and vice versa.
---------------------------------------------------------------------------

    In a second paper, Effects of Index-Fund Investing on Commodity 
Futures Prices, International Economic Review, (February 2015), 
Hamilton and Wu were able to replicate Singleton's result for the crude 
oil market during the 2006-2009 period. They found an effect from 
speculative positions of index investors on risk premium in crude 
oil.\1727\ Hamilton and Wu also did not find evidence of speculative 
positions influencing risk premia in crude oil after 2009. Nor did they 
find evidence that speculative positions affected the risk premia in 
the agricultural commodities markets. ``Our conclusion is that although 
in principle index-fund buying of commodity futures could influence 
pricing of risk, we do not find confirmation of that in the week-to-
week variability of the notional value of reported commodity index 
trader positions.'' Id. at p.193; see id. at p.195 (no persuasive 
evidence that changes in index trader positions is related to risk 
premium in agricultural commodities, whether the data is studied for 
change on a weekly or 13-week basis). Consequently, they find only 
limited evidence for a theoretically reasonable version of the Master's 
hypothesis, i.e., that long speculators bid down the risk premia and as 
a result induce a higher futures price in various commodity futures 
markets. ``Overall,'' Hamilton and Wu conclude, their work indicates 
that ``there seems to be little evidence that index-fund investing is 
exerting a measurable effect on commodity futures prices.'' Id. at 
p.204 (adding that it is ``difficult to find much empirical foundation 
for a view that continues to have a significant impact on policy 
decisions'').
---------------------------------------------------------------------------

    \1727\ Professor Kenneth Singleton found evidence that 
speculative positions Granger-causing risk premium on weekly time 
intervals during the 2007 to 2009 period when studying the crude oil 
futures markets. Singleton, Investor Flows and the 2008 Boom/Bust in 
Oil Prices (March 23, 2011 working paper).
---------------------------------------------------------------------------

e. Sanders/Irwin on the ``Necessity'' of Limits and Energy Futures 
Prices
    Professors Dwight Sanders and Scott Irwin submitted two working 
papers: (1) One paper arguing that new limits on speculation in 
agricultural futures markets are unnecessary; \1728\ and (2) a paper on 
energy futures prices, using high frequency daily position data for 
energy markets and concluding that there is no compelling evidence of 
predictive links between commodity index investment and changes in 
energy futures prices.\1729\
---------------------------------------------------------------------------

    \1728\ Sanders and Irwin, The ``Necessity'' of New Position 
Limits in Agricultural Futures Markets: The Verdict from Daily Firm-
Level Position Data (working paper 3/13/2014), comment letter at 1-
46.
    \1729\ Sanders and Irwin, Energy Futures Prices and Commodity 
Index Investment: New Evidence from Firm-Level Position Data 
(working paper 2/17/2014), comment letter at 47-89.
---------------------------------------------------------------------------

i. The ``Necessity'' of New Position Limits
    In Sanders and Irwin, The ``Necessity'' of New Position Limits in 
Agricultural Futures Markets: The Verdict from Daily Firm-Level 
Position Data (working paper 2014), the authors use price and position 
data shared by an unnamed large investment company.\1730\ They do 
various statistical analyses to concluding that the large investment 
company's roll of its position does not have any lasting price impact 
on the market. The find that the price impact of the roll is, at most, 
a small and temporary price impact; there is not a day-over-day impact 
and the impact is smaller than the bid/ask spread.
---------------------------------------------------------------------------

    \1730\ Id. at 4-5. They argue that this dataset will be more 
comprehensive than the CFTC's commitment of trader data, but they 
did not test to verify this assumption. They correctly observe that 
prior work using CFTC data suffers from limitations in the frequency 
of data and the availability of swaps data. Id. at 3, 5.
---------------------------------------------------------------------------

    This result does not disprove, generally, the possibility that the 
fund's long, speculative positions impact price because it focuses only 
on one aspect of the fund's trading: Its rolling of positions. The firm 
data used is from a large commodity index fund that is registered 
investment company, and such a firm is likely put into their prospectus 
how they are going to roll their positions. This pre-announcement of 
when the commodity index fund will roll may dampen the price impact of 
these particular changes in position. See n.1682 and associated text, 
supra; Aulerich, Irwin, and Garcia, Bubbles, Food Prices, and 
Speculation: Evidence from the CFTC's Daily Large Trader Data Files, 
id. at p.29 (NBER Conference

[[Page 96923]]

2012) (firms preannounce their rolls, and thus these position changes 
can be anticipated by the marketplace and thus lead to less price 
impact). Sanders and Irwin's result thus is not obviously extensible to 
any price impact of this large index fund's positions apart from its 
positions and trading at the time of roll.
    This fund did have days of heavy trading, apart from rolling, but 
Sanders and Irwin did not study the price impact arising from these 
changes in position. The fund traded cotton contracts representing 5.8% 
of average daily trading in cotton and wheat trades constituting 3.5% 
of average daily volume in the MGEX wheat contract. Sanders and Irwin 
did not attempt to study price impact on these un-announced trades. 
They stated that because the sizes of the roll transactions are 
``larger than changes in outright position,'' ``investigating the 
impact of rolling on market spreads'' is ``particularly interesting.'' 
Id. at p.10. On the other hand, the non-roll position changes are 
presumptively not preannounced to the marketplace, so studying this 
rich dataset for price impacts from those position changes might also 
be interesting.
    This paper by Sanders and Irwin thus has a limitation of scope 
based on its focus on just the rolling of positions. This large 
commodity index fund presumptively pre-announced its rolling of 
positions in its prospectus. However, this leaves open the question of 
what would be the effect if this same fund did not pre-announce in the 
future. The analysis by Sanders and Irwin, if credited as true within a 
reasonable degree of certainty, would address whether regulators should 
employ position limits prophylactically to diminish the price impact of 
any future, non-announced rolls. At least prior to sunshine trading of 
rolls, there is evidence of a price impact associated with rolling. 
Frenk and Turbeville, Commodity Index Traders and the Boom/Bust Cycle 
in Commodities Prices (Better Markets 2011).\1731\
---------------------------------------------------------------------------

    \1731\ An example of a study that is, in part, forward-looking, 
is Cheng, Kirilenko, and Xiong, Convective Risk Flows in Commodity 
Futures Markets (working paper 2012). The authors use comovement 
methodology to conclude that in times of distress, financial traders 
reduce their net long position, causing risk to flow from financial 
traders to commercial hedgers. See also Acharya, Ramadorai, and 
Lochstoer, Limits to Arbitrage and Hedging: Evidence from the 
Commodity Markets, Journal of Financial Economics (2013) (decreases 
in financial traders' risk capacity should lead to increases in 
hedgers' hedging cost, all else being equal).
---------------------------------------------------------------------------

    Moreover, not all large players pre-announce their rolls. The fact 
that Sanders and Irwin found no price impact with respect to rolls that 
were (assumedly) pre-announced does not mean that unannounced rolls 
might be mistaken for informed trading by the marketplace and cause a 
price impact.\1732\
---------------------------------------------------------------------------

    \1732\ Sanders and Irwin's piece does not directly test the 
effect of pre-existing position limits in these markets. Examining 
agricultural markets for whether there can be price impact on 
positions generally is complicated by the fact that the agricultural 
markets have been subject to federal position limits since 1920s. On 
the other hand, in the case of a commodity index fund, they may well 
not be carrying substantial positions into the spot month, and so 
even their large source of firm data may not be useful for testing 
the impact or effectiveness of position limits during the spot 
month.
---------------------------------------------------------------------------

    Despite these limitations in scope, Sanders and Irwin's article is 
one of the more useful Granger analysis papers for several reasons.
    First, it does present a working definition of ``excessive 
speculation:'' speculation that is ``causing'' price fluctuations that 
are ``sudden'' or ``unreasonable'' or ``unwarranted.'' Sanders and 
Irwin correctly state that their ``definition of excessive speculation 
seemingly excludes speculation that cannot be shown to cause price 
changes. . . .'' Id. at p.3. It is important to note, however, that 
Sanders and Irwin repeatedly use the word ``necessary'' to analyze the 
desirability of position limits, which elevates the requirements for 
establishing causation of price fluctuations to a very high level. High 
quality economic studies often use empirical data, typically the tools 
of statistics, to achieve reasonable certainty within a specified 
degree of error.
    Second, the data source is a novel and fairly comprehensive data 
set. It includes both swaps and futures, and encompasses many different 
commodities. The data does indicate the volume and nature of this large 
commodity fund's positions in the market place. All positions taken by 
the firm during the 2007-2012 time period were long positions, not 
short positions. Id. at p.5. The fund's total position size (including 
futures and swaps) grew from under $4 billion in 2007 to $12 billion in 
2011. Id.
    Third, with respect to the paper's conclusion on rolling of 
positions, the statistical result of Sanders and Irwin--concluding that 
there was no price impact from positions--is stronger than many other 
studies in some respects. Unlike Hamilton and Wu's work on just a 
component of the return from holding a futures contract (risk premium), 
Sanders and Irwin consider the entire return from holding the futures 
contract. They studied data over a long time period. If their model is 
correct, they have found evidence against (at least their formulation 
of) the Masters hypothesis. There is a potential concern, however, with 
their statistical result. The price equation used for their Granger 
analysis uses both lagged returns and changes in positions. See id. at 
p.16 (``Rt-i'' are lagged returns and ``Positions'' are 
changes in position in Equation 5a). To the extent that lagged returns 
and position changes are correlated with each other, their price 
equation may mask correlations between price returns and position 
changes.
ii. Energy Futures Prices
    Using the same commodity index fund data, Sanders and Irwin examine 
energy contracts: Crude oil, heating oil, natural gas, and reformulated 
blend stock gas (with ethanol added). Sanders and Irwin, Energy Futures 
Prices and Commodity Index Investment: New Evidence from Firm-Level 
Position Data (working paper 2014). This paper attempts to challenge 
the findings of an impact on price from positions by Singleton, 
Hamilton and Wu. Sanders and Irwin contend that their richer data 
source compels a conclusion that positions in commodity energy markets 
do not impact price.
    This paper also has a potential problem with the price return 
equation. The equation, see id. at p. 15 (Equation No. 7), uses lagged 
returns and positions to test against a correlation with price. 
Sometimes they use multiple lagged returns. For example, for their 
natural gas analysis, they used two sets of lagged returns. Id. at p.35 
(Table 5). Again, use of lagged returns in the price equation can mask 
a possible correlation.
    Sanders and Irwin argue that their results from a richer data 
source indicate that Singleton and Hamilton and Wu's results may be 
``artifacts'' of poor data. They contend that these authors' use of 
agricultural data as proxy for energy positions was problematic. Id. at 
p.3. They suggest this may explain the differing results of Singleton, 
as well as Hamilton and Wu.
    But there are other explanations for this difference in results. 
Singleton, Hamilton and Wu focus on risk premium, not, as Sanders and 
Irwin do, on price returns. This distinction can be quite important in 
this context. If positions impact price by impacting risk premium, that 
effect will not necessarily reveal itself in a study of just price 
returns. Perhaps more fundamentally, Sanders and Irwin and are asking a

[[Page 96924]]

slightly different question than Hamilton and Wu or Singleton. Sanders 
and Irwin are attempting to measure speculative position changes impact 
on price returns over a long time period, February of 2007 to May 2012. 
Hamilton and Wu, and also Singleton, use narrower timeframes in their 
papers and find a component of return, the risk premium, during a 
narrow time window, during a period of economic stress.
f. CME Group Study Submissions
    The CME Group filed in the administrative record several studies 
and reports on March 28, 2011. It did so in three sets, all filed on 
March 28, 2011.
    In the first set, CME filed: Tackling the Challenges in Commodity 
Markets and Raw Materials, European Commission (2011) (2.2.2011); 
Issues Involving the Use of the Futures Market to Invest in Commodity 
Indexes, Government Accountability Office Letter to the Hon. Collin 
Peterson, Chair, House Committee on Agriculture (June 30, 2009); and 
Korniotis, Does Speculation Affect Spot Price Levels? The Case of 
Metals With and Without Futures Markets, Working Paper of the Finance 
and Economic Discussion Series, Federal Reserve Board (2009).
    In a second set, CME filed: Stoll and Whaley, Commodity Index 
Investing and Commodity Futures Prices, Journal of Applied Finance 
(2010); and Irwin and Sanders, The Impact of Index and Swap Funds on 
Commodity Markets: Preliminary Results (OECD Food, Agriculture and 
Fisheries Working Papers, No. 27 2010).
    In a third set, CME filed: Celso Brunetti and Bahattin 
B[uuml]y[uuml]k[scedil]ahin, Is Speculation Destabilizing? (working 
paper 2009); Bahattin B[uuml]y[uuml]k[scedil]ahin and Jeffrey H. 
Harris, The Role of Speculators in the Crude Oil Futures Market 
(working paper 2009); and Interagency Task Force on Commodity Markets, 
Interim Report on Crude Oil (July 2008).
    Finally, CME submitted an undated CME study on conditional spot-
month limits and CME Group's white paper, Excessive Speculation and 
Position Limits in Energy Derivatives Markets.
    As a group, these studies are not new to the Commission. All of 
these papers, except the CME undated submission on conditional spot 
limits and the European Commission publication, were cited by the 
Commission in its December 2013 Position Limits Proposal and so are 
covered in the above analysis of various studies.\1733\
---------------------------------------------------------------------------

    \1733\ The undated CME study on conditional spot-month limits is 
the only empirical work submitted by CME in is opposition to the 
position limits rulemaking. It has been proven wrong. The Commission 
has previously explained that CME made technical data errors in 
doing its analysis. Position Limits for Futures and Swaps, 76 FR 
71626, 71635 nn. 100-101 (Nov. 18, 2011). The European Commission 
publication in CME's first set of submissions, Tackling the 
Challenges in Commodity Markets and Raw Materials, European 
Commission (2011) (2.2.2011), is simply a discussion of policy 
initiatives. It concedes that it is difficult to know which way 
causation forms between financial and physical markets and states 
that ``the debate . . . is still open'' on whether financial inflows 
have affected prices. Id. at 2, 7.
---------------------------------------------------------------------------

Conclusion
    Economists debate whether ``excessive speculation'' meaning, as an 
economic matter, a link between large speculation positions and 
unwarranted price changes or price volatility, exists in these 
regulated markets, and if so to what degree. The question presented is 
a surprisingly difficult one to answer. All the empirical studies on 
this question have drawbacks, and none is conclusive. This 
inconclusivity is not surprising. It is inevitable, given the economic 
uncertainties that inhere in the data and the complexity of the 
question. There are many theoretical and empirical assumptions and 
leaps, that are needed to transform and interpret raw market data into 
meaningful and persuasive results. There is no decisive statistical 
method for establishing evidence for or against position limits in the 
commodity.
    Those studies that use Granger causality methodology tend to 
conclude that there is no evidence of excessive speculation or its 
consequences on price returns and price volatility, and many industry 
commenters opposed to position limits used this methodology. But that 
methodology is peculiarly sensitive to model design choices, and this 
review has highlighted the modelling decisions that may have affected 
the ultimate conclusions of these studies. Moreover, there are 
countervailing Granger studies showing a link between large speculative 
positions and price volatility. And studies such as Cheng, Kirilenko, 
and Xiong, Convective Risk Flows in Commodity Futures Markets (working 
paper 2012), indicate that some Granger studies may mask the impact of 
speculation in times of financial stress.
    Those studies that use comovement and cointegration methods tend to 
conclude there is evidence of deleterious effects of ``excessive 
speculation.'' Yet comovement tests for correlation, not causation, and 
a correlation between large financial trading in the commodity markets 
and price changes and volatility could be driven by a common causal 
agent such as macroeconomic factors.
    Those studies that use models of fundamental supply and demand 
reach a whole host of divergent opinions on the subject, each opinion 
only as strong as the many modelling choices.
    In this way, the economic literature is inconclusive. Even clearly 
written, well-respected papers often contain nuances. It is telling 
that Hamilton, Causes and Consequences of the Oil Shock of 2007-2008, 
Brookings Paper on Economic Activity (2009), has been cited by both 
proponents and opponents of position limits.
    What can be said with certainty is summarized in the Commission's 
Notice of Proposed Rulemaking: That large speculative positions and 
outsized market power pose risks to a well-functioning marketplace. 
These risks may very well differ depending on commodity market 
structure, but can in some markets cause real-world price impacts 
through a higher risk premium as a component of total price. There are 
also economic studies indicating some correlation between increased 
speculation and price volatility in times of financial stress, but this 
correlation does not imply causation.
    Comment letters on either side declaring that the matter is settled 
in their favor among respectable economists are simply incorrect. The 
best economists on both sides of the debate concede that there is a 
legitimate debate. This analysis concludes that the academic debate 
amongst economists about the effects of outsized market positions has 
reputable and legitimate standard-bearers for opposing positions.

B. Appendix B--List of Comment Letters Cited in this Rulemaking

1. Agri-Mark, Inc.; (CL-Agri-Mark-59609, 2/10/2014)
2. Airlines for America (``A4A''); (CL-A4A-59714, 2/10/2014); (CL-
A4A-59686, 2/10/2014)
3. Alternative Investment Management Association (``AIMA''); (CL-
AIMA-59618, 2/10/2014); (CL-AIMA-59619, 2/10/2014)
4. American Bakers Association (``Bakers''); (CL-Bakers-59691, 2/10/
2014)
5. American Benefits Council (``ABC''); (CL-ABC-59670, 2/10/2014)
6. American Cotton Shippers Association (``ACSA''); (CL-ASCA-59667, 
2/10/2014)
7. American Farm Bureau Federation (``AFBF''); (CL-AFBF-59730, 2/10/
2014)
8. American Feed Industry Association (``AFIA''); (CL-AFIA-60955, 7/
13/2016)
9. American Gas Association (``AGA''), (CL-AGA-59632, 2/10/2014); 
(CL-AGA-

[[Page 96925]]

59633, 2/10/2014); (CL-AGA-60382, 3/30/2015); (CL-AGA-60943, 7/13/
2016)
10. American Petroleum Institute (``API''); (CL-API-59694, 2/10/
2014); (CL-API-59944, 8/4/2014); (CL-API-60939, 7/13/2016)
11. American Public Gas Association (``APGA''); (CL-APGA-59722, 2/
10/2014)
12. American Sugar Refining, Inc.; (CL-ASR-59668, 2/10/2014); (CL-
ASR-60933, 7/13/2016)
13. Americans for Financial Reform (``AFR''); (CL-AFR-59711, 2/10/
2014); (CL-AFR-59685, 2/10/2014); (CL-AFR-60953, 7/13/2016)
14. Archer Daniels Midland Company (``ADM''); (CL-ADM-59640, 2/10/
2014); (CL-ADM-60300, 1/22/2015); (CL-ADM-60934, 7/13/2016)
15. Armajaro Asset Management; (CL-Armajaro-59729, 2/10/2014)
16. Atmos Energy Holdings, Inc. (``Atmos''); (CL-Atmos-59705, 2/10/
2014)
17. Better Markets, Inc.; (CL-Better Markets-59715, 2/10/2014); (CL-
Better Markets-59716, 2/10/2014); (CL-Better Markets-60325, 1/22/
2015); (CL-Better Markets-60401, 3/30/2015); (CL-Better Markets-
60928, 7/13/2016)
18. BG Energy Merchants, LLC (``BG Group''); (CL-BG Group-59656, 2/
10/2014); (CL-BG Group-59937, 8/4/2014); (CL-BG Group-60383, 3/30/
2015)
19. Cactus Feeders, Inc., et al.; (CL-Cactus-59660, 2/10/2014)
20. Calpine Corporation; (CL-Calpine-59663, 2/10/2014)
21. Cargill, Incorporated; (CL-Cargill-59638, 2/10/2014)
22. Castleton Commodities International LLC (``CCI''); (CL-CCI-
60935, 7/13/2016)
23. Center for Capital Markets Competitiveness, U.S. Chamber of 
Commerce (``Chamber''); (CL-Chamber-59684, 2/10/2014); (CL-Chamber-
59721, 2/10/2014)
24. Chairman, U.S. Senate Permanent Subcommittee on Investigations 
of the Committee on Homeland Security and Governmental Affairs; (CL-
Sen. Levin-59637, 2/10/2014)
25. Citadel LLC; (CL-Citadel-59717, 2/10/2014); (CL-Citadel-59933, 
8/1/2014)
26. CME Group Inc. (``CME''); (CL-CME-59719, 2/10/2014); (CL-CME-
59718, 2/10/2014); (CL-CME-59970, 8/4/2014); (CL-CME-59971, 8/4/
2014); (CL-CME-60307, 1/22/2015); (CL-CME-60406, 3/30/2015); (CL-
CME-60926, 7/13/2016)
27. Coalition of Physical Energy Companies (``COPE''); (CL-COPE-
59662, 2/10/2014); (CL-COPE-59653, 2/10/2014); (CL-COPE-59950, 8/4/
2014); (CL-COPE-60388, 3/30/2015); (CL-COPE-60932, 7/13/2016)
28. Commercial Energy Working Group; (CL-Working Group-59647, 2/10/
2014)
29. Commodities Working Group of GFMA (``GFMA''); (CL-GFMA-60314, 1/
22/2015)
30. Commodity Markets Council (``CMC''); (CL-CMC-59634, 2/10/2014); 
(CL-CMC-59925, 7/25/2014); (CL-CMC-60318, 1/22/2015); (CL-CMC-60391, 
3/30/2015); (CL-CMC-60950, 7/13/2016)
31. Commodity Markets Oversight Coalition (``CMOC''); (CL-CMOC-
59720, 2/10/2014); (CL-CMOC-60324, 1/22/2015); (CL-CMOC-60400, 3/30/
2015)
32. Committee on Capital Markets Regulation (``CCMR''); (CL-CCMR-
59623, 2/10/2014)
33. Copperwood Asset Management LP (``CAM''); (CL-CAM-60097, 12/22/
2014)
34. Cota, Sean; (CL-Cota-59706, 2/10/2014); (CL-Cota-60322, 1/22/
2015)
35. CSC Sugar, LLC (``CSC''); (CL-CSC-59676, 2/10/2014); (CL-CSC-
59677, 2/10/2014)
36. Dairy Farmers of America (``DFA''); (CL-DFA-59621, 2/10/2014); 
(CL-DFA-59948, 8/4/2014); (CL-DFA-60309, 1/22/2015); (CL-DFA-60927, 
7/13/2016)
37. Darigold; (CL-Darigold-59651, 2/10/2014)
38. Davis Wright Tremaine LLP on behalf of Dairy America, Inc.; (CL-
Dairy America-59683, 2/10/2014)
39. DB Commodity Services LLC (``DBCS''); (CL-DBCS-59569, 2/6/2014)
40. Duke Energy Utilities; (CL-DEU-59627, 2/10/2014)
41. Ecom Agro Industrial, Inc.; (CL-Ecom-60308, 1/22/2015)
42. EDF Trading North America, LLC (``EDF''); (CL-EDF-59961, 8/4/
2014); (CL-EDF-60398, 3/30/2015); (CL-EDF-60944, 7/13/2016)
43. Edison Electric Institute (``EEI''); (CL-EEI-59945, 8/4/2014); 
(CL-EEI-Sup-60386, 3/30/2015)
44. Electric Power Supply Association (``EPSA''); (CL-EPSA-55953, 8/
4/2014); (CL-EPSA-59999, 11/12/2014); (CL-EPSA-60381, 3/30/2015)
45. EEI and EPSA, jointly (``EEI-EPSA''); (CL-EEI-EPSA-59602, 2/7/
2014); (CL-EEI-EPSA-60925, 7/13/2016)
46. Energy Transfer Partners, L.P. (``ETP''); (CL-ET-59958, 8/4/
2014); (CL-ETP-60915, 7/12/2016)
47. FC Stone LLC; (CL-FCS-59675, 2/10/2014)
48. Fonterra Co-operative Group Limited (``Fonterra''); (CL-
Fonterra-59608, 2/9/2014)
49. Futures Industry Association (``FIA''), (CL-FIA-59595, 2/7/
2014); (CL-FIA-59566, 2/6/2014); (CL-FIA-59931, 7/31/2014); (CL-FIA-
60303, 1/22/2015); (CL-FIA-60392, 3/30/2015); (CL-FIA-60937, 7/13/
2016)
50. Grain Service Corporation (``GSC''); (CL-GSC-59703, 2/10/2014)
51. HP Hood LLC (``Hood''), (CL-Hood-59582, 2/7/2014)
52. ICE Futures U.S., Inc.; (CL-ICE-59645, 2/10/2014); (CL-ICE-
59649, 2/10/2014); (CL-ICE-59938, 8/4/2014); (CL-ICE-60310, 1/22/
2015); (CL-ICE-60311, 1/22/2015); (CL-ICE-60378, 3/30/2015)
53. Industrial Energy Consumers of America; (CL-IECA-59671, 2/10/
2014); (CL-IECA-59713, 2/10/2014); (CL-IECA-59964, 8/4/2014); (CL-
IECA-60389, 3/30/2015)
54. Innovation Center for US Dairy; (CL-US Dairy-59952, 8/4/2014)
55. Institute for Agriculture and Trade Policy (``IATP''); (CL-IATP-
59701, 2/10/2014); (CL-IATP-59704, 2/10/2014); (CL-IATP-60394, 3/30/
2015); (CL-IATP-60951, 7/13/2016)
56. IATP and AFR, jointly; (CL-IATP-60323, 1/22/2015)
57. Intercontinental Exchange, Inc. (``ICE''); (CL-ICE-59669, 2/10/
2014); (CL-ICE-59962, 8/4/2014); (CL-ICE-59966, 8/4/2014); (CL-ICE-
60387, 3/30/2015); (CL-ICE-60929, 7/13/2016)
58. International Dairy Foods Association (``IDFA''); (CL-IDFA-
59771, 2/10/2014)
59. International Energy Credit Association; (CL-IECAssn-9679, 2/10/
2014); (CL-IECAssn-59957, 8/4/2014); (CL-IECAssn-60395, 3/30/2015); 
(CL-IECAssn-60949, 7/13/2016)
60. International Swaps and Derivatives Association, Inc. 
(``ISDA''); (CL-ISDA-60370, 3/26/2015); (CL-ISDA-60931, 7/13/2016)
61. Investment Company Institute (``ICI''); (CL-ICI-59614, 2/10/
2014)
62. ISDA and SIFMA, jointly; (CL-ISDA/SIFMA-59611, 2/10/2014); (CL-
ISDA/SIFMA-59917, 7/7/2014)
63. Just Energy Group Inc.; (CL-Just-59692, 2/10/2014)
64. Leprino Foods Company; (CL-Leprino-59707, 2/10/2014)
65. Louis Dreyfus Commodities LLC; (CL-LDC-59643, 2/10/2014)
66. Managed Funds Association (``MFA''); (CL-MFA-59600, 2/7/2014); 
(CL-MFA-59606, 2/9/2014); (CL-MFA-60385, 3/30/2015)
67. MidAmerican Energy Holdings Company; (CL-MidAmerican-59585, 2/7/
2014)
68. Minneapolis Grain Exchange, Inc. (``MGEX''); (CL-MGEX-59610, 2/
10/2014); (CL-MGEX-59932, 8/1/2014); (CL-MGEX-60301, 1/22/2015); 
(CL-MGEX-60380, 3/30/2015); (CL-MGEX-60936, 7/13/2016); (CL-MGEX-
60938, 7/13/2016)
69. Morgan Stanley; (CL-MSCGI-59708, 2/10/2014)
70. National Association of Wheat Growers; (CL-NAWG-59687, 2/10/
2014)
71. National Cattlemen's Beef Association (``NCBA''); (CL-NCBA-
59624, 2/10/2014)
72. National Corn Growers Association & American Soybeans 
Association, jointly; (CL-NCGA-ASA-60917, 7/12/2016)
73. National Corn Growers Association & Natural Gas Supply 
Association, jointly; (CL-NCGA-NGSA-60919, 7/13/2016)
74. National Cotton Council of America, American Cotton Shippers 
Association, and Amcot, jointly; (CL-NCC-ACSA-60972, 7/18/2016)
75. National Council of Farmer Cooperatives; (CL-NCFC-59613, 2/10/
2014); (CL-NCFC-59942, 8/4/2014); (CL-NCFC-60930, 7/13/2016)
76. National Energy Marketers Association; (CL-NEM-59586, 2/7/2014); 
(CL-NEM-59620, 2/10/2014)
77. National Grain and Feed Association; (CL-NGFA-59681, 2/10/2014); 
(CL-NGFA-59956, 8/4/2014); (CL-NGFA-60267, 1/17/2015); (CL-NGFA-
60312, 1/22/2015); (CL-NGFA-60941, 7/13/2016)
78. National Milk Producers Federation; (CL-NMPF-59652, 2/10/2014); 
(CL-NMPF-60956, 7/13/2016)

[[Page 96926]]

79. National Rural Electric Cooperative Association, American Public 
Power Association, and the Large Public Power Council, jointly (the 
``NFP Electric Associations''); (CL-NFP-59690, 2/10/2014); (CL-NFP-
59934, 8/1/2014); (CL-NFP-60393, 3/30/2015); (CL-NFP-60942, 7/13/
2016)
80. Natural Gas Supply Association; (CL-NGSA-59673, 2/10/2014); (CL-
NGSA-59674, 2/10/2014); (CL-NGSA-59900, 6/26/2014); (CL-NGSA-59941, 
8/4/2014); (CL-NGSA-60379, 3/30/2015)
81. Nebraska Cattlemen Inc.; (CL-NC-59696, 2/10/2014)
82. New York State Department of Agriculture & Markets; (CL-NYS 
Agriculture-59657, 2/10/2014)
83. Nodal Exchange, LLC; (CL-Nodal-59695, 2/10/2014); (CL-Nodal-
60948, 7/13/2016)
84. NRG Energy, Inc.; (CL-NRG-60434, 1/20/2015)
85. Occupy the SEC (``OSEC''); (CL-OSEC-59972, 8/7/2014)
86. Olam International Limited; (CL-Olam-59658, 2/10/2014); (CL-
Olam-59946, 8/4/2014)
87. Pedestal Commodity Group, LLC; (CL-Pedestal-59630, 2/10/2014)
88. Petroleum Marketers Association of America and the New England 
Fuel Institute; (CL-PMAA-NEFI-60952, 7/13/2016)
89. Plains All American Pipeline, L.P.; (CL-PAAP-59664, 2/10/2014); 
(CL-PAAP-59951, 8/4/2014)
90. Private Equity Growth Capital Council (``PEGCC''); (CL-PEGCC-
59650, 2/10/2014); (CL-PEGCC-59913, 7/3/2014); (CL-PEGCC-59987, 10/
24/2014)
91. Public Citizen, Inc.; (CL-Public Citizen-59648, 2/10/2014); (CL-
Public Citizen-60390, 3/30/2015); (CL-Public Citizen-60313, 1/22/
2015); (CL-Public Citizen-60940, 7/13/2016)
92. Rice Dairy LLC; (CL-Rice Dairy-59601, 2/7/2014); (CL-Rice Dairy-
59960, 8/4/2014)
93. RightingFinance; (CL-RF-60372, 3/28/2015)
94. Risk Management Work Group, Globalization Operating Committee, 
Innovation Center for US Dairy; (CL-US Dairy-59597, 2/7/2014)
95. Rutkowski, Robert; (CL-Rutkowski-60961, 7/14/2016); (CL-
Rutkowski-60962, 7/14/2016)
96. Sempra Energy; (CL-SEMP-59926, 7/25/2014); (CL-SEMP-60384, 3/30/
2015)
97. SIFMA AMG (``SIFMA''); (CL-AMG-59709, 2/10/2014); (CL-AMG-59710, 
2/10/2014); (CL-AMG-59935, 8/1/2014); (CL-AMG-60946, 7/13/2016)
98. Southern Company Services, Inc.; (CL-SCS-60399, 3/30/2015)
99. Sutherland Asbill & Brennan LLP on behalf of The Commercial 
Energy Working Group; (CL-Working Group-59693, 2/10/2014); (CL-
Working Group-59955, 8/4/2014); (CL-Working Group-59959, 8/4/2014); 
(CL-Working Group-60396, 3/30/2015); (CL-Working Group-60947, 7/13/
2016)
100. T.C. Jacoby & Company, Inc.; (CL-Jacoby-59622, 2/10/2014)
101. Texas Cattle Feeders Association (``TCFA''); (CL-TCFA-59680, 2/
10/2014); (CL-TCFA-59723, 2/10/2014)
102. The Andersons, Inc.; (CL-Andersons-60256, 1/15/2015)
103. The McCully Group LLC; (CL-McCully-59592, 2/7/2014)
104. Thornton, Pamela; (CL-Thornton-59702, 2/10/2014)
105. Traditum Group LLC; (CL-Traditum-59655, 2/10/2014)
106. Tri-State Coalition for Responsible Investment, et al.; (CL-
Tri-State-59682, 2/10/2014)
107. United States Commodity Funds LLC (``USCF''); (CL-USCF-59644, 
2/10/2014)
108. Vectra Capital LLC; (CL-Vectra-60369, 3/26/2015)
109. Wholesale Markets Brokers Association, Americas (``WMBA''); 
(CL-WMBA-60945, 7/13/2016)
110. World Economy, Ecology & Development (``WEED''); (CL-WEED-
59628, 2/10/2014)
111. World Gold Council (``WGC''); (CL-WGC-59558, 2/6/2014)

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 Part 15

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements, Swaps.

17 CFR Part 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 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.

17 CFR Part 151

    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, 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 (2012).


Sec.  1.3(z)  [Removed and Reserved]

0
2. Remove and reserve Sec.  1.3(z).


Sec.  1.47  [Removed and Reserved]

0
3. Remove and reserve Sec.  1.47.


Sec.  1.48  [Removed and Reserved]

0
4. Remove and reserve Sec.  1.48.

PART 15--REPORTS--GENERAL PROVISIONS

0
5. 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
6. In Sec.  15.00, revise paragraph (p) to read as follows:


Sec.  15.00  Definitions of terms used in parts 15 through 19, and 21 
of this chapter.

* * * * *
    (p) Reportable position means:
    (1) For reports specified in parts 17 and 18 and in Sec.  
19.00(a)(2) and (a)(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 of this part 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

[[Page 96927]]

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
7. In Sec.  15.01, revise paragraph (d) to read as follows:


Sec.  15.01  Persons required to report.

* * * * *
    (d) Persons, as specified in part 19 of this chapter, who either:
    (1) 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) 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
8. 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 Trader............................           18.04
71...................................  Identification of Omnibus Accounts and Sub-accounts......           17.01
101..................................  Positions of Special Accounts............................           17.00
102..................................  Identification of Special Accounts, Volume Threshold                17.01
                                        Accounts, and Consolidated Accounts.
204..................................  Statement of Cash Positions of Hedgers...................           19.00
304..................................  Statement of Cash Positions for Unfixed-Price Cotton ``On           19.00
                                        Call''.
504..................................  Statement of Cash Positions for Conditional Spot Month              19.00
                                        Exemptions.
604..................................  Statement of Pass-Through Swap Exemptions................           19.00
----------------------------------------------------------------------------------------------------------------

(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
9. The authority citation for part 17 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
10. In Sec.  17.00, revise 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
11. In Sec.  17.03, revise 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 Office of Data and Technology to instruct a futures 
commission merchant, clearing member or foreign broker to consider 
otherwise than 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
12. 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 A to Part 19--Forms 204, 304, 504, 604, and 704

    Authority: 7 U.S.C. 6g, 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)(B) 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

[[Page 96928]]

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, or 604 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 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) Any 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

[[Page 96929]]

    (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 in units of such commodity and in terms of 
futures equivalents of the core referenced futures contract, including:
    (i) The as of date, the commodity derivative contract held or 
controlled, and the equivalent core referenced 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 merchant, producer or 
agent, 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 CFTC Form 204 monthly on the 
remaining unsold, unfilled and other anticipated activity for the 
Specified Period that was reported on such person's most recent initial 
statement or annual update filed on Form 704, pursuant to Sec.  150.7 
(e) of this chapter.
    (b) Time and place of filing reports--(1) General. Except for 
reports specified in paragraphs (b)(2) or (b)(3) of this section, 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)(4) of this section, and not 
later than 9 a.m. Eastern Time on the third business day following the 
date of the report.
    (2) Spot month reports. Persons required to file `04 reports under 
Sec.  19.00(a)(1)(i) for special commodities as specified by the 
Commission under Sec.  19.03 or under Sec.  19.00(a)(1)(ii)(B) shall 
file each report:
    (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)(4) of this section, and not 
later than 9 a.m. Eastern Time on the next business day following the 
date of the report.
    (3) Special calls. Persons required to file '04 reports in response 
to special calls made under Sec.  19.00(a)(3) shall file each report as 
specified in paragraph (b)(4) of this section within one business day 
of receipt of the special call unless otherwise specified in the call.
    (4) 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.

    (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 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.
    (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.


Sec. Sec.  19.05-19.10   [Reserved]

Appendix A to Part 19--Forms 204, 304, 504, 604, and 704

BILLING CODE 6351-01-P

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BILLING CODE 6351-01-C

PART 37--SWAP EXECUTION FACILITIES

0
13. 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
14. 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
15. In Appendix B to part 37, under the heading Core Principle 6 of 
Section 5h of the Act--Position Limits or Accountability, revise 
paragraphs (A) and (B) 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

    (A) In general. To reduce the potential threat of market 
manipulation or congestion, especially during trading in the 
delivery month, a swap execution facility that is a trading facility 
shall adopt for each of the contracts of the facility, as is 
necessary and appropriate, position limitations or position 
accountability for speculators.
    (B) Position limits. For any contract that is subject to a 
position limitation established by the Commission pursuant to 
section 4a(a), the swap execution facility shall:
    (1) Set its position limitation at a level not higher than the 
Commission limitation; and
    (2) Monitor positions established on or through the swap 
execution facility for compliance with the limit set by the 
Commission and the limit, if any, set by the swap execution 
facility.
    (a) Guidance.
    (1) Until a swap execution facility has access to sufficient 
swap position information, a swap execution facility that is a 
trading facility need not demonstrate compliance with Core Principle 
6(B). A swap execution facility has access to sufficient swap 
position information if, for example:
    (i) It has access to daily information about its market 
participants' open swap positions; or
    (ii) It knows, including through knowledge gained in 
surveillance of heavy trading activity occurring on or pursuant to 
the rules of the swap execution facility, that its market 
participants regularly engage in large volumes of speculative 
trading activity that would cause reasonable surveillance personnel 
at a swap execution facility to inquire further about a market 
participant's intentions or open swap positions.
    (2) When a swap execution facility has access to sufficient swap 
position information, this guidance is no longer applicable. At such 
time, a swap execution facility is required to demonstrate 
compliance with Core Principle 6(B).
    (b) Acceptable practices. [Reserved]
* * * * *

PART 38--DESIGNATED CONTRACT MARKETS

0
16. 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
17. 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.
0
18. In Appendix B to part 38, under the heading Core Principle 5 of 
section 5(d) of the Act: Position Limitations or Accountability, revise 
paragraphs (A) and (B) to read as follows:

Appendix B to Part 38--Guidance on, and Acceptable Practices in, 
Compliance with Core Principles

* * * * *

Core Principle 5 of Section 5(d) of the Act: Position Limitations or 
Accountability

    (A) In general.--To reduce the potential threat of market 
manipulation or congestion (especially during trading in the 
delivery month), the board of trade shall adopt for each contract of 
the board of trade, as is necessary and appropriate, position 
limitations or position accountability for speculators.
    (B) Maximum allowable position limitation.--For any contract 
that is subject to a position limitation established by the 
Commission pursuant to section 4a(a), the board of trade shall set 
the position limitation of the board of trade at a level not higher 
than the position limitation established by the Commission.
    (a) Guidance.
    (1) Until a board of trade has access to sufficient swap 
position information, a board of trade need not demonstrate 
compliance with Core Principle 5(B) with respect to swaps. A board 
of trade has access to sufficient swap position information if, for 
example:
    (i) It has access to daily information about its market 
participants' open swap positions; or
    (ii) It knows, including through knowledge gained in 
surveillance of heavy trading activity occurring on or pursuant to 
the rules of the designated contract market, that its market 
participants regularly engage in large volumes of speculative 
trading activity that would cause reasonable surveillance personnel 
at a board of trade to inquire further about a market participant's 
intentions or open swap positions.
    (2) When a board of trade has access to sufficient swap position 
information, this guidance is no longer applicable. At such time, a 
board of trade is required to demonstrate compliance with Core 
Principle 5(B) with respect to swaps.
    (b) Acceptable Practices. [Reserved]
* * * * *

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), 12a, 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 continues 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--
    Bona fide hedging position means--
    (1) Hedges of an excluded commodity. For a position in commodity 
derivative contracts in an excluded commodity, as that term is defined 
in section 1a(19) of the Act:
    (i) Such position is economically appropriate to the reduction of 
risks in the conduct and management of a commercial enterprise and is 
enumerated in paragraph (3), (4) or (5) of this definition; or
    (ii) Is otherwise 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--general definition. 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--

[[Page 96964]]

    (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; 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 swap 
would qualify as a bona fide hedging position pursuant to paragraph 
(2)(i) of this definition (a pass-through swap counterparty), provided 
that the bona fides of the pass-through swap counterparty may be 
determined at the time of the transaction;
    (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; or
    (C) Offsets of bona fide hedging swap positions. Such position 
reduces risks attendant to a position resulting from a swap that meets 
the requirements of paragraph (2)(i) of this definition.
    (iii) Additional requirements for enumeration or other recognition. 
Notwithstanding the foregoing general definition, a position in 
commodity derivative contracts in a physical commodity shall be 
classified as a bona fide hedging position only if:
    (A) The position satisfies the requirements of paragraph (2)(i) of 
this definition and is enumerated in paragraph (3), (4), or (5) of this 
definition;
    (B) The position satisfies the requirements of paragraph (2)(ii) of 
this definition, provided that no offsetting 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; or
    (C) The position has been otherwise recognized as a non-enumerated 
bona fide hedging position by either a designated contract market or 
swap execution facility, each in accordance with Sec.  150.9(a); or by 
the Commission.
    (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, 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 to its customers.
    (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 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.
    (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.
    (6) Offsets of commodity trade options. For purposes of this 
definition, a commodity trade option, meeting the requirements of Sec.  
32.3 of this chapter for a commodity option transaction, may be deemed 
a cash commodity purchase or sales contract, as appropriate, provided 
that such option is adjusted on a futures-equivalent basis. By way of 
example, a commodity trade option with a fixed strike price may be 
converted to a futures-equivalent basis, and, on that futures-
equivalent basis,

[[Page 96965]]

deemed a cash commodity sale, in the case of a short call option or 
long put option, or a cash commodity purchase, in the case of a long 
call option or short put option.
    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.
    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).
    Commodity index contract means an agreement, contract, or 
transaction that is not a location basis contract or any type of spread 
contract, based on an index comprised of prices of commodities that are 
not the same or substantially the same.
    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 \1\ means a commodity pool operator, the operator 
of a trading vehicle which is excluded or who itself has qualified for 
exclusion from the definition of the term ``pool'' or ``commodity pool 
operator,'' respectively, under Sec.  4.5 of this chapter; the limited 
partner or shareholder in a commodity pool the operator of which is 
exempt from registration under Sec.  4.13 of this chapter; a commodity 
trading advisor; a bank or trust company; a savings association; an 
insurance company; or the separately organized affiliates of any of the 
above entities:
---------------------------------------------------------------------------

    \1\ The definition of the term, eligible entity, was amended by 
the Commission in a final rule published on December 16, 2016 (81 FR 
91454, 91489). The unamended version of the definition presented 
here is included solely to maintain the continuity of this 
regulatory section and for the convenience of the reader. The 
definition of the term, eligible entity, is not a subject of this 
reproposal and will be revised when the amended definition takes 
effect on February 14, 2017.
---------------------------------------------------------------------------

    (1) Which authorizes an independent account controller 
independently to control all trading decisions for positions it holds 
directly or indirectly, or on its behalf, but without its 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 and 
necessary to fulfill its duty to supervise diligently the trading done 
on its behalf; or
    (ii) If a limited partner or shareholder of a commodity pool the 
operator of which is exempt from registration under Sec.  4.13 of this 
chapter, only such limited control as is consistent with its status.
    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 converted to an 
economically equivalent amount of an open position in a core referenced 
futures contract, provided however, if a participant's position exceeds 
position limits as a result of an option assignment, that participant 
is allowed one business day to liquidate the excess position without 
being considered in violation of the limits;
    (2) A futures contract which has been converted to an economically 
equivalent amount of an open position in a core referenced futures 
contract; and
    (3) A swap which has been converted to an economically equivalent 
amount of an open position in a core referenced futures contract.
    Independent account controller \2\ means a person--
---------------------------------------------------------------------------

    \2\ The definition of the term, independent account controller, 
was amended by the Commission in a final rule published on December 
16, 2016 (81 FR 91454, 91489). The unamended version of the 
definition presented here is included solely to maintain the 
continuity of this regulatory section and for the convenience of the 
reader. The definition of the term, independent account controller, 
is not a subject of this reproposal and will be revised when the 
amended definition takes effect on February 14, 2017.
---------------------------------------------------------------------------

    (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 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 registered as a futures commission merchant, an 
introducing broker, a commodity trading advisor, an associated person 
or any such registrant, or is a general partner of a commodity pool the 
operator of which is exempt from registration under Sec.  4.13 of this 
chapter.
    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.
    Intermarket spread position means a long (short) position in one or 
more commodity derivative contracts in a particular commodity, or its 
products or its by-products, at a particular designated contract market 
or swap execution facility and a short (long) position in one or more 
commodity derivative contracts in that same, or similar, commodity, or 
its products or its by-products, away from that particular designated 
contract market or swap execution facility.
    Intramarket spread position means a long position in one or more 
commodity derivative contracts in a particular commodity, or its 
products or its by-products, and a short position in one or more 
commodity derivative contracts in the same, or similar, commodity, or 
its products or its by-products, on the same designated contract market 
or swap execution facility.
    Location 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

[[Page 96966]]

    (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 to this part as 
substantially the same as a commodity underlying the same core 
referenced futures contract.
    Long position means, on a futures-equivalent basis, a long call 
option, a short put option, a long underlying futures contract, or a 
swap position that is equivalent to a long futures contract.
    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 a core referenced futures contract listed 
in Sec.  150.2(d) or, on a futures equivalent basis with respect to a 
particular core referenced futures contract, a futures contract, 
options contract, or swap 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.
    (3) The definition of referenced contract does not include any 
guarantee of a swap, a location basis contract, a commodity index 
contract, or a trade option that meets the requirements of Sec.  32.3 
of this chapter.
    Short position means, on a futures-equivalent basis, a short call 
option, a long put option, a short underlying futures contract, or a 
swap position that is equivalent to a short futures contract.
    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 core referenced futures contracts, the 
period of time beginning at the earlier of the close of business on the 
trading day preceding the first day on which delivery notices can be 
issued by the clearing organization of a contract market, or the close 
of business on the trading day preceding the third-to-last trading day, 
until the contract expires, except as follows:
    (i) For ICE Futures U.S. Sugar No. 11 (SB) referenced contract, the 
spot month means the period of time beginning at the opening of trading 
on the second business day following the expiration of the regular 
option contract traded on the expiring futures contract until the 
contract expires;
    (ii) For ICE Futures U.S. Sugar No. 16 (SF) referenced contract, 
the spot month means the period of time beginning on the third-to-last 
trading day of the contract month until the contract expires;
    (iii) For Chicago Mercantile Exchange Live Cattle (LC) referenced 
contract, the spot month means the period of time beginning at the 
close trading on the fifth business day of the contract month until the 
contract expires;
    (2) For cash-settled core referenced futures contracts:
    (i) [Reserved]
    (3) For referenced contracts other than core referenced futures 
contracts, the spot month means the same period as that of the relevant 
core referenced futures contract.
    Spread contract means either a calendar spread contract or an 
intercommodity spread 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 this part 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 Table Core Referenced Futures Contracts:

                                        Core Referenced Futures Contracts
----------------------------------------------------------------------------------------------------------------
          Commodity type            Designated contract market        Core referenced futures contract \1\
----------------------------------------------------------------------------------------------------------------
Legacy Agricultural...............  Chicago Board of Trade....  Corn (C).

[[Page 96967]]

 
                                                                Oats (O).
                                                                Soybeans (S).
                                                                Soybean Meal (SM).
                                                                Soybean Oil (SO).
                                                                Wheat (W).
                                                                Hard Winter Wheat (KW).
                                    ICE Futures U.S...........  Cotton No. 2 (CT).
                                    Minneapolis Grain Exchange  Hard Red Spring Wheat (MWE).
Other Agricultural................  Chicago Board of Trade....  Rough Rice (RR).
                                    Chicago Mercantile          Live Cattle (LC).
                                     Exchange.
                                    ICE Futures U.S...........  Cocoa (CC).
                                                                Coffee C (KC).
                                                                FCOJ-A (OJ).
                                                                U.S. Sugar No. 11 (SB).
                                                                U.S. Sugar No. 16 (SF).
Energy............................  New York Mercantile         Light Sweet Crude Oil (CL).
                                     Exchange.
                                                                NY Harbor ULSD (HO).
                                                                RBOB Gasoline (RB).
                                                                Henry Hub Natural Gas (NG).
Metals............................  Commodity Exchange, Inc...  Gold (GC).
                                                                Silver (SI).
                                                                Copper (HG).
                                    New York Mercantile         Palladium (PA).
                                     Exchange.
                                                                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 to this part; provided 
however, compliance with such initial speculative limits shall not be 
required until January 3, 2018, which date shall be the initial 
establishment date for purposes of paragraphs (e)(3) and (4) of this 
section.
    (2) Subsequent levels. (i) The Commission shall fix subsequent 
levels of speculative position limits in accordance with the procedures 
in this 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. If the Commission determines to rely on its own 
estimate of deliverable supply, then the Commission shall publish such 
estimate for public comment in the Federal Register; provided however, 
that the Commission may determine to fix the level of the spot-month 
limit at a level, recommended by the designated contract market listing 
the relevant core referenced futures contract for good cause shown, 
that is less than one-quarter of the estimated spot-month deliverable 
supply, or not to change the level of the spot-month limit.
    (ii) Estimates of deliverable supply. (A) 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 to 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:
    (1) For energy commodities, January 31 of the second calendar year 
following the most recent Commission action establishing such limit 
levels;
    (2) For metals commodities, March 31 of the second calendar year 
following the most recent Commission action establishing such limit 
levels;
    (3) For legacy agricultural commodities, May 31 of the second 
calendar year following the most recent Commission action establishing 
such limit levels; and
    (4) For other agricultural commodities, August 31 of the second 
calendar year following the most recent Commission action establishing 
such limit levels.
    (B) Notwithstanding paragraph (e)(3)(ii)(A) of this section, each 
designated contract market may petition the Commission not less than 
two calendar months before the due date for submission of an estimate 
of deliverable supply under paragraph (e)(3)(ii)(A) of this section, 
recommending that the Commission not change the spot-month limit. Such 
recommendation should include a summary of the designated contract 
market's experience administering its spot-month limit. The Commission 
shall determine not less than one calendar month before such due date 
whether to accept the designated contract market's recommendation. If 
the Commission accepts such recommendation, then the designated 
contract market need not submit an estimated spot-month deliverable 
supply for such due date.
    (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-

[[Page 96968]]

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; 
provided however, the Commission may determine not to change the level 
of the single-month limit or the all-months-combined limit.
    (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 or 5,000 
contracts.
    (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.
    (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 in paragraph (e) of this section to fix and publish 
subsequent levels of speculative position limits, including the 
authority not to change levels of such limits, and the authority in 
paragraph (e)(3)(iii) of this section to relieve a designated contract 
market from the requirement to submit an estimate of deliverable 
supply.
    (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.
    (j) 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.
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 that comply with the definition in 
Sec.  150.1, provided that:
    (A) For non-enumerated bona fide hedges, the person has not 
otherwise been notified by the Commission under Sec.  150.9(d)(4) or, 
under rules adopted pursuant to Sec.  150.9(a)(4)(iv)(B), by the 
designated contract market or swap execution facility; and
    (B) For anticipatory bona fide hedging positions under paragraphs 
(3)(iii), (4)(i), (4)(iii), (4)(iv) and (5) of the bona fide hedging 
position definition in Sec.  150.1, the person complies with the filing 
requirements found in Sec.  150.7 or the filing requirements adopted, 
in accordance with Sec.  150.11(a)(3), by a designated contract market 
or swap execution facility, as applicable;
    (ii) Financial distress positions exempted under paragraph (b) of 
this section;
    (iii) Conditional spot-month limit positions exempted under 
paragraph (c) of this section;
    (iv) Spread positions recognized by a designated contract market or 
swap execution facility, each in accordance with Sec.  150.10(a), or 
the Commission, provided that the person has not otherwise been 
notified by the Commission under Sec.  150.10(d)(4) or by the 
designated contract market or swap execution facility under rules 
adopted pursuant to Sec.  150.10(a)(4)(iv)(B); or
    (v) 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 limit set 
forth in Sec.  150.2 may be exceeded for natural gas cash-settled 
referenced contracts, provided that such positions do not exceed 10,000 
contracts and the person holding or controlling such positions does not 
hold or control positions in spot-month physical-delivery referenced 
contracts.

[[Page 96969]]

    (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 to this part provides a non-exhaustive list of 
examples of bona fide hedging positions as defined under Sec.  150.1.
    (f) Previously granted exemptions. (1) Exemptions granted by the 
Commission under Sec.  1.47 of this chapter for risk management of 
positions in financial instruments shall not apply to positions in 
financial instruments entered into after the effective date of initial 
position limits implementing section 737 of the Dodd-Frank Act of 2010.
    (2) Exemptions for risk management of positions in financial 
instruments granted by a designated contract market or swap execution 
facility shall not apply to positions in financial instruments entered 
into after the effective date of initial position limits implementing 
section 737 of the Dodd-Frank Act of 2010, provided that, for positions 
in financial instruments entered into on or before the effective date 
of initial position limits implementing section 737 of the Dodd-Frank 
Act of 2010, the exemption shall apply for purposes of position limits 
under Sec.  150.2 if the exemption:
    (i) Applies to positions outside of the spot month only; and
    (ii) Was granted prior to the compliance date provided under Sec.  
150.2(e)(1).
    (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)(B) 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, 
provided that the bona fides of the pass-through swap counterparty may 
be determined at the time of the transaction. 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)(B) 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 delegee, 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 of this part 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 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, a 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 to exchange-set limits--(i) Grant of exemption. Any 
designated contract market or swap execution facility that is a trading 
facility may grant exemptions from any speculative position limits it 
sets under paragraph (a)(1) of this section, provided that exemptions 
from federal limits conform to the requirements specified in Sec.  
150.3, and provided further that any exemptions to exchange-set limits 
not conforming to Sec.  150.3 are capped at the level of the applicable 
federal limit in Sec.  150.2.
    (ii) Application for exemption. Any designated contract market or 
swap execution facility that grants exemptions under paragraph 
(a)(2)(i) of this section:
    (A) Must require traders to file an application requesting such 
exemption in advance of the date that such position would be in excess 
of the limits then in effect, provided however, that it may adopt rules 
that allow a trader to file an application for an enumerated bona fide 
hedging exemption within five business days after the trader assumed 
the position that exceeded a position limit.
    (B) Must require, for any exemption granted, that the trader 
reapply for the exemption at least on an annual basis.

[[Page 96970]]

    (C) May deny any such application, or limit, condition, or revoke 
any such exemption, at any time, including if it determines such 
positions would not be in accord with sound commercial practices, or 
would 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 in a physical commodity as defined in Sec.  150.1 that are 
not subject to the limits set forth in Sec.  150.2--(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 of this chapter 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. 
For agricultural or exempt 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 equal to or less than the greater of: 
The level of the spot month limit; or 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 spot-month, individual non-spot-
month, and all-months combined position limits comparable to those of 
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 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 based on 
position sizes customarily held by speculative traders on the contract 
market or equal to or less than the greater of: The spot-month position 
limit level; 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 5,000 
contracts. 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

[[Page 96971]]

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) 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), except that a 
designated contract market or swap execution facility that is a trading 
facility shall include swaps in their open interest calculation only if 
such entities administer position limits on swap contracts of their 
facilities.
    (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, except that 
a designated contract market or swap execution facility that is a 
trading facility shall include swaps in their trading volume count only 
if such entities administer position limits on swap contracts of their 
facilities.
    (5) Exemptions--(i) Hedge exemption. (A) Any hedge exemption rules 
adopted by a designated contract market or a swap execution facility 
that is a trading facility should conform to the definition of bona 
fide hedging position in Sec.  150.1 and may provide for recognition as 
a non-enumerated bona fide hedge in a manner consistent with the 
process described in Sec.  150.9(a).
    (B) Any hedge exemption rules adopted under paragraph (b)(5)(i)(A) 
of this section may allow a person to file an application for 
enumerated hedging positions, which application should be filed not 
later than five business days after the person assumed the position 
that exceeded a position limit.
    (ii) Other exemptions. A designated contract market or swap 
execution 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 spot-month 
speculative position limits may be exceeded for cash-settled contracts, 
provided that such positions should not exceed two times the level of 
the spot-month limit specified by the designated contract market or 
swap execution facility that is a trading facility, that lists a 
physical-delivery contract to which the cash-settled contracts are 
directly or indirectly linked, and the person holding or controlling 
such positions should not hold or control positions in such spot-month 
physical-delivery contract.
    (C) Intramarket spread positions and intermarket spread positions, 
each as defined in Sec.  150.1, provided that the designated contract 
market or swap execution facility, in considering whether to grant an 
application for such exemption, should take into account whether 
exempting the spread position from position limits would, to the 
maximum extent practicable, ensure sufficient market liquidity for bona 
fide hedgers, and not unduly reduce the effectiveness of position 
limits to:
    (1) Diminish, eliminate, or prevent excessive speculation;
    (2) Deter and prevent market manipulation, squeezes, and corners; 
and
    (3) Ensure that the price discovery function of the underlying 
market is not disrupted.
    (iii) Application for exemption. Traders should be required to 
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 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) Preexisting 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

[[Page 96972]]

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.
    (c) Requirements and acceptable practices for excluded commodity 
derivative contracts as defined in section 1a(19) of the Act--(1) 
Levels at initial listing. At the time of each excluded 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) Excluded commodity derivative 
contracts with a measurable deliverable supply. For all excluded 
commodity derivative contracts 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 of this chapter for guidance on estimating spot-month 
deliverable supply);
    (B) Excluded commodity derivative contracts without a measurable 
deliverable supply. For excluded 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. 
For excluded commodity derivative contracts, the individual non-spot or 
all-months-combined levels should be equal to or less than the greater 
of: The level of the spot month limit; or 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 
excluded 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 spot-month, 
individual non-spot-month, and all-months combined position limits that 
are comparable to those of 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 
for excluded commodity derivative contracts 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 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. 
Individual non-spot or all-months-combined levels should be based on 
position sizes customarily held by speculative traders on the contract 
market or equal to or less than the greater of: the spot-month position 
limit level; 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 5,000 
contracts. 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 (c), 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) 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;
    (ii) 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 on 
an excluded 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

[[Page 96973]]

    (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), except that a 
designated contract market or swap execution facility that is a trading 
facility should include swaps in their open interest calculation only 
if such entities administer position limits on swap contracts of their 
facilities.
    (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, except that 
a designated contract market or swap execution facility that is a 
trading facility should include swaps in their trading volume count 
only if such entities administer position limits on swap contracts of 
their facilities.
    (5) Exemptions--(i) Hedge exemptions. Any hedge exemption rules 
adopted by a designated contract market or a swap execution facility 
that is a trading facility should conform to the definition of bona 
fide hedging position in Sec.  150.1.
    (ii) Other exemptions for excluded commodities. A designated 
contract market or swap execution facility may grant, in addition to 
the exemptions under paragraphs (b)(5)(ii)(A), (b)(5)(ii)(B), and 
(b)(5)(ii)(C) of this section, a risk management exemption pursuant to 
rules submitted to the Commission, including for a position that is 
consistent with the guidance in Appendix A of this part.
    (iii) Application for exemption. Traders should be required to 
apply to the designated contract market or swap execution facility that 
is a trading facility for any exemption from its speculative position 
limit rules. Such exchange may allow a person to file an application 
after the person assumed the position that exceeded a position limit. 
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 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.
    (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 should have aggregation rules 
for excluded commodity derivative contracts that conform to Sec.  
150.4.
    (9) Additional acceptable practices. A designated contract market 
or swap execution facility that is a trading facility may impose such 
other restrictions on excluded commodity derivative contracts 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.
    (d) Requirements for security futures products. For security 
futures products, position limitations and position accountability 
requirements 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, including any associated recordkeeping and 
reporting regulations. 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, unless incorporated by reference.
0
27. Add Sec. Sec.  150.7 through 150.11 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 
an application on 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 an application or annual update on 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 an application or annual update 
Form 704 under paragraph (a) of this section to file specific 
additional or updated information with the Commission to support a 
determination that the application or annual update on file accurately 
reflects unsold anticipated production, unfilled anticipated 
requirements, anticipated royalties, or anticipated services contract 
payments or receipts.
    (d) Initial statement and annual update. 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.

[[Page 96974]]

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, including 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 annual statement. Such statements shall set forth in 
detail for a specified operating period 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) 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)(A) 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, if filing an initial statement; or
    (B) For the prior fiscal year if filing an annual update;
    (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;
    (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; 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.
    (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) 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) of this chapter.
    (f) 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.
    (g) 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 an application or annual update on 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 any 
applications or annual updates filed on 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.


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.


Sec.  150.9   Process for recognition of positions as non-enumerated 
bona fide hedges.

    (a) Requirements for a designated contract market or swap execution 
facility to recognize non-enumerated bona fide hedging positions. (1) A 
designated contract market or swap execution facility that elects to 
process non-enumerated bona fide hedging position applications to 
demonstrate why a derivative position satisfies the requirements of 
section 4a(c) of the Act shall maintain rules, submitted to the 
Commission pursuant to part 40 of this chapter, establishing an 
application process for recognition of non-enumerated bona fide hedging 
positions consistent with the requirements of this section and the 
general definition of bona fide hedging position in Sec.  150.1. A

[[Page 96975]]

designated contract market or swap execution facility may elect to 
process non-enumerated bona fide hedging position applications for 
positions in commodity derivative contracts only if, in each case:
    (i) The commodity derivative contract is a referenced contract;
    (ii) Such designated contract market or swap execution facility 
lists such commodity derivative contract for trading;
    (iii) Such commodity derivative contract is actively traded on such 
designated contract market or swap execution facility;
    (iv) Such designated contract market or swap execution facility has 
established position limits for such commodity derivative contract; and
    (v) Such designated contract market or swap execution facility has 
at least one year of experience and expertise administering position 
limits for a referenced contract in a particular commodity. A 
designated contract market or swap execution facility shall not 
recognize a non-enumerated bona fide hedging position involving a 
commodity index contract and one or more referenced contracts.
    (2) A designated contract market or swap execution facility may 
establish different application processes for persons to demonstrate 
why a derivative position constitutes a non-enumerated bona fide 
hedging position under novel facts and circumstances and under facts 
and circumstances substantially similar to a position for which a 
summary has been published on such designated contract market's or swap 
execution facility's Web site, pursuant to paragraph (a)(7) of this 
section.
    (3) Any application process that is established by a designated 
contract market or swap execution facility shall elicit sufficient 
information to allow the designated contract market or swap execution 
facility to determine, and the Commission to verify, whether the facts 
and circumstances in respect of a derivative position satisfy the 
requirements of section 4a(c) of the Act and the general definition of 
bona fide hedging position in Sec.  150.1, and whether it is 
appropriate to recognize such position as a non-enumerated bona fide 
hedging position, including at a minimum:
    (i) A description of the position in the commodity derivative 
contract for which the application is submitted and the offsetting cash 
positions;
    (ii) Information to demonstrate why the position satisfies the 
requirements of section 4a(c) of the Act and the general definition of 
bona fide hedging position in Sec.  150.1;
    (iii) A statement concerning the maximum size of all gross 
positions in derivative contracts for which the application is 
submitted;
    (iv) Information regarding the applicant's activity in the cash 
markets for the commodity underlying the position for which the 
application is submitted during the past year; and
    (v) Any other information necessary to enable the designated 
contract market or swap execution facility to determine, and the 
Commission to verify, whether it is appropriate to recognize such 
position as a non-enumerated bona fide hedging position.
    (4) Under any application process established under this section, a 
designated contract market or swap execution facility shall:
    (i) Require each person intending to exceed position limits to 
submit an application, to reapply at least on an annual basis by 
updating that application, and to receive notice of recognition from 
the designated contract market or swap execution facility of a position 
as a non-enumerated bona fide hedging position in advance of the date 
that such position would be in excess of the limits then in effect 
pursuant to section 4a of the Act;
    (ii) Notify an applicant in a timely manner if a submitted 
application is not complete. If an applicant does not amend or resubmit 
such application within a reasonable amount of time after such notice, 
a designated contract market or swap execution facility may reject the 
application;
    (iii) Determine in a timely manner whether a derivative position 
for which a complete application has been submitted satisfies the 
requirements of section 4a(c) of the Act and the general definition of 
bona fide hedging position in Sec.  150.1, and whether it is 
appropriate to recognize such position as a non-enumerated bona fide 
hedging position;
    (iv) Have the authority to revoke, at any time, any recognition 
issued pursuant to this section if it determines the recognition is no 
longer in accord with section 4a(c) of the Act and the general 
definition of bona fide hedging position in Sec.  150.1; and
    (v) Notify an applicant in a timely manner:
    (A) That the derivative position for which a complete application 
has been submitted has been recognized by the designated contract 
market or swap execution facility as a non-enumerated bona fide hedging 
position under this section, and the details and all conditions of such 
recognition;
    (B) That its application is rejected, including the reasons for 
such rejection; or
    (C) That the designated contract market or swap execution facility 
has asked the Commission to consider the application under paragraph 
(a)(8) of this section.
    (5) An applicant's derivatives position shall be deemed to be 
recognized as a non-enumerated bona fide hedging position exempt from 
federal position limits at the time that a designated contract market 
or swap execution facility notifies an applicant that such designated 
contract market or swap execution facility will recognize such position 
as a non-enumerated bona fide hedging position.
    (6) A designated contract market or swap execution facility that 
elects to process non-enumerated bona fide hedging position 
applications shall file new rules or rule amendments pursuant to part 
40 of this chapter, establishing or amending requirements for an 
applicant to file reports pertaining to the use of any such exemption 
that has been granted in the manner, form, and frequency, as determined 
by the designated contract market or swap execution facility.
    (7) After recognition of each unique type of derivative position as 
a non-enumerated bona fide hedging position, based on novel facts and 
circumstances, a designated contract market or swap execution facility 
shall publish on its Web site, on at least a quarterly basis, a summary 
describing the type of derivative position and explaining why it was 
recognized as a non-enumerated bona fide hedging position.
    (8) If a non-enumerated bona fide hedging position application 
presents novel or complex issues or is potentially inconsistent with 
section 4a(c) of the Act and the general definition of bona fide 
hedging position in Sec.  150.1, a designated contract market or swap 
execution facility may ask the Commission to consider the application 
under the process set forth in paragraph (d) of this section. The 
Commission may, in its discretion, agree to or reject any such request 
by a designated contract market or swap execution facility.
    (b) Recordkeeping. (1) A designated contract market or swap 
execution facility that elects to process non-enumerated bona fide 
hedging position applications shall keep full, complete, and systematic 
records, which include all pertinent data and memoranda, of all 
activities relating to the processing of such applications and the 
disposition thereof, including the recognition by the designated 
contract market or swap execution facility of any derivative position 
as a non-enumerated bona fide hedging position, the revocation or

[[Page 96976]]

modification of any such recognition, the rejection by the designated 
contract market or swap execution facility of an application, or the 
withdrawal, supplementation or updating of an application by the 
applicant. Included among such records shall be:
    (i) All information and documents submitted by an applicant in 
connection with its application;
    (ii) Records of oral and written communications between such 
designated contract market or swap execution facility and such 
applicant in connection with such application; and
    (iii) All information and documents in connection with such 
designated contract market's or swap execution facility's analysis of 
and action on such application.
    (2) All books and records required to be kept pursuant to this 
section shall be kept in accordance with the requirements of Sec.  1.31 
of this chapter.
    (c) Reports to the Commission. (1) A designated contract market or 
swap execution facility that elects to process non-enumerated bona fide 
hedging position applications shall submit to the Commission a report 
for each week as of the close of business on Friday showing the 
following information:
    (i) For each commodity derivative position that had been recognized 
that week by the designated contract market or swap execution facility 
as a non-enumerated bona fide hedging position, and for any revocation 
or modification of a previously granted recognition:
    (A) The date of disposition,
    (B) The effective date of the disposition,
    (C) The expiration date of any recognition,
    (D) Any unique identifier assigned by the designated contract 
market or swap execution facility to track the application,
    (E) Any unique identifier assigned by the designated contract 
market or swap execution facility to a type of recognized non-
enumerated bona fide hedging position,
    (F) The identity of the applicant,
    (G) The listed commodity derivative contract to which the 
application pertains,
    (H) The underlying cash commodity,
    (I) The maximum size of the commodity derivative position that is 
recognized by the designated contract market or swap execution facility 
as a non-enumerated bona fide hedging position,
    (J) Any size limitation established for such commodity derivative 
position on the designated contract market or swap execution facility, 
and
    (K) A concise summary of the applicant's activity in the cash 
markets for the commodity underlying the commodity derivative position; 
and
    (ii) The summary of any non-enumerated bona fide hedging position 
published pursuant to paragraph (a)(7) of this section, or revised, 
since the last summary submitted to the Commission.
    (2) Unless otherwise instructed by the Commission, a designated 
contract market or swap execution facility that elects to process non-
enumerated bona fide hedging position applications shall submit to the 
Commission, no less frequently than monthly, any report such designated 
contract market or swap execution facility requires to be submitted by 
an applicant to such designated contract market or swap execution 
facility pursuant to rules required under paragraph (a)(6) of this 
section.
    (3) Unless otherwise instructed by the Commission, a designated 
contract market or swap execution facility that elects to process non-
enumerated bona fide hedging position applications shall submit to the 
Commission the information required by paragraphs (c)(1) and (2) of 
this section, as follows:
    (i) As specified by the Commission on the Forms and Submissions 
page at www.cftc.gov;
    (ii) Using the format, coding structure, and electronic data 
transmission procedures approved in writing by the Commission; and
    (iii) Not later than 9:00 a.m. Eastern time on the third business 
day following the date of the report.
    (d) Review of applications by the Commission. (1) The Commission 
may in its discretion at any time review any non-enumerated bona fide 
hedging position application submitted to a designated contract market 
or swap execution facility, and all records required to be kept by such 
designated contract market or swap execution facility pursuant to 
paragraph (b) of this section in connection with such application, for 
any purpose, including to evaluate whether the disposition of the 
application is consistent with section 4a(c) of the Act and the general 
definition of bona fide hedging position in Sec.  150.1.
    (i) The Commission may request from such designated contract market 
or swap execution facility records required to be kept by such 
designated contract market or swap execution facility pursuant to 
paragraph (b) of this section in connection with such application.
    (ii) The Commission may request additional information in 
connection with such application from such designated contract market 
or swap execution facility or from the applicant.
    (2) If the Commission preliminarily determines that any non-
enumerated bona fide hedging position application or the disposition 
thereof by a designated contract market or swap execution facility 
presents novel or complex issues that require additional time to 
analyze, or that an application or the disposition thereof by such 
designated contract market or swap execution facility is potentially 
inconsistent with section 4a(c) of the Act and the general definition 
of bona fide hedging position in Sec.  150.1, the Commission shall:
    (i) Notify such designated contract market or swap execution 
facility and the applicable applicant of the issues identified by the 
Commission; and
    (ii) Provide them with 10 business days in which to provide the 
Commission with any supplemental information.
    (3) The Commission shall determine whether it is appropriate to 
recognize the derivative position for which such application has been 
submitted as a non-enumerated bona fide hedging position, or whether 
the disposition of such application by such designated contract market 
or swap execution facility is consistent with section 4a(c) the Act and 
the general definition of bona fide hedging position in Sec.  150.1.
    (4) If the Commission determines that the disposition of such 
application is inconsistent with section 4a(c) of the Act and the 
general definition of bona fide hedging position in Sec.  150.1, the 
Commission shall notify the applicant and grant the applicant a 
commercially reasonable amount of time to liquidate the derivative 
position or otherwise come into compliance. This notification will 
briefly specify the nature of the issues raised and the specific 
provisions of the Act or the Commission's regulations with which the 
application is, or appears to be, inconsistent.
    (e) Review of summaries by the Commission. The Commission may in 
its discretion at any time review any summary of a type of non-
enumerated bona fide hedging position required to be published on a 
designated contract market's or swap execution facility's Web site 
pursuant to paragraph (a)(7) of this section for any purpose, including 
to evaluate whether the summary promotes transparency and fair and open 
access by all market participants to information regarding bona fide 
hedges. If the Commission determines that a summary is deficient in any 
way, the Commission shall notify such designated contract market or 
swap execution facility, and grant to the designated contract market or 
swap

[[Page 96977]]

execution facility a reasonable amount of time to revise the summary.
    (f) 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 (a)(8) of this section to agree to or reject a 
request by a designated contract market or swap execution facility to 
consider a non-enumerated bona fide hedging position application;
    (ii) In paragraph (c) of this section to provide instructions 
regarding the submission to the Commission of information required to 
be reported by a designated contract market or swap execution facility, 
to specify the manner for submitting such information on the Forms and 
Submissions page at www.cftc.gov, and to determine the format, coding 
structure, and electronic data transmission procedures for submitting 
such information;
    (iii) In paragraph (d)(1) of this section to review any non-
enumerated bona fide hedging position application and all records 
required to be kept by a designated contract market or swap execution 
facility in connection with such application, to request such records 
from such designated contract market or swap execution facility, and to 
request additional information in connection with such application from 
such designated contract market or swap execution facility or from the 
applicant;
    (iv) In paragraph (d)(2) of this section to preliminarily determine 
that a non-enumerated bona fide hedging position application or the 
disposition thereof by a designated contract market or swap execution 
facility presents novel or complex issues that require additional time 
to analyze, or that such application or the disposition thereof is 
potentially inconsistent with section 4a(c) of the Act and the general 
definition of bona fide hedging position in Sec.  150.1, to notify the 
designated contract market or swap execution facility and the 
applicable applicant of the issues identified, and to provide them with 
10 business days in which to file supplemental information; and
    (v) In paragraph (e) of this section to review any summary of a 
type of non-enumerated bona fide hedging position required to be 
published on a designated contract market's or swap execution 
facility's Web site, to determine that any such summary is deficient, 
to notify a designated contract market or swap execution facility of a 
deficient summary, and to grant such designated contract market or swap 
execution facility a reasonable amount of time to revise such summary.
    (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.


Sec.  150.10   Process for designated contract market or swap execution 
facility exemption from position limits for certain spread positions.

    (a) Requirements for a designated contract market or swap execution 
facility to exempt from position limits certain positions normally 
known to the trade as spreads. (1) A designated contract market or swap 
execution facility that elects to process applications for exemptions 
from position limits for certain positions normally known to the trade 
as spreads shall maintain rules, submitted to the Commission pursuant 
to part 40 of this chapter, establishing an application process for 
exempting positions normally known to the trade as spreads consistent 
with the requirements of this section. A designated contract market or 
swap execution facility may elect to process applications for such 
spread exemptions only if, in each case:
    (i) Such designated contract market or swap execution facility 
lists for trading at least one contract that is either a component of 
the spread or a referenced contract that is a component of the spread;
    (ii) The contract, in paragraph (a)(1)(i) of this section, in a 
particular commodity is actively traded on such designated contract 
market or swap execution facility;
    (iii) Such designated contract market or swap execution facility 
has established position limits for at least one contract that is 
either a component of the spread or a referenced contract that is a 
component of the spread; and
    (iv) Such designated contract market or swap execution facility has 
at least one year of experience and expertise administering position 
limits for at least one contract that is either a component of the 
spread or a referenced contract that is a component of the spread. A 
designated contract market or swap execution facility shall not approve 
a spread exemption involving a commodity index contract and one or more 
referenced contracts.
    (2) Spreads that a designated contract market or swap execution 
facility may approve under this section include:
    (i) Calendar spreads;
    (ii) Quality differential spreads;
    (iii) Processing spreads; and
    (iv) Product or by-product differential spreads.
    (3) Any application process that is established by a designated 
contract market or swap execution facility under this section shall 
elicit sufficient information to allow the designated contract market 
or swap execution facility to determine, and the Commission to verify, 
whether the facts and circumstances demonstrate that it is appropriate 
to exempt a spread position from position limits, including at a 
minimum:
    (i) A description of the spread position for which the application 
is submitted;
    (ii) Information to demonstrate why the spread position should be 
exempted from position limits, including how the exemption would 
further the purposes of section 4a(a)(3)(B) of the Act;
    (iii) A statement concerning the maximum size of all gross 
positions in derivative contracts for which the application is 
submitted; and
    (iv) Any other information necessary to enable the designated 
contract market or swap execution facility to determine, and the 
Commission to verify, whether it is appropriate to exempt such spread 
position from position limits.
    (4) Under any application process established under this section, a 
designated contract market or swap execution facility shall:
    (i) Require each person requesting an exemption from position 
limits for its spread position to submit an application, to reapply at 
least on an annual basis by updating that application, and to receive 
approval in advance of the date that such position would be in excess 
of the limits then in effect pursuant to section 4a of the Act;
    (ii) Notify an applicant in a timely manner if a submitted 
application is not complete. If an applicant does not amend or resubmit 
such application within a reasonable amount of time after such notice, 
a designated contract market or swap execution facility may reject the 
application;
    (iii) Determine in a timely manner whether a spread position for 
which a complete application has been submitted satisfies the 
requirements of paragraph (a)(4)(vi) of this section, and whether it is 
appropriate to exempt such spread position from position limits;
    (iv) Have the authority to revoke, at any time, any spread 
exemption issued pursuant to this section if it determines

[[Page 96978]]

the spread exemption no longer satisfies the requirements of paragraph 
(a)(4)(vi) of this section and it is no longer appropriate to exempt 
the spread from position limits;
    (v) Notify an applicant in a timely manner:
    (A) That a spread position for which a complete application has 
been submitted has been exempted by the designated contract market or 
swap execution facility from position limits, and the details and all 
conditions of such exemption;
    (B) That its application is rejected, including the reasons for 
such rejection; or
    (C) That the designated contract market or swap execution facility 
has asked the Commission to consider the application under paragraph 
(a)(8) of this section; and
    (vi) Determine whether exempting the spread position from position 
limits would, to the maximum extent practicable, ensure sufficient 
market liquidity for bona fide hedgers, and not unreasonably reduce the 
effectiveness of position limits to:
    (A) Diminish, eliminate or prevent excessive speculation;
    (B) Deter and prevent market manipulation, squeezes, and corners; 
and
    (C) Ensure that the price discovery function of the underlying 
market is not disrupted.
    (5) An applicant's derivatives position shall be deemed to be 
recognized as a spread position exempt from federal position limits at 
the time that a designated contract market or swap execution facility 
notifies an applicant that such designated contract market or swap 
execution facility will exempt such spread position.
    (6) A designated contract market or swap execution facility that 
elects to process applications to exempt spread positions from position 
limits shall file new rules or rule amendments pursuant to part 40 of 
this chapter, establishing or amending requirements for an applicant to 
file reports pertaining to the use of any such exemption that has been 
granted in the manner, form, and frequency, as determined by the 
designated contract market or swap execution facility.
    (7) After exemption of each unique type of spread position, a 
designated contract market or swap execution facility shall publish on 
its Web site, on at least a quarterly basis, a summary describing the 
type of spread position and explaining why it was exempted.
    (8) If a spread exemption application presents complex issues or is 
potentially inconsistent with the purposes of section 4a(a)(3)(B) of 
the Act, a designated contract market or swap execution facility may 
ask the Commission to consider the application under the process set 
forth in paragraph (d) of this section. The Commission may, in its 
discretion, agree to or reject any such request by a designated 
contract market or swap execution facility.
    (b) Recordkeeping. (1) A designated contract market or swap 
execution facility that elects to process spread exemption applications 
shall keep full, complete, and systematic records, which include all 
pertinent data and memoranda, of all activities relating to the 
processing of such applications and the disposition thereof, including 
the exemption of any spread position, the revocation or modification of 
any exemption, the rejection by the designated contract market or swap 
execution facility of an application, or the withdrawal, 
supplementation or updating of an application by the applicant. 
Included among such records shall be:
    (i) All information and documents submitted by an applicant in 
connection with its application;
    (ii) Records of oral and written communications between such 
designated contract market or swap execution facility and such 
applicant in connection with such application; and
    (iii) All information and documents in connection with such 
designated contract market's or swap execution facility's analysis of 
and action on such application.
    (2) All books and records required to be kept pursuant to this 
section shall be kept in accordance with the requirements of Sec.  1.31 
of this chapter.
    (c) Reports to the Commission. (1) A designated contract market or 
swap execution facility that elects to process spread exemption 
applications shall submit to the Commission a report for each week as 
of the close of business on Friday showing the following information:
    (i) The disposition of any spread exemption application, including 
the exemption of any spread position, the revocation or modification of 
any exemption, or the rejection of any application, as well as the 
following details:
    (A) The date of disposition,
    (B) The effective date of the disposition,
    (C) The expiration date of any exemption,
    (D) Any unique identifier assigned by the designated contract 
market or swap execution facility to track the application,
    (E) Any unique identifier assigned by the designated contract 
market or swap execution facility to a type of exempt spread position,
    (F) The identity of the applicant,
    (G) The listed commodity derivative contract to which the 
application pertains,
    (H) The underlying cash commodity,
    (I) The size limitations on any exempt spread position, specified 
by contract month if applicable, and
    (J) Any conditions on the exemption; and
    (ii) The summary of any exempt spread position newly published 
pursuant to paragraph (a)(7) of this section, or revised, since the 
last summary submitted to the Commission.
    (2) Unless otherwise instructed by the Commission, a designated 
contract market or swap execution facility that elects to process 
applications to exempt spread positions from position limits shall 
submit to the Commission, no less frequently than monthly, any report 
such designated contract market or swap execution facility requires to 
be submitted by an applicant to such designated contract market or swap 
execution facility pursuant to rules required by paragraph (a)(6) of 
this section.
    (3) Unless otherwise instructed by the Commission, a designated 
contract market or swap execution facility that elects to process 
applications to exempt spread positions from position limits shall 
submit to the Commission the information required by paragraphs (c)(1) 
and (2) of this section, as follows:
    (i) As specified by the Commission on the Forms and Submissions 
page at www.cftc.gov;
    (ii) Using the format, coding structure, and electronic data 
transmission procedures approved in writing by the Commission; and
    (iii) Not later than 9:00 a.m. Eastern time on the third business 
day following the date of the report.
    (d) Review of applications by the Commission. (1) The Commission 
may in its discretion at any time review any spread exemption 
application submitted to a designated contract market or swap execution 
facility, and all records required to be kept by such designated 
contract market or swap execution facility pursuant to paragraph (b) of 
this section in connection with such application, for any purpose, 
including to evaluate whether the disposition of the application is 
consistent with the purposes of section 4a(a)(3)(B) of the Act.
    (i) The Commission may request from such designated contract market 
or swap execution facility records required

[[Page 96979]]

to be kept by such designated contract market or swap execution 
facility pursuant to paragraph (b) of this section in connection with 
such application.
    (ii) The Commission may request additional information in 
connection with such application from such designated contract market 
or swap execution facility or from the applicant.
    (2) If the Commission preliminarily determines that any application 
to exempt a spread position from position limits, or the disposition 
thereof by a designated contract market or swap execution facility, 
presents novel or complex issues that require additional time to 
analyze, or that an application or the disposition thereof by such 
designated contract market or swap execution facility is potentially 
inconsistent with the Act, the Commission shall:
    (i) Notify such designated contract market or swap execution 
facility and the applicable applicant of the issues identified by the 
Commission; and
    (ii) Provide them with 10 business days in which to provide the 
Commission with any supplemental information.
    (3) The Commission shall determine whether it is appropriate to 
exempt the spread position for which such application has been 
submitted from position limits, or whether the disposition of such 
application by such designated contract market or swap execution 
facility is consistent with the purposes of section 4a(a)(3)(B) of the 
Act.
    (4) If the Commission determines that it is not appropriate to 
exempt the spread position for which such application has been 
submitted from position limits, or that the disposition of such 
application is inconsistent with the Act, the Commission shall notify 
the applicant and grant the applicant a commercially reasonable amount 
of time to liquidate the spread position or otherwise come into 
compliance. This notification will briefly specify the nature of the 
issues raised and the specific provisions of the Act or the 
Commission's regulations with which the application is, or appears to 
be, inconsistent.
    (e) Review of summaries by the Commission. The Commission may in 
its discretion at any time review any summary of a type of spread 
position required to be published on a designated contract market's or 
swap execution facility's Web site pursuant to paragraph (a)(7) of this 
section for any purpose, including to evaluate whether the summary 
promotes transparency and fair and open access by all market 
participants to information regarding spread exemptions. If the 
Commission determines that a summary is deficient in any way, the 
Commission shall notify such designated contract market or swap 
execution facility, and grant to the designated contract market or swap 
execution facility a reasonable amount of time to revise the summary.
    (f) 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 (a)(8) of this section to agree to or reject a 
request by a designated contract market or swap execution facility to 
consider a spread exemption application;
    (ii) In paragraph (c) of this section to provide instructions 
regarding the submission to the Commission of information required to 
be reported by a designated contract market or swap execution facility, 
to specify the manner for submitting such information on the Forms and 
Submissions page at www.cftc.gov, and to determine the format, coding 
structure, and electronic data transmission procedures for submitting 
such information;
    (iii) In paragraph (d)(1) of this section to review any spread 
exemption application and all records required to be kept by a 
designated contract market or swap execution facility in connection 
with such application, to request such records from such designated 
contract market or swap execution facility, and to request additional 
information in connection with such application from such designated 
contract market or swap execution facility, or from the applicant;
    (iv) In paragraph (d)(2) of this section to preliminarily determine 
that a spread exemption application or the disposition thereof by a 
designated contract market or swap execution facility presents complex 
issues that require additional time to analyze, or that such 
application or the disposition thereof is potentially inconsistent with 
the Act, to notify the designated contract market or swap execution 
facility and the applicable applicant of the issues identified, and to 
provide them with 10 business days in which to file supplemental 
information; and
    (v) In paragraph (e) of this section to review any summary of a 
type of spread exemption required to be published on a designated 
contract market's or swap execution facility's Web site, to determine 
that any such summary is deficient, to notify a designated contract 
market or swap execution facility of a deficient summary, and to grant 
such designated contract market or swap execution facility a reasonable 
amount of time to revise such summary.
    (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.


Sec.  150.11   Process for recognition of positions as bona fide hedges 
for unfilled anticipated requirements, unsold anticipated production, 
anticipated royalties, anticipated service contract payments or 
receipts, or anticipatory cross-commodity hedge positions.

    (a) Requirements for a designated contract market or swap execution 
facility to recognize certain enumerated anticipatory bona fide hedging 
positions. (1) A designated contract market or swap execution facility 
that elects to process applications for recognition of positions as 
hedges of unfilled anticipated requirements, unsold anticipated 
production, anticipated royalties, anticipated service contract 
payments or receipts, or anticipatory cross-commodity hedges under the 
provisions of paragraphs (3)(iii), (4)(i), (iii), (iv), or (5), 
respectively, of the definition of bona fide hedging position in Sec.  
150.1 shall maintain rules, submitted to the Commission pursuant to 
part 40 of this chapter, establishing an application process for such 
anticipatory bona fide hedges consistent with the requirements of this 
section. A designated contract market or swap execution facility may 
elect to process such anticipatory hedge applications for positions in 
commodity derivative contracts only if, in each case:
    (i) The commodity derivative contract is a referenced contract;
    (ii) Such designated contract market or swap execution facility 
lists such commodity derivative contract for trading;
    (iii) Such commodity derivative contract is actively traded on such 
derivative contract market;
    (iv) Such designated contract market or swap execution facility has 
established position limits for such commodity derivative contract; and
    (v) Such designated contract market or swap execution facility has 
at least one year of experience and expertise administering position 
limits for a referenced contract in a particular commodity.
    (2) Any application process that is established by a designated 
contract

[[Page 96980]]

market or swap execution facility shall require, at a minimum, the 
information required under Sec.  150.7(d).
    (3) Under any application process established under this section, a 
designated contract market or swap execution facility shall:
    (i) Require each person intending to exceed position limits to 
submit an application, and to reapply at least on an annual basis by 
updating that application, as required under Sec.  150.7(d), and to 
receive notice of recognition from the designated contract market or 
swap execution facility of a position as a bona fide hedging position 
in advance of the date that such position would be in excess of the 
limits then in effect pursuant to section 4a of the Act;
    (ii) Notify an applicant in a timely manner if a submitted 
application is not complete. If the applicant does not amend or 
resubmit such application within a reasonable amount of time after 
notification from the designated contract market or swap execution 
facility, the designated contract market or swap execution facility may 
reject the application;
    (iii) Inform an applicant within ten days of receipt of such 
application by the designated contract market or swap execution 
facility that:
    (A) The derivative position for which a complete application has 
been submitted has been recognized by the designated contract market or 
swap execution facility as a bona fide hedging position, and the 
details and all conditions of such recognition;
    (B) The application is rejected, including the reasons for such 
rejection; or
    (C) The designated contract market or swap execution facility has 
asked the Commission to consider the application under paragraph (a)(6) 
of this section; and
    (iv) Have the authority to revoke, at any time, any recognition 
issued pursuant to this section if it determines the position no longer 
complies with the filing requirements under paragraph (a)(2) of this 
section.
    (4) An applicant's derivatives position shall be deemed to be 
recognized as a bona fide hedging position at the time that a 
designated contract market or swap execution facility notifies an 
applicant that such designated contract market or swap execution 
facility will recognize such position as a bona fide hedging position.
    (5) A designated contract market or swap execution facility that 
elects to process bona fide hedging position applications shall file 
new rules or rule amendments pursuant to part 40 of this chapter, 
establishing or amending requirements for an applicant to file the 
supplemental reports, as required under Sec.  150.7(e), pertaining to 
the use of any such exemption that has been granted.
    (6) A designated contract market or swap execution facility may ask 
the Commission to consider any application made under this section. The 
Commission may, in its discretion, agree to or reject any such request 
by a designated contract market or swap execution facility, provided 
that, if the Commission agrees to the request, it will have 10 business 
days from the time of the request to carry out its review.
    (b) Recordkeeping. (1) A designated contract market or swap 
execution facility that elects to process bona fide hedging position 
applications under this section shall keep full, complete, and 
systematic records, which include all pertinent data and memoranda, of 
all activities relating to the processing of such applications and the 
disposition thereof, including the recognition of any derivative 
position as a bona fide hedging position, the revocation or 
modification of any recognition, the rejection by the designated 
contract market or swap execution facility of an application, or 
withdrawal, supplementation or updating of an application. Included 
among such records shall be:
    (i) All information and documents submitted by an applicant in 
connection with its application;
    (ii) Records of oral and written communications between such 
designated contract market or swap execution facility and such 
applicant in connection with such application; and
    (iii) All information and documents in connection with such 
designated contract market's or swap execution facility's analysis of 
and action on such application.
    (2) All books and records required to be kept pursuant to this 
section shall be kept in accordance with the requirements of Sec.  1.31 
of this chapter.
    (c) Reports to the Commission. (1) A designated contract market or 
swap execution facility that elects to process bona fide hedging 
position applications under this section shall submit to the Commission 
a report for each week as of the close of business on Friday showing 
the following information:
    (i) The disposition of any application, including the recognition 
of any position as a bona fide hedging position, the revocation or 
modification of any recognition, as well as the following details:
    (A) The date of disposition,
    (B) The effective date of the disposition,
    (C) The expiration date of any recognition,
    (D) Any unique identifier assigned by the designated contract 
market or swap execution facility to track the application,
    (E) Any unique identifier assigned by the designated contract 
market or swap execution facility to a bona fide hedge recognized under 
this section;
    (F) The identity of the applicant,
    (G) The listed commodity derivative contract to which the 
application pertains,
    (H) The underlying cash commodity,
    (I) The maximum size of the commodity derivative position that is 
recognized by the designated contract market or swap execution facility 
as a bona fide hedging position,
    (J) Any size limitation established for such commodity derivative 
position on the designated contract market or swap execution facility, 
and
    (K) A concise summary of the applicant's activity in the cash 
market for the commodity underlying the position for which the 
application was submitted.
    (2) Unless otherwise instructed by the Commission, a designated 
contract market or swap execution facility that elects to process bona 
fide hedging position applications shall submit to the Commission the 
information required by paragraph (c)(1) of this section, as follows:
    (i) As specified by the Commission on the Forms and Submissions 
page at www.cftc.gov;
    (ii) Using the format, coding structure, and electronic data 
transmission procedures approved in writing by the Commission; and
    (iii) Not later than 9:00 a.m. Eastern time on the third business 
day following the date of the report.
    (d) Review of applications by the Commission. (1) The Commission 
may in its discretion at any time review any bona fide hedging position 
application submitted to a designated contract market or swap execution 
facility under this section, and all records required to be kept by 
such designated contract market or swap execution facility pursuant to 
paragraph (b) of this section in connection with such application, for 
any purpose, including to evaluate whether the disposition of the 
application is consistent with the Act.
    (i) The Commission may request from such designated contract market 
or swap execution facility records required to be kept by such 
designated contract market or swap execution facility pursuant to 
paragraph (b) of this section in connection with such application.

[[Page 96981]]

    (ii) The Commission may request additional information in 
connection with such application from such designated contract market 
or swap execution facility or from the applicant.
    (2) If the Commission preliminarily determines that any 
anticipatory hedge application is inconsistent with the filing 
requirements of Sec.  150.11(a)(2), the Commission shall:
    (i) Notify such designated contract market or swap execution 
facility and the applicable applicant of the deficiencies identified by 
the Commission; and
    (ii) Provide them with 10 business days in which to provide the 
Commission with any supplemental information.
    (3) If the Commission determines that the anticipatory hedge 
application is inconsistent with the filing requirements of Sec.  
150.11(a)(2), the Commission shall notify the applicant and grant the 
applicant a commercially reasonable amount of time to liquidate the 
derivative position or otherwise come into compliance. This 
notification will briefly specify the specific provisions of the filing 
requirements of Sec.  150.11(a)(2), with which the application is, or 
appears to be, inconsistent.
    (e) 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 (a)(6) of this section to agree to or reject a 
request by a designated contract market or swap execution facility to 
consider a bona fide hedge application;
    (ii) In paragraph (c) of this section to provide instructions 
regarding the submission to the Commission of information required to 
be reported by a designated contract market or swap execution facility, 
to specify the manner for submitting such information on the Forms and 
Submissions page at www.cftc.gov, and to determine the format, coding 
structure, and electronic data transmission procedures for submitting 
such information;
    (iii) In paragraph (d)(1) of this section to review any bona fide 
hedging position application and all records required to be kept by a 
designated contract market or swap execution facility in connection 
with such application, to request such records from such designated 
contract market or swap execution facility, and to request additional 
information in connection with such application from such designated 
contract market or swap execution facility or from the applicant; and
    (iv) In paragraph (d)(2) of this section to determine that it is 
not appropriate to recognize a derivative position for which an 
application for recognition has been submitted as a bona fide hedging 
position, or that the disposition of such application by a designated 
contract market or swap execution facility is inconsistent with the 
Act, and, in connection with such a determination, to grant the 
applicant a reasonable amount of time to liquidate the derivative 
position or otherwise come into compliance.
    (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. In Part 150, add Appendices A through E to read as follows:

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 management 
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 appropriate for 
management 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. One 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

[[Page 96982]]

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.
    (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.

Appendix B to Part 150--Commodities Listed as Substantially the Same 
for Purposes of the Definition of Location 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 location basis contract in Sec.  150.1.

   Location 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   1. Light Louisiana    NYMEX Argus LLS vs.
 futures contract (CL)         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    1. Chicago ULSD.....  NYMEX Chicago ULSD
 Heating Oil futures                                 (Platts) vs. NY
 contract (HO)                                       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).

[[Page 96983]]

 
                                                    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   1. Chicago Unleaded   NYMEX Chicago
 contract (RB)                 87 gasoline.          Unleaded Gasoline
                                                     (Platts) vs. RBOB
                                                     Gasoline futures
                                                     contract (3C).
                                                    NYMEX Group Three
                                                     Unleaded Gasoline
                                                     (Platts) vs. RBOB
                                                     Gasoline futures
                                                     contract (A8).
                              2. Gulf Coast         NYMEX Gulf Coast
                               Conventional          CBOB Gasoline A1
                               Blendstock for        (Platts) vs. RBOB
                               Oxygenated Blending   Gasoline futures
                               (CBOB) 87.            contract (CBA).
                                                    NYMEX Gulf Coast Unl
                                                     87 (Argus) Up-Down
                                                     futures contract
                                                     (UZ).
                              3. Gulf Coast CBOB    NYMEX Gulf Coast
                               87 (Summer            CBOB Gasoline A2
                               Assessment).          (Platts) vs. RBOB
                                                     Gasoline futures
                                                     contract (CRB).
                              4. Gulf Coast         NYMEX Gulf Coast 87
                               Unleaded 87 (Summer   Gasoline M2
                               Assessment).          (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         NYMEX Gulf Coast Unl
                               Unleaded 87.          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        NYMEX Los Angeles
                               California            CARBOB Gasoline
                               Reformulated          (OPIS) vs. RBOB
                               Blendstock for        Gasoline futures
                               Oxygenate Blending    contract (JL).
                               (CARBOB) Regular.
                              7. Los Angeles        NYMEX Los Angeles
                               California            CARBOB Gasoline
                               Reformulated          (OPIS) vs. RBOB
                               Blendstock for        Gasoline futures
                               Oxygenate Blending    contract (JL).
                               (CARBOB) Premium.
                              8. Euro-BOB OXY NWE   NYMEX RBOB Gasoline
                               Barges.               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   ICE Futures Europe
                               Rotterdam.            Gasoline Diff--RBOB
                                                     Gasoline 1st Line
                                                     vs. Argus Euro-BOB
                                                     OXY FOB Rotterdam
                                                     Barge Swap futures
                                                     contract (ROE).
------------------------------------------------------------------------


[[Page 96984]]

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 
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 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: A Natural Gas Utility A, regulated by State Public 
Utility Commission, decides to hedge its purchases of natural gas in 
order to reduce natural gas price risk on behalf of its 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 residential 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.

[[Page 96985]]

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. 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 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: Cotton Merchant A is in the business of 
merchandising (selling) cash cotton. Cotton Merchant A does not own 
any cash commodity, but has purchased the right to redeem a 
producer's cotton held as collateral by USDA (that is, ``cotton 
equities'') and, thereby, Cotton Merchant A has incurred price risk. 
A producer of cotton may borrow from the USDA's Commodity Credit 
Corporation, posting their cotton as collateral on the loan. USDA 
permits the producer to assign the right to redeem cotton held as 
collateral. Once Cotton Merchant A purchases from a producer the 
right to redeem cotton from USDA, Cotton Merchant A, in effect, is 
responsible for merchandising of the cash cotton held as collateral 
by USDA. For the volumes of cotton it is authorized to redeem from 
USDA, Cotton Merchant A enters into economically appropriate short 
positions in cotton 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 
cotton owned by the agent's contractual counterparties, and arise 
from the potential change in the value of such cotton. The agent 
does not own and has not contracted to purchase such cotton 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 cotton 
being offset.

7. Sovereign Hedge of a Pass-Through Swap Under Paragraph (2)(ii) of 
the Bona Fide Hedging Position Definition Opposite a Deemed Bona Fide 
Hedge of Unsold Anticipated Production Under Paragraph 4(i)

    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, by, in 
effect, granting that farmer a cash-settled call option at no cost. 
In return for the farmer entering into the fixed-price forward sale 
at the prevailing market price, 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 
offsets the farmer's price risk associated with his anticipated 
agricultural production. The call option provides the farmer with 
upside price participation. The Sovereign faces commodity price risk 
from the option it granted at no cost to the farmer. 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: The farmer was induced by a long call option granted 
at no cost, in return for the farmer entering into a fixed-price 
forward sale at the prevailing market price.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. Under these circumstances of a Sovereign granting a call 
option to a farmer at no cost, the Commission deems the synthetic 
position of the farmer as satisfying the general requirements for a 
bona fide hedging position under paragraphs (2)(i)(A)-(C) and 
meeting the requirements for anticipated agricultural production 
under paragraph (4)(i), for purposes of the Sovereign's pass-through 
swap offset under paragraph (2)(ii). The agreement between the 
Sovereign and the farmer involves the production of a commodity 
underlying the CBOT Corn futures contract. Also under these 
circumstances, the Commission deems the synthetic long put as a 
substitute for transactions that the farmer has made in the physical 
marketing channel, because a long put would reduce the price risk 
associated with the farmer's anticipated agricultural production.
---------------------------------------------------------------------------

    \2\ Put-call parity describes the mathematical relationship 
between price of a put and call with identical strike prices and 
expiry.
---------------------------------------------------------------------------

    The Sovereign is the counterparty to the farmer, who under these 
circumstances the Commission deems to be a bona fide hedger for 
purposes of the Sovereign's pass-through swap offset. That is, the 
Commission considers the Sovereign's long call position to be a 
pass-through swap meeting the

[[Page 96986]]

requirements of paragraph (2)(ii)(B). As provided under paragraph 
(2)(ii)(A), the Sovereign's risk-reducing position in the CBOT Corn 
option would qualify as a pass-through swap offset as a bona fide 
hedging position, or, alternatively, if the pass-through 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. Such a pass-through swap offset will not qualify as a 
bona fide hedging position in a physical-delivery futures contract 
during the last five days of trading under paragraphs (2)(iii)(B) or 
(5); 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.

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 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.

[[Page 96987]]

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 price of copper. Currently it is November 
and it owns inventory of 100 million pounds of copper and 50 million 
pounds of finished copper wire. 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 6,000 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, 2,000 contracts of the short position are a 
cross-commodity hedge of the finished copper wire and 4,000 
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

[[Page 96988]]

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.

Appendix D to Part 150--Initial Position Limit Levels

------------------------------------------------------------------------
                                                           Single month
                Contract                    Spot-month    and all months
------------------------------------------------------------------------
Legacy Agricultural:
    Chicago Board of Trade Corn (C).....             600          62,400
    Chicago Board of Trade Oats (O).....             600           5,000
    Chicago Board of Trade Soybeans (S).             600          31,900
    Chicago Board of Trade Soybean Meal              720          16,900
     (SM)...............................
    Chicago Board of Trade Soybean Oil               540          16,700
     (SO)...............................
    Chicago Board of Trade Wheat (W)....             600          32,800
    ICE Futures U.S. Cotton No. 2 (CT)..           1,600           9,400
    Chicago Board of Trade KC HRW Wheat              600          12,000
     (KW)...............................
    Minneapolis Grain Exchange Hard Red            1,000          12,000
     Spring Wheat (MWE).................
Other Agricultural:
    Chicago Board of Trade Rough Rice                600           5,000
     (RR)...............................
    Chicago Mercantile Exchange Live                 450          12,200
     Cattle (LC)........................
    ICE Futures U.S. Cocoa (CC).........           5,500          10,200
    ICE Futures U.S. Coffee C (KC)......           2,400           8,800
    ICE Futures U.S. FCOJ-A (OJ)........           2,800           5,000
    ICE Futures U.S. Sugar No. 11 (SB)..          23,300          38,400
    ICE Futures U.S. Sugar No. 16 (SF)..           7,000           7,000
Energy:
    New York Mercantile Exchange Henry             2,000         200,900
     Hub Natural Gas (NG)...............
    New York Mercantile Exchange Light            10,400         148,800
     Sweet Crude Oil (CL)...............
    New York Mercantile Exchange NY                2,900          21,300
     Harbor ULSD (HO)...................
    New York Mercantile Exchange RBOB              6,800          15,300
     Gasoline (RB)......................
Metal:
    Commodity Exchange, Inc. Copper (HG)           1,000           7,800
    Commodity Exchange, Inc. Gold (GC)..           6,000          19,500
    Commodity Exchange, Inc. Silver (SI)           3,000           7,600
    New York Mercantile Exchange                     100           5,000
     Palladium (PA).....................
    New York Mercantile Exchange                     500           5,000
     Platinum (PL)......................
------------------------------------------------------------------------

Appendix E To Part 150--Guidance Regarding Exchange-Set Speculative 
Position Limits

Guidance for Designated Contract Markets

    (1) Until such time that a boards of trade has access to 
sufficient swap position information, a board of trade need not 
demonstrate compliance with Core Principle 5 with respect to swaps. 
A board of trade should have access to sufficient swap position 
information if, for example: (1) It had access to daily information 
about its market participants' open swap positions; or (2) it knows 
that its market participants regularly engage in large volumes of 
speculative trading activity, including through knowledge gained in 
surveillance of heavy trading activity, that would cause reasonable 
surveillance personnel at an exchange to inquire further about a 
market participant's intentions or total open swap positions.
    (2) When a board of trade has access to sufficient swap position 
information, this guidance would no longer be applicable. At such 
time, a board of trade is required to file rules with the Commission 
to implement the relevant position limits and demonstrate compliance 
with Core Principle 5(A) and (B).

Guidance for Swap Execution Facilities

    (1) Until such time that a swap execution facility that is a 
trading facility has access to sufficient swap position information, 
the swap execution facility need not demonstrate compliance with 
Core Principle 6(A) or (B). A swap execution facility should have 
access to sufficient swap position information if, for example: (1) 
It had access to daily information about its market participants' 
open swap positions; or (2) if it knows that its market participants 
regularly engage in large volumes of speculative trading activity, 
including through knowledge gained in surveillance of heavy trading 
activity, that would cause reasonable surveillance personnel at an 
exchange to inquire further about a market participant's intentions 
or total open swap positions.
    (2) When a swap execution facility has access to sufficient swap 
position information, this guidance would no longer be applicable. 
At such time, a swap execution facility is required to file rules 
with the Commission to implement the relevant position limits and 
demonstrate compliance with Core Principle 6(A) and (B).

PART 151--[REMOVED AND RESERVED]

0
29. Under the authority of section 8a(5) of the Commodity Exchange Act, 
7 U.S.C. 12a(5), remove and reserve part 151.

    Issued in Washington, DC, on December 5, 2016, by the 
Commission.
Christopher J. Kirkpatrick,
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, Chairman's Statement, and Commissioners' Statements

Appendix 1--Commission Voting Summary

    On this matter, Chairman Massad and Commissioners Bowen and 
Giancarlo voted in the affirmative. No Commissioner voted in the 
negative.

[[Page 96989]]

Appendix 2--Statement of Chairman Timothy G. Massad

    Today, the Commission is issuing a revised position limits 
proposal. We are also finalizing a separate but related rule on the 
aggregation of positions. I am pleased that today's actions are 
unanimous.
    Congress directed us to implement a position limits rule to 
limit excessive speculation. While speculators play a necessary and 
important role in our markets, position limits can prevent the type 
of excessive speculation by a few large participants that leads to 
corners, squeezes and other activity that can distort markets and be 
unfair to other participants. Position limits can also promote 
convergence without compromising market liquidity. There are many 
issues to consider in this rule, but position limits are not a new 
or untested concept. They have been in place in our markets for 
decades, either through federal limits or exchange-set limits, and 
they have worked well.
    There are two reasons why I am supporting issuing a reproposal. 
First, we have made many changes to the 2013 proposal we inherited 
that are reflected in today's reproposal. Certain aspects have been 
previously proposed in separate pieces, and I believe the public 
would benefit from seeing the proposal in its entirety, to better 
understand how the various changes work together.
    Second, the Commission is now in a time of transition. I do not 
want to adopt a final rule today that the Commission would choose 
not to implement or defend next year. Our markets and the many end-
users and consumers who rely on them are served best by having 
reasonable and predictable regulation. Uncertainty and inconsistency 
from one year to the next are not helpful.
    Our staff has done a tremendous amount of work to devise a 
position limits rule that meets the requirements of the law and 
balances the various concerns at stake. This work has spanned 
several years, involved review of literally thousands of pages of 
comments from participants, and included many meetings and public 
roundtables.
    Commissioners Bowen, Giancarlo, and I have also spent 
substantial time on this issue. We took office together in June 2014 
and inherited a proposal that the Commission had issued six months 
before. As I promised then, we have been working hard to get the 
rule right. In addition to discussing the issues extensively with 
staff, we have each had many meetings with market participants and 
other members of the public. We have each traveled around the 
country and heard from users of these markets. In particular, I have 
heard from many smaller, traditional users about the importance of 
position limits. I have also had the benefit of sponsoring the 
Agricultural Advisory Committee, whose members have provided 
important input on these issues.
    We have revised the proposed limits themselves in light of 
substantial work our staff has done to make sure they are based on 
the latest and best information as to estimated deliverable supply. 
We have considered a wide range of information, including the 
recommendations of the exchanges and other data to which the 
exchanges do not have access. For some contracts, the proposed 
limits for the spot month are higher than the exchange-set limits 
today. There have been, for example, substantial increases in 
estimates of deliverable supply in the energy sector. In other 
cases, we have accepted recommendations of the exchanges to set 
federal limits that are actually lower than 25 percent of 
deliverable supply, because we determined that the requested lower 
limit was consistent with the overall policy goals and would not 
compromise market liquidity.
    We have proposed further adjustments to the bona fide hedging 
position definition, to eliminate certain requirements that we have 
decided are unnecessary, and to address other concerns raised by 
market participants.
    Another substantial difference from the 2013 text is our 
proposal first made this summer to allow the exchanges to grant non-
enumerated hedge exemptions. This process must be subject to our 
oversight as a matter of law and as a matter of policy, given the 
inherent tension in the roles of the exchanges as market overseers 
and beneficiaries of higher trading volumes.
    The proposal we are issuing today provides extensive analysis of 
the impact of the proposed spot and all months limits, which I 
believe supports the view that the limits should not compromise 
liquidity while addressing excessive speculation. The analysis shows 
few existing positions would exceed the limits, and that is without 
considering possible exemptions.
    I recognize there will still be those that are critical of the 
proposal. Some will complain simply because of the length of the 
proposal--even though most of that is not rule text, but rather the 
summaries of the extensive comments and analysis required by law. 
Others may suggest broadening the bona fide hedge exemption so that 
it encompasses practically any activity with a business purpose, 
which is not what Congress said in the law. Still others will argue 
position limits are not necessary. But while the Commission should 
consider all comments, it is important to remember that the 
Commission has a responsibility to implement a balanced rule that 
achieves the objectives Congress has established.
    Finally, while the Commission works to finalize this rule, we 
still have federal limits for nine agricultural commodities and 
exchange-set spot month limits for all the physical delivery 
contracts covered by this rule, which the Commission will continue 
to enforce.
    I want to thank the staff again for their extensive work on this 
rule, particularly our staff in the Division of Market Oversight, 
the Office of the Chief Economist and the Office of the General 
Counsel. Their expertise and dedication on this matter is truly 
exemplary. I also want to thank Commissioners Bowen and Giancarlo 
for their very constructive engagement on this issue.

Appendix 3--Statement of Commissioner Sharon Y. Bowen

    With today's repreposal, the Commission moves one step closer to 
the implementation of position limits as directed by Congress in 
2010. CFTC staff has worked laboriously with market users and the 
exchanges we regulate to craft a rule that will protect investors 
from disruptive practices and manipulation, while simultaneously 
allowing our markets to serve their critical price-discovery 
function. I commend staff on their hard work and thank the hundreds 
of commenters for their insightful feedback. I would also like to 
thank Chairman Massad and Commissioner Giancarlo on their commitment 
to this important rule and look forward to its finalization in the 
near future.

Appendix 4--Statement of Commissioner J. Christopher Giancarlo

    Since taking my seat on the Commission, I have traveled to well 
over a dozen states where I met with many family farmers and toured 
numerous energy utilities and manufacturing facilities. I have heard 
the concerns of agriculture and energy producers and consumers about 
market speculation and the role of position limits.
    I have always been open to supporting a well-conceived and 
practical position limits rule that restricts excessive speculation. 
That is so long as it protects the ability of America's farmers, 
ranchers and processors to hedge risks of agricultural commodities 
and the ability of America's energy producers and distributors to 
control risks of energy production, storage and distribution.
    That is why I believe it is so important to carefully consider 
the impact of this very complex rule on America's almost nine 
thousand grain elevators,\1\ two million family farms \2\ and 147 
million electric utility customers.\3\ That is why I support putting 
out this rule as a proposal.
---------------------------------------------------------------------------

    \1\ U.S. Grain Storage Data, National Grain and Feed Association 
Web site (last visited Dec. 5, 2016), https://www.ngfa.org/news-policy-center/resources/grain-industry-data/.
    \2\ News Release, Family Farms are the Focus of New Agriculture 
Census Data, U.S. Department of Agriculture, Mar. 17, 2015, http://www.usda.gov/wps/portal/usda/usdamediafb?contentid=2015/03/0066.xml&printable=true.
    \3\ 2015-2016 Annual Directory & Statistical Report, American 
Public Power Association, at 26 (2016), http://www.publicpower.org/files/PDFs/USElectricUtilityIndustryStatistics.pdf.
---------------------------------------------------------------------------

    My concern regarding previous earlier proposals has been that 
they would restrict bona fide hedging activity or harm America's 
agriculture and energy industries that have been sorely impacted by 
plummeting commodity prices and service provider consolidation. I am 
simply not willing to support a poorly designed and unworkable rule 
that ever after needs to be adjusted through a series of no-action 
letters and ad hoc staff interpretations and advisories that had 
become too common at the CFTC in prior years.
    While some may view position limits as the ``eternal rule,'' I 
disagree. The current proposal is very detailed and highly complex. 
It is over 700 pages in length and has over one thousand footnotes. 
In some areas, concerns expressed by market participants regarding 
the 2011 rule that was struck down by the court and the 2013 
proposal have been well addressed. In other

[[Page 96990]]

areas, they do not appear to have been as well addressed.
    Notably, the proposal introduces a series of new estimates of 
deliverable supply that have not been previously presented to the 
public. It also incorporates concepts introduced in the 2016 
supplemental proposal. Given these new additions and the complexity 
of the proposal, one more round of public comment is appropriate.
    I feel comfortable that the proposal before us provides the 
basis for the implementation of a final position limits rule that I 
could support. I commend the staff responsible for this proposal for 
all their hard work in making the significant improvements that are 
before us. I also extend my gratitude to Chairman Massad and 
Commissioner Bowen for agreeing to put this proposal before the 
public for comment.
    I welcome commenters' views on the proposal. I expect that with 
their added insight we can finalize a position limits rule in 2017 
that is workable and does not undo years of standard practice in 
these markets.

[FR Doc. 2016-29483 Filed 12-29-16; 8:45 am]
 BILLING CODE 6351-01-P