[Federal Register Volume 83, Number 147 (Tuesday, July 31, 2018)]
[Proposed Rules]
[Pages 36799-36814]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-16079]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 41

RIN 3038-AE61


Position Limits and Position Accountability for Security Futures 
Products

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') is proposing to amend its position limits rules for 
security futures products (``SFPs'') by: Increasing the default level 
of equity SFP position limits, and modifying the criteria for setting a 
higher level of position limits and position accountability levels. In 
addition, the proposed amended position limit regulation would provide 
discretion to a designated contract market (``DCM'') to apply limits to 
either a person's net position or a person's position on the same side 
of the market. The Commission also proposes criteria for setting 
position limits on an SFP on other than an equity security, generally 
based on an estimate of deliverable supply.

DATES: Comments must be received on or before October 1, 2018.

ADDRESSES: You may submit comments, identified by RIN 3038-AE61 and 
``Position Limits and Position Accountability for Security Futures 
Products,'' by any of the following methods:
     CFTC website: http://comments.cftc.gov. Follow the 
instructions for submitting comments through the Comments Online 
process on the website.
     Mail: Christopher Kirkpatrick, 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.
    Please submit your comments using only one method.
    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 is exempt from disclosure under the Freedom of 
Information Act, a petition for confidential treatment of the exempt 
information may be submitted according to the procedures set forth in 
section 145.9 of the Commission's regulations.\1\
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    \1\ All Commission regulations referred to herein are found in 
chapter I of title 17 of the Code of Federal Regulations. Commission 
regulations are accessible on the Commission's website, http://www.cftc.gov.
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    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

[[Page 36800]]

applicable laws, and may be accessible under the Freedom of Information 
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Act.

FOR FURTHER INFORMATION CONTACT: Thomas M. Leahy, Jr., Associate 
Director, Product Review, Division of Market Oversight, 202-418-5278, 
[email protected]; or Riva Spear Adriance, Senior Special Counsel, Chief 
Counsel's Office, Division of Market Oversight, 202-418-5494, 
[email protected]; Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street NW, Washington, DC 20581.

SUPPLEMENTARY INFORMATION: 

I. Background

A. Overview

    On December 21, 2000, the Commodity Futures Modernization Act 
(``CFMA'') became law and amended the Commodity Exchange Act (``CEA''). 
The CFMA removed a long-standing ban \2\ on trading futures on single 
securities and narrow-based security indexes \3\ in the United States. 
As amended by the CFMA, in order for a DCM to list SFPs,\4\ the SFPs 
and the securities underlying the SFPs must meet a number of 
criteria.\5\ One of the criteria requires that trading in the SFP is 
not readily susceptible to manipulation of the price of such SFP, nor 
to causing or being used in the manipulation of the price of any 
underlying security, option on such security, or option on a group or 
index including such securities.\6\
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    \2\ See section 251(a) of the CFMA. This trading previously was 
prohibited by 7 U.S.C. 2(a)(1)(B)(v).
    \3\ See 7 U.S.C. 1a(35) for the definition of ``narrow-based 
security index.''
    \4\ The term ``security futures product'' is defined in section 
1a(45) of the CEA and section 3(a)(56) of the Exchange Act to mean a 
security future or any put, call, straddle, option, or privilege on 
any security future. The term ``security future'' is defined in 
section 1a(44) of the CEA and section 3(a)(55)(A) of the Exchange 
Act to include futures contracts on individual securities and on 
narrow-based security indexes. The term ``narrow-based security 
index'' is defined in section 1a(35) of the CEA and section 
3(a)(55)(B) of the Exchange Act.
    \5\ See 7 U.S.C. 2(a)(1)(D)(i).
    \6\ 7 U.S.C. 2(a)(1)(D)(i)(VII).
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    As the Commission noted when it proposed to adopt criteria for 
trading of SFPs:

    It is important that the listing standards and conditions in the 
CEA and the [Securities Exchange Act of 1934 (``Exchange Act'')] be 
easily understood and applied by [DCMs]. The rules proposed today 
address issues related to these standards and establish uniform 
requirements related to position limits, as well as provisions to 
minimize the potential for manipulation and disruption to the 
futures markets and underlying securities markets.\7\
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    \7\ See Listing Standards and Conditions for Trading Security 
Futures Products, proposed rules, 66 FR 37932, 37933 (July 20, 2001) 
(``2001 Proposed SFP Rules''). The Commission further noted, ``The 
speculative position limit level adopted by a [DCM] should be 
consistent with the obligation in section 2(a)(1)(D)(i)(VII) of the 
CEA that the [DCM] maintain procedures to prevent manipulation of 
the price of the [SFP] and the underlying security or securities.'' 
Id. at 37935.
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    Among those provisions is current Commission regulation 
41.25(a)(3), which requires a DCM that lists SFPs to establish position 
limits or position accountability standards. The Commission's SFP 
position limits regulations were set at levels that are generally 
comparable but not identical to the limits that currently apply to 
options on individual securities.\8\
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    \8\ See Listing Standards and Conditions for Trading Security 
Futures Products, 66 FR 55078, 55082 (November 1, 2001) (``2001 
Final SFP Rules'').
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    Under the existing regulations, a DCM is required to establish for 
each SFP a position limit, applicable to positions held during the last 
five trading days of an expiring contract month, of no greater than 
13,500 (100-share) contracts, except under specific conditions.\9\ If a 
security underlying an SFP has either (i) an average daily trading 
volume of at least 20 million shares; or (ii) an average daily trading 
volume of at least 15 million shares and at least 40 million shares 
outstanding, then the DCM may establish a position limit for the SFP of 
no more than 22,500 contracts.\10\ A DCM may adopt position 
accountability for an SFP on a security that has: (i) An average daily 
trading volume of at least 20 million shares; and (ii) at least 40 
million shares outstanding.\11\ Under any position accountability 
regime, upon a request from a DCM, traders holding a position of 
greater than 22,500 contracts, or such lower threshold as specified by 
the DCM, must provide information to the exchange regarding the nature 
of the position.\12\ Under position accountability, traders must also 
consent to halt increases in the size of their positions upon the 
direction of the DCM.\13\ The position limits and position 
accountability trigger levels specified in the Commission's regulations 
are based on a contract size of 100 shares in the underlying security. 
DCMs may use part 150 of the Commission's regulations as guidance when 
approving exemptions from SFP position limit rules.\14\
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    \9\ 17 CFR 41.25(a)(3)(i). The 13,500 limit level is premised on 
an SFP contract size of 100 shares of an underlying equity security.
    \10\ 17 CFR 41.25(a)(3)(i)(A).
    \11\ 17 CFR 41.25(a)(3)(i)(B).
    \12\ Id.
    \13\ Id.
    \14\ Although part 150 previously provided requirements for 
exchange-set position limits, it was rendered ``mere guidance'' by 
the CFMA. See, e.g., 81 FR 96704, 96742 (Dec. 30, 2016); see also 74 
FR 12178, 12183 (March 23, 2009) (noting ``the part 150 rules 
essentially constitute guidance for DCMs administering position 
limits regimes'').
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B. Differences Between Initially Adopted SFP and Equity Option Position 
Limit Rules

    In response to the 2001 Proposed SFP rules, three commenters noted 
several differences between the SFP position limit regulations and 
position limit rules for equity security options listed on national 
security exchanges or associations (``NSE'') approved by the Securities 
and Exchange Commission (``SEC''): (1) The specification that position 
limits for SFPs are on a net, rather than a gross,\15\ basis; (2) the 
numerical limits on SFPs differ from those on security options; and (3) 
the position limits for SFPs are applicable only during the last five 
trading days prior to expiration, rather than at any time in the 
lifespan of a security option contract.\16\ Commenters also requested 
that the Commission coordinate with the SEC so that the SFP position 
limit regulations are the same as those applicable to security and 
securities index options, or, alternatively, that such position limit 
regulations more closely resemble existing limits on security and 
securities index options.\17\ The Commission noted that the provisions 
in Commission regulation 41.25(a)(3) as finalized were consistent with 
the Commission's customary approach for all other futures markets,\18\ 
were necessary to effectively oversee the markets, and were consistent 
with the obligation of a DCM to prevent manipulation of the price of an 
SFP and its underlying security or securities.\19\
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    \15\ The Commission understands that ``gross'' in this context 
means on the same side of the market, as discussed infra.
    \16\ 2001 Final SFP Rules at 55081.
    \17\ Id. at 55082.
    \18\ See infra discussion regarding part 150 of the Commission's 
regulations.
    \19\ 2001 Final SFP Rules at 55082.
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    There was one other difference between the position limit rules for 
SFPs and security options, on which no one commented. Specifically, the 
volume test adopted by the Commission for position limits on SFPs was 
based on average trading volume over a six-month period while the 
volume test for security options was based on total trading volume over 
a six-month period. This difference typically results in position 
limits for SFPs that are more restrictive than those on analogous 
security options.\20\
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    \20\ Although DCMs may adopt for certain SFPs position 
accountability provisions with an accountability level of 22,500 
(100-share) SFP contracts, in lieu of position limits, the analogous 
security option is subject to a position limit likely to be set at a 
level of 250,000 (100-share) option contracts, as shown below in 
Table A.

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[[Page 36801]]

C. Subsequent Developments in SFP Position Limit Regulations

    Since the 2001 Final SFP Rules, the Commission's SFP position limit 
regulations have not been substantively amended to account for SFPs on 
securities other than common stock, although the statute authorizes it. 
CEA section 2(a)(1)(D)(i) authorizes DCMs to list for trading SFPs 
based upon common stock and such other equity securities as the 
Commission and the Securities and Exchange Commission jointly determine 
appropriate.\21\ The CFMA further authorized the Commission and the SEC 
(collectively ``Commissions'') to allow SFPs to be based on securities 
other than equity securities.\22\ The Commissions used their authority 
to allow SFPs on Depositary Receipts; \23\ Exchange Traded Funds, Trust 
Issued Receipts and Closed End Funds; \24\ and debt securities.\25\
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    \21\ 7 U.S.C. 2(a)(1)(D)(i)(III).
    \22\ 7 U.S.C. 2(a)(1)(D)(v)(I).
    \23\ See Joint Order Granting the Modification of Listing 
Standards Requirements under section 6(h) of the Securities Exchange 
Act of 1934 and the Criteria under section 2(a)(1) of the Commodity 
Exchange Act, August 20, 2001 https://www.sec.gov/rules/other/34-44725.htm.
    \24\ See 67 FR 42760 (June 25, 2002).
    \25\ See 17 CFR 41.21(a)(2)(iii) (providing that the underlying 
security of an SFP may include a note, bond, debenture, or evidence 
of indebtedness); see also 71 FR 39534 (July 13, 2006) (describing 
debt securities to include notes, bonds, debentures, or evidences of 
indebtedness).
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D. Subsequent Equity Security Option Position Limit Increases

    Since the Commission's initial adoption of SFP position limits, the 
SEC has granted approval to increase position limits for equity 
security options listed on NSEs, but the Commission has not amended its 
SFP regulations to reflect those changes. For example, under current 
position limits for equity security options that are uniform across 
rules of NSEs,\26\ position limits are at least 25,000 option 
contacts.\27\ Also, as noted above, NSEs set higher levels based on 
six-month total trading volume or, alternatively, a combination of six-
month total trading volume and shares outstanding, as shown in Table 
A.\28\
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    \26\ See, e.g., the Cboe Exchange, Inc. (``Cboe'') rule 4.11, 
Nasdaq ISE, LLC (``ISE'') rule 412, NYSE American LLC (``NYSE 
American'') rule 904, Nasdaq PHLX LLC (``Phlx'') rule 1001.
    \27\ See, e.g., 73 FR 10076 (February 25, 2008) (granting 
permanent approval of an increase in position and exercise limits 
for equity security options).
    \28\ Id. at 10076-77.

                               Table A--NSE Equity Security Option Position Limits
                                              [As of Dec. 6, 2017]
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                                       Six-month total trading  Or, if six-month total trading volume and shares
  Option contract limit (100 shares/     volume is at least:           currently outstanding are at least:
              contract)               --------------------------------------------------------------------------
                                       Trading volume (shares)  Trading volume (shares)     Shares outstanding
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25,000...............................  Default................  Default................  Default.
50,000...............................  20 million.............  15 million.............  40 million.
75,000...............................  40 million.............  30 million.............  120 million.
200,000..............................  80 million.............  60 million.............  240 million.
250,000..............................  100 million............  75 million.............  300 million.
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    Each equity security option contract limit is applicable on a gross 
basis to option positions on both sides of the market.\29\ The NSEs 
permit certain exemptions, including for qualified hedging transactions 
and positions and for facilitation of orders with customers. Generally, 
limits for options on registered investment companies, organized as 
open-end management companies, unit investment trusts or similar 
entities, are the same as the positions limits applicable to equity 
options.\30\
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    \29\ For example, Cboe applies limits to an aggregate position 
in an option contract ``of the put type and call type on the same 
side of the market.'' Cboe rule 4.11. For this purpose, under the 
rule, long positions in put options are combined with short 
positions in call options; and short positions in put options are 
combined with long position in call options.
    \30\ NSEs have established position limits higher than shown in 
Table A for certain security options on products with broad-based 
holdings of underlying securities; for example, the Cboe position 
limit in the DIAMONDS Trust option is 300,000 contracts, iShares 
Russell 2000 Index Fund option is 500,000 contracts, PowerShares QQQ 
Trust option is 900,000 contracts, and iShares MSCI Emerging Markets 
Index Fund option is 500,000 contracts. Similarly, BOX Options 
Exchange, Inc., Cboe, Nasdaq ISE, LLC, Nasdaq PHLX, LLC, NYSE 
American, LLC, and NYSE Arca, Inc. all recently adopted position 
limits for security options on the Standard and Poor's Depositary 
Receipts Trust that are 1,800,000 contracts. See, e.g., 83 FR 28274 
(June 18, 2018) (allowing the SPY Pilot Program to terminate and 
making immediately effective the new limit).
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    In addition to position limits under NSE rules, NSEs establish 
uniform exercise limits for the aggregate exercise of a long position 
in any option contract within any five consecutive business days, 
generally at the levels of the applicable position limits.\31\ This 
exercise limit may serve to reduce the potential for manipulation (such 
as a squeeze on short option position holders) by restricting the 
number of shares demanded for delivery by a long call option position 
holder, in a similar manner to a DCM's position limit, under current 
Commission regulation 41.25(a)(3), thus restricting the number of 
shares that may be demanded during the last five days of trading.
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    \31\ See, e.g., Cboe rule 4.12, ISE rule 414, NYSE American rule 
905, and Phlx rule 1001.
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E. Commission's Position Limit Approach in Other Commodity Futures

    The Commission's customary approach for position limits in futures 
contracts other than SFPs is found in part 150 of the Commission's 
regulations, which establishes a position limits regime that generally 
includes three components: (1) The level of the limits, which sets a 
threshold that restricts the number of speculative positions that a 
person may hold in the spot-month, individual month, and all months 
combined; (2) exemptions for positions that constitute bona fide 
hedging transactions and certain other types of transactions; and (3) 
rules to determine which accounts and positions a person must aggregate 
for the purpose of determining compliance with the position limit 
levels. For exchange-set position limits, on physically-delivered 
contracts, the spot month limit level should be no greater than one-
quarter of the estimated spot month deliverable supply, calculated 
separately for each month to be listed, and for cash settled contracts, 
the spot month limit level should be no greater than necessary to 
minimize the potential for manipulation

[[Page 36802]]

or distortion of the contract's or the underlying commodity's 
price.\32\
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    \32\ See 17 CFR 150.5(b)(1); see also supra note 14.
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II. The Proposal

A. Overview

    The Commission notes that SFPs and security options may serve 
economically equivalent or similar functions.\33\ As noted above, when 
adopted, the Commission's SFP position limits regulations were set at 
levels that are generally comparable but not identical to the limits 
that currently apply to options on individual securities. However, over 
time, while the default level for position limits for SFPs did not 
change, those of security options on the same security have in some 
cases changed, allowing the position limit for the security option, as 
observed above, to be set at a much higher default level. This may 
place SFPs at a competitive disadvantage. One goal of this proposal, 
therefore, is to provide a level regulatory playing field.\34\
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    \33\ For example, the price of a long call option with a strike 
price well below the prevailing market price of the underlying 
security is expected to move almost in lock step with the price of a 
long SFP on the same underlying security. Similarly, the price of a 
long put option with a strike price well above the prevailing market 
price of the underlying security is expected to move almost in lock 
step with the price of a short SFP on the same underlying security.
    \34\ As the Commission notes above, commenters also requested 
that the SFP position limit regulations be the same as those 
applicable to security and securities index options, or, 
alternatively, that such position limit regulations more closely 
resemble existing limits on security and securities index options. 
See supra note 17 and accompanying text.
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    When determining appropriate limit levels, the Commission took note 
of the experience of NSEs over several years with higher position limit 
levels on security options, with no apparent significant issues, 
suggesting, therefore, that it may be reasonable for SFP position 
limits to closely resemble existing contract limits for equity options 
at NSEs. To allow DCMs to adapt as NSE position limits change, the 
current draft would be flexible, providing a formula for a DCM to set a 
higher level, rather than the specific levels in a current rule of an 
NSE.
    However, as has been noted, some aspects of the position limits 
regime under current Commission regulation 41.25 differ from those on 
security options as the Commission determined certain approaches were 
necessary to effectively oversee the markets, and consistent with the 
obligation of a DCM to prevent manipulation of the price of an SFP and 
its underlying security or securities.\35\ In light of its experience 
since the first adoption of a position limits regime for SFPs in 2001, 
the Commission believes in the merit of updating Commission regulation 
41.25 under an incremental approach, for example, by providing DCMs 
with discretion to increase limits, generally consistent with those 
currently permitted for equity options listed by an NSE, while allowing 
the Commission to assess the impact on SFP markets.
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    \35\ See 2001 Final SFP Rules at 55082. The approach NSEs may 
use to set an equity option's position limit is not consistent with 
existing Commission policy and may, in the Commission's opinion, as 
noted previously, render position limits ineffective.
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    The Commission proposes to maintain the requirement in current 
Commission regulation 41.25(a)(3) that DCMs establish position limits 
or, in certain cases, accountability standards for SFPs. The proposal 
would increase the default level for speculative position limits in 
SFPs in equity securities to 25,000 100-share contracts (or the 
equivalent if the contract size is different than 100 shares per 
contract) from 13,500 100-share contracts. The proposal would change 
the criterion that DCMs use to set higher levels of speculative 
position limits to no more than 12.5 percent of the estimated 
deliverable supply \36\ of the relevant underlying security, from no 
greater than 22,500 100-share contracts if certain criteria are met in 
current Commission regulation 41.25(a)(3)(i).\37\ The proposed 12.5 
percent criterion is discussed further below. In this regard, the 
Commission believes that exchange-set position limits for SFPs based on 
estimated deliverable supply would provide flexibility to DCMs while 
ensuring that position limits appropriately reflect current market 
conditions for the specific securities that underlie their SFPs.
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    \36\ See infra regarding proposed guidance on estimated 
deliverable supply.
    \37\ The current criteria for a level higher than 13,500 100-
share contracts are six-month average daily trading volume in the 
underlying security exceeds 20 million shares, or exceeds 15 million 
shares and there are more than 40 million shares of the underlying 
security outstanding.
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    The Commission also proposes to amend the position accountability 
provisions so that a DCM could substitute position accountability for 
position limits when six-month total trading volume in the underlying 
security exceeds 2.5 billion shares and there are more than 40 million 
shares of estimated deliverable supply, rather than the current 
criteria of six-month average daily trading volume in the underlying 
security exceeds 20 million shares and there are more than 40 million 
outstanding shares. In addition, the maximum accountability level under 
the position accountability regime would be increased to 25,000 
contracts, from the current level of 22,500 contracts.
    This proposal also addresses SFPs based on products other than a 
single equity security. As discussed below, these products are a 
physically-delivered basket equity SFP, a cash-settled equity index 
SFP, and an SFP on one or more debt securities.\38\
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    \38\ The SFP definition permits the listing of SFPs on debt 
securities (other than exempted securities). See supra note 22 and 
accompanying text. While an SFP may not be listed on a debt security 
that is an exempted security, futures contracts may be listed on an 
exempted security. See infra note 69 and accompanying text.
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    The Commission proposes to maintain the provision that requires 
position limits to be applied during a period of time of no shorter 
than the last five trading days in an expiring contract month. However, 
the proposed regulation would require a longer period than five trading 
days in the event the terms of an SFP provide for delivery prior to the 
last five trading days.
    The Commission proposes that a DCM should have discretion to apply 
position limits or position accountability levels either on a net 
basis, as under current regulations, or on the same side of the 
market.\39\ If a DCM imposes limits on the same side of the market, 
then the DCM could not net positions in SFPs in the same security on 
opposite sides of the market.
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    \39\ The Commission notes that, although it has not proposed an 
aggregation rule that would define ``person'' for purposes of SFP 
position limits, current 17 CFR 150.5(g) provides guidance to DCMs 
in setting aggregation standards for exchange-set position limits. 
The Commission believes a DCM should have reasonable discretion to 
set aggregate standards based on a person's control or ownership of 
SFP positions, including in the same manner as that of an NSE for 
equity security options.
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    This proposal permits DCMs to approve exemptions to limits, 
provided such exemptions are consistent with the guidance in current 
Commission regulation 150.5, which addresses exchange-set position 
limits, rather than consistent with current Commission regulation 
150.3, which addresses exemptions to Commission-set position limits. In 
addition, the proposal permits DCMs to approve exemptions consistent 
with those of an NSE.
    Under this proposal, DCMs would be required to calculate estimated 
deliverable supply and six-month total trading volume no less 
frequently than semi-annually, rather than the monthly requirement 
under the current regulations. The proposal requires that a DCM lower 
the position limit levels if the estimated deliverable supply

[[Page 36803]]

justifies lower position limits. Similarly, the proposal requires that 
a DCM adopt position limits if the estimated deliverable supply or six-
month total trading volume no longer supports position accountability 
provisions.
    Finally, as discussed further below, these proposed regulations 
provide the definitions for ``estimated deliverable supply and ``same 
side of the market'', terms used in Commission regulation 41.25, by 
adding those definitions into a new paragraph (a).\40\
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    \40\ In connection with adding the definitions into a new 
paragraph (a), paragraphs (a) through (d) would be re-designated as 
paragraphs (b) through (e).
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B. Section-by-Section Discussion

1. Commission Regulation 41.25(a), Definitions
    The proposal includes two definitions used in Commission regulation 
41.25: Estimated deliverable supply; and same side of the market. These 
definitions are included in new paragraph (a).
    Estimated deliverable supply is defined under the proposal as the 
quantity of the security underlying a security futures product 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 during the specified delivery period. The proposal provides 
guidance for estimating deliverable supply in proposed appendix A to 
subpart C of part 41, as discussed below.
    The proposal defines same side of the market to mean long positions 
in physically-delivered security futures contracts and cash settled 
security futures contracts, in the same security, and, separately, 
short positions in physically-delivered security futures contracts and 
cash settled security futures contracts, in the same security. The 
Commission invites comment on whether it should also include options on 
security futures contracts in this definition, although options on SFPs 
are not currently permitted to be listed.\41\ Generally, a long call 
and a short put, on a futures equivalent basis, would be aggregated 
with a long futures contract; and a short call and a long put, on a 
futures equivalent basis, would be aggregated with a short futures 
contract.
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    \41\ Under CEA section 2(a)(1)(D)(iii)(II), the CFTC and SEC 
may, by Order, jointly determine to permit the listing of options on 
SFPs; that authority has not been exercised.
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2. Commission Regulation 41.25(b)(3), Position Limits or Accountability 
Rules Required
    As with current Commission regulation 41.25(a)(3), under this 
proposal, the paragraph, as re-designated regulation 41.25(b)(3), would 
continue to require a DCM to establish position limits or position 
accountability rules in each SFP for the expiring futures contract 
month.
3. Commission Regulation 41.25(b)(3)(i), Limits for Equity SFPs
    Proposed changes to regulation 41.25(a)(3)(i), re-designated as 
regulation 41.25(b)(3)(i), would increase the default level of position 
limits in an equity SPF to no greater than 25,000 100-share contracts 
(or the equivalent if the contract size is different than 100 shares 
per contract), either net or on the same side of the market, from the 
existing regulation's default level of no greater than 13,500 100-share 
contracts on a net basis. The default level of 25,000 100-share 
contracts is equal to 2,500,000 shares. The Commission notes that 12.5 
percent of 20 million shares equals 2,500,000 shares. Thus, for an 
equity security with less than 20 million shares of estimated 
deliverable supply, the default position limit level for the equity SFP 
would be larger than 12.5 percent of estimated deliverable supply. 
While a DCM could adopt the default position limit for SFPs in equity 
securities with fewer than 20 million shares, consistent with a 
position limit applicable to an option on that security, the Commission 
would expect a DCM to assess the liquidity of trading in the underlying 
security to determine whether the DCM should set a lower position limit 
level, as appropriate to ensure compliance with DCM Core Principles 3 
and 5. In this regard, the Commission seeks comment on whether it 
should provide greater specificity with respect to this liquidity 
assessment and whether there are circumstances where the position limit 
level should be set lower than 25,000 100-share contracts (for example, 
no greater than 12.5 percent of estimated deliverable supply).\42\
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    \42\ Core Principle 3, 7 U.S.C. 7(d)(3), provides that DCMs 
shall list only contracts that are not readily susceptible to 
manipulation, while Core Principle 5, 7 U.S.C. 7(d)(5), provides for 
the adoption of position limits and position accountability, as is 
necessary and appropriate, to deter the threat of manipulation. 
Moreover, 7 U.S.C. 2(a)(1)(D)(i)(VII) and 17 CFR 41.22(f) require 
that trading in an SFP: (i) Be not readily susceptible to 
manipulation of the SFP; or (ii) cause the manipulation of any 
underlying security, an option on such security, or an option on a 
group or index including such security or securities.
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    The Commission notes that minimum position limits for equity 
security option positions on NSEs are 25,000 100-share option contracts 
on the same side of the market. Thus, the proposal would allow a DCM to 
coordinate the default position limit level for SFPs to that of an 
equity option traded on a NSE. Accordingly, as previously requested by 
commenters in the context of the CFTC's adoption of its current SFP 
position limit requirements, this proposed default level for SFP limits 
would closely resemble existing minimum limit levels on security 
options.
    As noted above, SFPs and security options may serve economically 
equivalent or similar functions.\43\ However, under current Commission 
regulation 41.25(a)(3), as previously detailed, the default level for 
position limits for SFPs must be set no greater than 13,500 (100-share) 
contracts, while security options on the same security may be, and 
currently are, set at a much higher default level of 25,000 
contracts,\44\ which may place SFPs at a competitive disadvantage. 
Closer coordination of limit levels is intended to provide a level 
regulatory playing field.
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    \43\ For example, the price of a long call option with a strike 
price well below the prevailing market price of the underlying 
security is expected to move almost in lock step with the price of a 
long SFP on the same underlying security. Similarly, the price of a 
long put option with a strike price well above the prevailing market 
price of the underlying security is expected to move almost in lock 
step with the price of a short SFP on the same underlying security.
    \44\ See current Cboe rule 4.11.
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    However, because limit levels would not apply to a market 
participant's combined position between SFPs and security options, the 
Commission is not proposing a default limit level for an SFP higher 
than 12.5 percent of estimated deliverable supply. That is, under the 
proposal, a market participant with positions at the limits in each of 
an SFP and a security option on the same underlying security might be 
equivalent to about 25 percent of estimated deliverable supply, which 
is at the outer bound of where the Commission has historically 
permitted spot month limit levels. The Commission invites comment on 
whether this proposed default level is appropriate.
    The proposal would include, in the requirements for limits for 
equity SFPs, securities such as exchange trading funds (``ETFs'') and 
other securities that represent ownership in a group of underlying 
securities. The Commission requests comment on whether this is 
appropriate and invites further comment, below, in the discussion of 
estimated deliverable supply.
    This proposal would provide discretion to a DCM to apply position 
limits on a gross basis (``on the same side of the market'') or net 
basis, rather than the current regulation's net basis.

[[Page 36804]]

For example, if there were a physically-delivered SFP on equity XYZ, a 
dividend-adjusted SFP on equity XYZ, and a cash-settled SFP on equity 
XYZ, then a DCM's rules could provide that long positions held by the 
same person across each of these classes of SFP based on equity XYZ 
would be aggregated for the purpose of determining compliance with the 
position limit. A gross position in a futures contract is larger than a 
net position in the event a person holds positions on opposite sides of 
the market. That is, a net basis is computed by subtracting a person's 
short futures position from that person's long futures positions, and, 
under current regulations, a single position limit applies on a net 
basis to that net long or net short position. Under the proposal, at 
the discretion of a DCM, a person's long futures position would be 
subject to the position limit and, separately, a person's short futures 
position also would be subject to the position limit. As previously 
requested by commenters, adding this proposed gross basis approach (in 
addition to net basis) to SFP limits would more closely resemble 
existing limits on security options that apply on the same side of the 
market per the rules of the NSEs. A DCM that elects to implement limits 
on a gross basis would be providing its market participants with the 
same metric for position limit compliance as is currently the case on 
NSEs, which may reduce compliance costs and encourage cross-market 
participation. However, limits on a gross basis may be more restrictive 
than limits on a net basis, which could reduce the position sizes that 
may be held, without an applicable exemption.
    In addition, the Commission would continue to permit DCMs to apply 
limits on a net basis at the DCM's discretion. In this regard, the 
Commission believes it is possible for a DCM's application of limits to 
further the goals of the CEA whether applied on a net or a gross 
basis.\45\ This would be true, for example, if a DCM applied limits on 
a net basis and did not permit netting of physically-delivered 
contracts with cash settled contracts. But if, instead, the DCM 
permitted netting of physically-delivered contracts and cash settled 
contracts in the same security, it would render position limits 
ineffective.\46\ For example, a person should not be permitted to avoid 
limits by obtaining a large long position in a physically-delivered 
contract (which could be used to corner or squeeze) and a similarly 
large short position in a cash settled contract that would net to zero.
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    \45\ CEA section 2(a)(1)(D)(i)(VII) requires that trading in 
SFPs is not readily susceptible to manipulation of the price of the 
SFP, the SFP's underlying security, or an option on the SFP's 
underlying security.
    \46\ Although no DCM currently lists both physically-delivered 
SFPs contracts and cash-settled SFP contracts for the same 
underlying security, and this concern may be theoretical, the 
Commission believes that providing clarity reduces uncertainty 
regarding netting in such circumstances, which may facilitate 
listing of such contracts in the future. Therefore, the Commission 
proposes to provide in 17 CFR 41.25(b)(3)(vii) that, for a DCM 
applying limits on a net basis, netting of physically-delivered 
contracts and cash settled-contracts in the same security is not 
permitted as it would render position limits ineffective. This 
concern is not applicable to a DCM applying limits on the same side 
of the market, as limits are applied separately to long positions 
and to short positions.
---------------------------------------------------------------------------

4. Commission Regulation 41.25(b)(3)(i)(A), Higher Position Limits in 
Equity SFPs \47\
---------------------------------------------------------------------------

    \47\ As noted above, the proposal would re-designate 17 CFR 
41.25(a)(3)(i)(A) as 17 CFR 41.25(b)(3)(i)(A).
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    For an SFP based on an underlying security with an estimated 
deliverable supply of more than 20 million shares, the proposal would 
permit a DCM to set a higher limit level based on 12.5 percent of the 
estimated deliverable supply of the underlying security, if appropriate 
in light of the liquidity of trading in the underlying security. By way 
of example, if the estimated deliverable supply were 40 million shares, 
then the proposed regulation would permit a DCM to set a limit level of 
no greater than 50,000 100-share contracts; computed as 40 million 
shares times 12.5 percent divided by 100 shares per contract.
    This level of 50,000 100-share contracts is the same as permitted 
under current rules of NSEs for an underlying security with 40 million 
shares outstanding, although an NSE would also require the most recent 
six-month trading volume of the underlying security to have totaled at 
least 15 million shares. While this proposed provision for SFP position 
limits would more closely resemble existing limits on security options, 
the Commission is proposing to permit a DCM to use its discretion in 
assessing the liquidity of trading in the underlying security, rather 
than imposing a prescriptive trading volume requirement.\48\ The 
Commission preliminarily does not believe that trading volume alone is 
an appropriate indicator of liquidity.\49\ In this regard, the proposed 
regulation would permit a DCM to set a position limit at a level lower 
than 12.5 percent of estimated deliverable supply. The Commission 
invites comment on whether it is appropriate to provide a DCM with 
discretion in its assessment of liquidity in the underlying security, 
rather than the Commission imposing a liquidity requirement. Core 
Principle 5 requires DCMs to adopt, as is necessary and appropriate, 
position limits to deter the adverse market impact of manipulation. The 
Commission invites comment on whether estimated deliverable supply 
alone serves as an adequate proxy for market impact.
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    \48\ Generally, under CEA section 5(d)(1)(B), unless otherwise 
restricted by a Commission regulation, a DCM has reasonable 
discretion in establishing the manner in which it complies with core 
principles, including Core Principle 5 regarding position limits or 
position accountability. See 7 U.S.C. 7(d)(1) and (5).
    \49\ Under current 17 CFR 41.25(a)(3)(i)(A), for example, a DCM 
may adopt a net position limit no greater than 22,500 shares, 
provided the six-month average daily trading volume exceeds 15 
million shares and there are more than 40 million shares of the 
security outstanding. The Commission notes that almost all stocks 
with at least 40 million shares outstanding also had a six-month 
average trading volume of at least 15 million shares. Thus, the 
current trading volume criterion generally is not a meaningful 
restriction.
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    Although the Commission is proposing a criterion of 12.5 percent of 
estimated deliverable supply, the Commission expects a DCM to conduct a 
reasoned analysis as to whether setting a level for a limit based on 
such criterion is appropriate. In this regard, for example, assume 
security QRS and security XYZ have equal free float of shares. Assume, 
however, that trading in QRS is not as liquid as trading in XYZ. Under 
these assumptions, it may be appropriate for a DCM to adopt a position 
limit for XYZ equivalent to 12.5 percent of deliverable supply, but to 
adopt a lower limit for QRS because a lesser number of shares would be 
readily available for shorts to make delivery.
    The Commission notes that the proposed criterion of 12.5 percent of 
estimated deliverable supply is half the level for DCM-set spot month 
speculative position limits in current Commission regulation 
150.5(c),\50\ which, as previously noted, has been rendered ``mere 
guidance'' since the CFMA.\51\ That regulation provides that, for 
physically-delivered contracts, the spot month limit level should be no 
greater than one-quarter of the estimated spot month deliverable 
supply.\52\ The Commission is proposing a lower percent of estimated 
deliverable supply in light of current limits on equity security 
options listed at NSEs. In this regard, the proposal would result in 
SFP position limits that closely resemble the existing 25,000 and 
50,000 contract

[[Page 36805]]

limits for equity options at NSEs, set when certain trading volume has 
been reached or a combination of trading volume and shares currently 
outstanding, as shown in Table A above. For example, a position at a 
50,000 (100-share) option contract limit is equivalent to 5 million 
shares. 12.5 percent of 40 million shares equals 5 million shares; that 
is, the proposed criterion for a DCM to set a limit would be similar to 
that of the criteria for an NSE to set such a limit. Under this 
proposal, a similar 50,000 contract position limit on an SFP on such a 
security would be an increase from the 22,500 contract limit currently 
permitted for such an SFP. The Commission believes the proposed 
incremental approach to increasing SFP limits is a measured response to 
changes in the SFP markets, while retaining consistency with the 
existing requirements for equity security options listed by NSEs.
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    \50\ 17 CFR 150.5(c).
    \51\ See supra discussion of the impact of the CFMA on part 150; 
see also 74 FR 12177 at 12183 (March 23, 2009).
    \52\ 17 CFR 150.5(c)(1).
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    However, as noted above, SFPs and equity security options in the 
same underlying security are not subject to a combined position limit 
across DCMs and NSEs. Accordingly, the Commission is proposing a 
maximum SFP limit level that is half the guidance level for DCM-set 
spot month futures contract limits of 25 percent of estimated 
deliverable supply.
    Further, as shown in Table A above, the Commission notes that 
limits for equity security options at NSEs do not increase in a linear 
manner for all increases in shares outstanding; for example, upon a 
doubling of shares outstanding, the 100-share equity security option 
contract limit increases only to 75,000 contracts from 50,000 
contracts, while, under similar circumstances of a doubling of 
estimated deliverable supply, the Commission proposes to permit a 
linear increase for a SFP limit to 100,000 contracts from 50,000 
contracts. The Commission invites comments as to whether the proposed 
linear approach based on estimated deliverable supply is appropriate.
    Alternative Criteria for Setting Levels of Limits. As an 
alternative to the proposed criteria for setting position limit levels 
based on estimated deliverable supply, the Commission invites comments 
on whether the Commission should permit a DCM to mirror the position 
limit level set by an NSE in a security option with the same underlying 
security or securities as that of the DCM's SFP. This alternative has 
the advantage of consistency in position limits across exchange-traded 
derivatives based on the same security.
    However, the Commission notes that NSEs may set an equity option's 
position limit by the use of trading volume as a sole criterion. That 
approach is not consistent with existing Commission policy regarding 
use of estimated deliverable supply to support position limits in an 
expiring contract month, as stated in part 150 of the Commission's 
regulations.\53\ The Commission notes that use of trading volume as a 
sole criterion for setting the level of a position limit could result 
in a position limit that exceeds the number of outstanding shares when 
the underlying security exhibits a very high degree of turnover. Such a 
resulting high limit level would render position limits ineffective.
---------------------------------------------------------------------------

    \53\ For example, Cboe rules also permit a 50,000 contract 
position limit based on the total most recent six-month trading 
volume of 20 million shares, without regard to shares outstanding.
---------------------------------------------------------------------------

5. Commission Regulation 41.25(b)(3)(i)(B), Position Accountability in 
Lieu of Limits \54\
---------------------------------------------------------------------------

    \54\ As noted above, the proposal would re-designate 17 CFR 
41.25(a)(3)(i)(B) as 17 CFR 41.25(b)(3)(i)(B).
---------------------------------------------------------------------------

    This proposal would continue to permit a DCM to substitute position 
accountability for a position limit in an equity SFP that meets two 
criteria. The proposal would require six-month total trading volume of 
at least 2.5 billion shares, which generally is equivalent to the 
current first criterion that six-month average daily trading volume in 
the underlying security must exceed 20 million shares.\55\ The proposal 
would tighten the second criterion. Rather than require that the 
underlying security have more than 40 million shares outstanding, under 
the proposal the second criterion would require the underlying security 
to have more than 40 million shares of estimated deliverable supply, 
which generally would be smaller than shares outstanding. This change 
conforms to the proposed use of estimated deliverable supply in setting 
a position limit. The Commission believes an appropriate refinement to 
its criterion for position accountability is to quantify those equity 
shares that are readily available in the market, rather than all shares 
outstanding. Generally, a short position holder may expect to obtain at 
or close to fair value shares that are readily available in the market 
and a long position holder may expect to sell such shares at or close 
to fair value. However, in contrast, shares that are issued and 
outstanding by a corporation may not be readily available in a timely 
manner, such as shares held by the corporation as treasury stock.\56\ 
Therefore, to ensure that position holders will generally be able to 
obtain equity shares at or close to fair value, the DCM should consider 
whether the shares are readily available in the market when estimating 
deliverable supply.
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    \55\ 20 million shares times 125 trading days in a typical six-
month period equals 2.5 billion shares. In regards to total trading 
volume rather than average daily trading volume, the Commission 
notes that use of total trading volume is consistent with the rules 
of NSEs, which use six-month total trading volume in their criteria 
for setting position limits, as shown in Table A above.
    \56\ Treasury stock means any shares that a company holds 
itself. Such treasury stock may be authorized by the corporate 
charter but not yet issued to the public or, in contrast, may have 
been previously issued to the public but was the subject of a stock 
repurchase program to buy back the shares from the public.
---------------------------------------------------------------------------

    In addition, the proposal would amend the accountability level to 
no greater than 25,000 contracts, either net or on the same side of the 
market, from 22,500 contracts net, conforming to the proposed default 
position limit level. The Commission notes a DCM would be able to set a 
lower accountability level, should it desire. The Commission 
preliminarily believes it is appropriate to set a position 
accountability level no higher than 25,000 contracts because the 
Commission believes a DCM should have the authority, but not the 
obligation, to inquire with very large position holders and to order 
such position holders not to increase positions.\57\ The Commission 
preliminarily believes a maximum position accountability level of 
25,000 contracts is at the outer bounds for purposes of providing a DCM 
with authority to obtain information from position holders; for 
example, a position of 25,000 100-share contracts has a notional size 
of $125 million when the price of the underlying stock is $50 per 
share.
---------------------------------------------------------------------------

    \57\ By way of comparison, under 17 CFR 15.03, the Commission's 
reporting level for large traders (``reportable position'') is 1,000 
contracts for individual equity SFPs and 200 contracts for narrow-
based SFPs. Under 17 CFR 18.05, the Commission may request any 
pertinent information concerning such a reportable position.
---------------------------------------------------------------------------

6. Commission Regulation 41.25(b)(3)(ii), Limits for Physically-
Delivered Basket Equity SFPs
    This proposal would amend the existing position limits and position 
accountability provisions for a physically-delivered SFP comprised of 
more than one equity security \58\ by

[[Page 36806]]

basing the criteria on the underlying equity security with the lowest 
estimated deliverable supply, rather than the lowest average daily 
trading volume.\59\ Specifically, under the proposal, for an SFP on 
more than one security, the criteria in proposed regulations 
41.25(b)(3)(i)(A) and (B) \60\ would apply to the underlying security 
with the lowest estimated deliverable supply in the basket, with an 
appropriate adjustment to the level of the position limit or 
accountability level for a contract size different than 100 shares per 
underlying security.
---------------------------------------------------------------------------

    \58\ The Commission notes that there is not a limit per se on 
the maximum number of securities in a narrow-based security index. 
Rather, under CEA section 1a(35), a narrow-based security index 
generally means, among other criteria, an index that has 9 or fewer 
component securities; in which a component security comprises more 
than 30 percent of the index's weighting; in which the five highest 
weighted component securities in the aggregate comprise more than 60 
percent of the index's weight; or in which the lowest weighted 
component securities, comprising the lowest 25 percent of the 
index's weight, have an aggregate dollar value of average daily 
trading volume of less than $50 million.
    \59\ This means that, under proposed 17 CFR 41.25(b)(3)(i), the 
default level position limit would be no greater than 25,000 100-
share contracts, unless the underlying equity security with the 
lowest estimated deliverable supply supports a higher level.
    \60\ As noted above, as proposed, 17 CFR 41.25(a)(3)(i)(A) and 
(B) would be re-designated as 17 CFR 41.25(b)(3)(i)(A) and (B).
---------------------------------------------------------------------------

    The proposal is based on the premise that the limit on a 
physically-delivered basket equity SFP should be consistent with the 
most restrictive of each limit that would be applicable to SFPs based 
on each component of such basket of deliverable securities. This would 
restrict a person from obtaining a larger exposure to a particular 
security through a physically-delivered basket equity SFP, than could 
be obtained directly in a single equity SFP. However, this proposal 
would not aggregate positions in single equity SFPs with positions in 
basket deliverable SFPs.
7. Commission Regulation 41.25(b)(3)(iii), Limits for Cash-Settled 
Equity Index SFPs
    For setting levels of limits on an SFP comprised of more than one 
security, current Commission regulation 41.25(a)(3)(ii) specifies 
certain criteria for trading volume and shares outstanding that must be 
applied to the security in the index with the lowest average daily 
trading volume. However, the Commission is not proposing to retain 
those criteria for setting levels of limits for cash-settled equity 
index SFPs for a number of reasons. For an equity index that is price 
weighted, it appears that use of shares outstanding or trading volume 
may result in an inappropriately restrictive level for a position 
limit.\61\ For an equity index that is value weighted, it also appears 
that such use may result in an inappropriately restrictive level for a 
position limit.\62\ The Commission observes that while trading volume, 
as an indicator of liquidity, may be an appropriate factor for a DCM to 
consider in setting position limits, trading volume is not generally 
used in construction of equity indexes.
---------------------------------------------------------------------------

    \61\ For example, assume the level of a simple price-weighted 
index is computed by adding the price of each equity security in the 
index and dividing by the number of different equity securities. For 
such a simple index, a given percentage change in the price of a 
company with a higher share price would have a greater impact on the 
index than a given percentage change in the price of a company with 
a lower share price. In such a circumstance, the Commission 
preliminarily believes the DCM should have discretion, in setting 
the position limit, to give consideration to the equity (or 
equities) with the greater weight(s) in the index, rather than only 
with regard to the equity with the lowest number of shares 
outstanding.
    \62\ For example, the level of a value-weighted index will 
change in relation to the change in the market capitalization of 
each component equity security. In such a circumstance, a given 
percentage change in the market value of a higher capitalized 
company would have a greater impact on the index than a given 
percentage change in the market value of a lower capitalized 
company. In such a circumstance, the Commission preliminarily 
believes the DCM should have discretion, in setting the position 
limit, to give consideration to the equity (or equities) with the 
greater weight(s) in the index, rather than only with regard to the 
equity with the lowest number of shares outstanding.
---------------------------------------------------------------------------

    Proposed appendix A to subpart C provides guidance and acceptable 
practices for setting the limit level for a cash-settled equity index 
SFP, discussed below. However, as noted above, the proposal would 
continue to require a DCM, for cash-settled equity index SFPs, to 
establish position limits or position accountability rules in each SFP 
for the expiring futures contract month in the last five trading days 
of an expiring contract month. As also discussed above, the proposal 
provides discretion to a DCM to set such a limit either net or on the 
same side of the market.
8. Commission Regulation 41.25(b)(3)(iv), Limits for Debt SFPs \63\
---------------------------------------------------------------------------

    \63\ As noted above, as proposed, 17 CFR 41.25(a)(3) would be 
re-designated as 17 CFR 41.25(b)(3).
---------------------------------------------------------------------------

    As previously detailed, for setting levels of limits on an SFP 
comprised of more than one security, current Commission regulation 
41.25(a)(3)(ii) specifies certain criteria for trading volume and 
shares outstanding that must be applied to the security in the index 
with the lowest average daily trading volume. However, the Commission 
is not proposing to retain those criteria for setting levels of limits 
for debt SFPs because debt securities generally are neither issued in 
terms of shares nor trading volume measured in terms of shares.
    Proposed appendix A to subpart C provides guidance and acceptable 
practices for setting the limit level for a debt SFP, discussed below. 
This proposal would require a DCM to set a position limit on a debt 
SFP, either net or on the same side of the market, applicable to 
positions held during the last five trading days of an expiring 
contract month, as is the case for equity SFPs under the proposal.
9. Commission Regulation 41.25(b)(3)(v), Required Minimum Position 
Limit Time Period
    Although DCMs do not currently list SFPs where the product permits 
delivery before the close of trading, the Commission proposes that, for 
such a product, the DCM would be required to apply position limits 
beginning no later than the first day that long position holders may be 
assigned delivery notices, if such period is longer than the last five 
trading days of an expiring contract month. The Commission notes that 
the current DCM practice for other commodity futures contracts is to 
apply spot month position limits at the close of business before 
delivery notices are assigned to holders of long positions in futures 
contracts that provide for physical delivery prior to the close of 
trading. Further, this provision is analogous to provisions of NSEs 
that apply exercise limits for any five consecutive business days, 
applicable to American exercise style equity options.\64\
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    \64\ American exercise style refers to the right of an option 
holder to exercise the option at any time prior to, and including, 
expiration. In contrast, a European exercise style option only can 
be exercised at expiration.
---------------------------------------------------------------------------

10. Commission Regulation 41.25(b)(3)(vi), Requirements for Re-Setting 
Levels of Position Limits \65\
---------------------------------------------------------------------------

    \65\ The proposal would re-designate 17 CFR 41.25(a)(3)(iv) to 
17 CFR 41.25(b)(3)(vi).
---------------------------------------------------------------------------

    This proposal would require a DCM to consider, on at least a semi-
annual basis, whether position limits were set at appropriate levels, 
through consideration of estimated deliverable supply. In the event 
that estimated deliverable supply has decreased, then a DCM would be 
required to lower the level of a position limit in light of that 
decreased deliverable supply. In the event that estimated deliverable 
supply has increased, then a DCM would have discretion to increase the 
level of a position limit. In addition, a DCM that has substituted a 
position accountability rule for a position limit would be required to 
consider whether estimated deliverable supply and total six-month

[[Page 36807]]

trading volume continue to justify that position accountability rule.
    Current provisions require a DCM to calculate trading volume 
monthly. The Commission believes that review of position limit levels 
and position accountability rules on at least a semi-annual basis 
rather than a monthly basis generally should be adequate to ensure 
appropriate levels because deliverable supply generally does not change 
to a great degree from month to month. For example, the number of 
shares outstanding may increase through periodic issuance of additional 
shares, and may decrease through stock repurchase programs, but, as a 
general observation, such issuance or repurchases are not a large 
percentage of free float. Of course, there could be situations where 
deliverable supply changes to a great degree before the semi-annual 
period and the rule does not prevent a DCM from considering those 
changes before such period.
    The Commission also proposes a technical change to the filing 
requirement whenever a DCM makes such changes to limit levels. While 
the proposal continues to provide that changes to limit levels be filed 
pursuant to the requirements of Commission regulation 41.24, it removes 
the superfluous provision in the current regulation that provides that 
the change be effective no earlier than the day after the DCM has 
provided notification to the Commission and to the public. Instead, the 
regulation simply cites to Commission regulation 41.24, which specifies 
that changes must be received by the Commission no later than the day 
prior to the implementation.
11. Appendix A to Subpart C of Part 41, Guidance and Acceptable 
Practices for Position Limits and Position Accountability for SFPs
    Section (a), Guidance on Estimating Deliverable Supply. The 
proposal provides guidance for estimating deliverable supply. For an 
equity security, deliverable supply should be no greater than the free 
float of the security. For a debt security, deliverable supply should 
not include securities that are committed for long-term agreements 
(e.g., closed-end investment companies, structured products, or similar 
securities).
    Regarding the guidance for estimating deliverable supply for equity 
securities, free float of the security generally means issued and 
outstanding shares less restricted shares. Restricted shares include 
restricted and control securities, which are not registered with the 
SEC to sell in a public marketplace.\66\ The Commission requests 
comment on whether there are any other adjustments that should be made 
in estimating deliverable supply for equities. For example, should the 
guidance exclude from deliverable supply any equity shares held by 
ETFs, mutual funds, or similar investment vehicles? If so, how would 
such counts of shares be determined or estimated?
---------------------------------------------------------------------------

    \66\ For a general discussion of restricted and control 
securities, see https://www.sec.gov/reportspubs/investor-publications/investorpubsrule144htm.html.
---------------------------------------------------------------------------

    Also regarding the guidance for estimating deliverable supply for 
equity securities, the Commission notes that authorized participants 
may increase the number of outstanding shares in an ETF.\67\ In setting 
a position limit for an ETF, the Commission has not proposed that DCMs 
look through the ETF to the lowest deliverable supply in an underlying 
security, as is the case in the proposal for limits for physically-
delivered basket equity SFPs. Rather, the Commission has proposed to 
restrict the estimate of deliverable supply in an ETF to existing 
shares of the ETF. As an alternative, the Commission requests comment 
on whether an estimate of deliverable supply for an ETF should include 
an allowance for the creation of ETF shares. If so, how would one 
estimate such an allowance?
---------------------------------------------------------------------------

    \67\ An authorized participant generally is an institutional 
investor, such as a broker dealer, who acts to create or redeem ETF 
shares. The authorized participant buys shares that underlie the ETF 
and exchanges those underlying shares with the ETF sponsor for 
shares in the ETF, thus creating new ETF shares that it may sell to 
the public. An authorized participant may also purchase ETF shares 
in the market place and redeem those shares with the ETF sponsor, 
thus reducing the number of ETF shares outstanding.
---------------------------------------------------------------------------

    Section (b), Guidance on Setting Limits on Cash-Settled Equity 
Index SFPs. As noted above, the Commission is proposing guidance for 
setting limits on cash-settled equity index SFPs. This proposed 
guidance would permit a DCM to set the limit level for a cash-settled 
SFP on a narrow-based security index of equity securities to that of a 
similar narrow-based security index equity option listed on an NSE. As 
an alternative for setting the level based on that of a similar equity 
option, the proposal provides guidance and acceptable practices that 
would allow a DCM, in setting a limit, to consider the deliverable 
supply of securities underlying the equity index, and the equity index 
weighting and SFP contract multiplier.
    As an example of an acceptable practice, for a cash-settled equity 
index SFP on a security index weighted by the number of shares 
outstanding, a DCM could set a position limit as follows: First, 
compute the limit on an SFP on each underlying security under proposed 
regulation (b)(3)(i)(A) (currently designated as (a)(3)(i)(A)); second, 
multiply each such limit by the ratio of the 100-share contract size 
and the shares of the security in the index; and third, determine the 
minimum level from step two and set the limit to that level, given a 
contract size of one dollar times the index, or for a larger contract 
size, reduce the level proportionately. As the Commission is proposing 
for physically-delivered basket equity SFPs, the proposal is based on 
the premise that the limit on a cash-settled SFP on a narrow-based 
security index of equity securities should be as restrictive as the 
limit for an SFP based on the underlying security with the most 
restrictive limit.
    Section (c), Guidance on Setting Limits on Debt SFPs. The proposal 
would provide guidance that an appropriate level for limits on debt 
SFPs generally would be no greater than the equivalent of 12.5 percent 
of the par value of the estimated deliverable supply of the underlying 
debt security. The Commission notes that this approach is guidance 
because there may be other reasonable bases for setting levels of debt 
SFPs position limits and the Commission does not want to foreclose 
those bases. For example, a coupon stripped from an interest bearing 
corporate bond does not have a par value in terms of such corporate 
bond, but instead such coupon is the amount of interest due at the time 
the corporate issuer is scheduled to pay such coupon under the 
corporate bond indenture.\68\
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    \68\ An interest bearing bond may be structured in a conduit and 
divided into separate obligations, where the cash flow from the 
principal of the bond and the cash flow from each coupon may be sold 
as separate securities. Each such separate security is a zero-coupon 
security.
---------------------------------------------------------------------------

    Although no DCM currently lists an SFP based on a debt security, 
the Commission believes a framework for position limits may reduce 
uncertainty regarding acceptable practices for listing such contracts 
on non-exempted securities and, thereby, may facilitate listing of such 
contracts. The Commission notes that futures contracts in exempted 
securities, such as U.S. Treasury notes, have been listed for many 
years.\69\ The Commission is proposing 12.5 percent of the par value of 
the estimated deliverable supply of the underlying debt security as 
guidance

[[Page 36808]]

on an appropriate basis based on the existing levels of limits for 
equity option contracts on NSEs. The Commission invites comment on 
whether a level based on par value is appropriate, or whether some 
other metric would be appropriate.
---------------------------------------------------------------------------

    \69\ In this regard, an exempted security refers to certain 
exempted securities under the Securities Act of 1933 or the 
Securities Exchange Act of 1934. See CEA section 2(a)(1)(C).
---------------------------------------------------------------------------

    Section (d), Guidance on Position Accountability. The Commission 
proposes, as guidance, that a DCM may adopt a position accountability 
rule for any SFP, including an SFP where a position limit is required 
or adopted. Under the proposal, a position accountability rule would 
provide, at a minimum, that the DCM have authority to obtain 
information from a market participant with a position at or above the 
accountability level and that the DCM have authority, in its 
discretion, to order such a market participant to halt increasing their 
position. The Commission notes that position accountability can work in 
tandem with a position limit rule, particularly where the 
accountability level is set at a low level, in comparison to the level 
of the position limit. Further, the Commission notes that a DCM may 
adopt a position accountability rule to provide authority to the DCM to 
order market participants to reduce position sizes, for example, to 
maintain orderly trading or to ensure an orderly delivery.
    Section (e), Guidance for Exemptions.\70\ The proposed regulation 
would continue to provide a DCM with discretion to grant exemptions to 
position limits. The proposal provides guidance that such exemptions 
may be consistent with current Commission regulation 150.5 regarding 
exchange-set position limits or consistent with rules of an NSE 
regarding securities option exemptions. This guidance differs from the 
provisions of the current regulation, which references Commission 
regulation 150.3 regarding federal position limits in certain physical 
commodity futures contracts. The Commission believes the guidance 
should reference exemption provisions applicable to exchange-set limits 
in Commission regulation 150.5, rather than federal limits, because the 
exemptions for federal limits are written largely in terms of the 
federal limits on physical commodity contracts in Commission regulation 
150.2.
---------------------------------------------------------------------------

    \70\ In addition to re-designating 17 CFR 41.25(a)(3) as 17 CFR 
41.25(b)(3), the proposal would re-designate current 17 CFR 
41.25(a)(3)(iii) to appendix A to subpart C.
---------------------------------------------------------------------------

III. Related Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA'') \71\ requires that federal 
agencies consider whether a proposed rule will have a significant 
economic impact on a substantial number of small entities and, if so, 
provide a regulatory flexibility analysis of the impact. The proposed 
amendments generally apply to exchange-set position limits. The 
proposed amendments would permit a DCM to increase the level of 
position limits for SFPs and may change the application of those limits 
from a trader's net position to a trader's gross position. The proposed 
amendments would affect DCMs. The Commission has previously established 
certain definitions of ``small entities'' to be used in evaluating the 
impact of its rules on small entities in accordance with the RFA, and 
has previously determined that DCMs are not small entities for purpose 
of the RFA.\72\
---------------------------------------------------------------------------

    \71\ 5 U.S.C. 601 et seq.
    \72\ See Policy Statement and Establishment of Definitions of 
``Small Entities'' for Purposes of the Regulatory Flexibility Act, 
47 FR 18618, 18619 (Apr. 30, 1982).
---------------------------------------------------------------------------

    Therefore, the Commission believes that the amendments to the SFP 
position limits regulations would not have a significant economic 
impact on a substantial number of small entities. Accordingly, the 
Chairman, on behalf of the Commission, hereby certifies, pursuant to 5 
U.S.C. 605(b), that the proposed amendments will not have a significant 
economic impact on a substantial number of small entities.

B. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') \73\ provides that a 
federal 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''). The collection of information related to this 
proposed rule is OMB control number 3038-0059--Security Futures 
Products.\74\ As a general matter, the proposed amendments to the SFP 
position limits regulation (1) permit a DCM to increase the level of 
limits; and (2) may change the application of exchange-set limits from 
a net basis to a gross basis. The Commission believes that the proposed 
amendments will not impose any new information collection requirements 
that require approval of OMB under the PRA. As such, the proposed 
amendments do not impose any new burden or any new information 
collection requirements in addition to those that already exist in 
connection with filing to list SFPs under Commission regulation 41.23 
or to amend exchange rules for SFPs under Commission regulation 
41.24.\75\
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    \73\ 44 U.S.C. 3501 et seq.
    \74\ Regarding Security Futures Products (OMB Control No. 3038-
0059), the Commission recently published a notice of a request for 
extension of the currently approved information collection. See 82 
FR 48496 (Oct. 18, 2017).
    \75\ Similarly, the Commission previously determined that a rule 
expanding the listing standards for security futures did not require 
a new collection of information on the part of any entities. See 71 
FR 39534 at 39539 (July 13, 2006) (adopting a rule to permit 
security futures to be based on individual debt securities or a 
narrow-based security index comprised of such securities).
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C. Cost-Benefit Considerations

1. Introduction
    Section 15(a) of the CEA requires the CFTC to consider the costs 
and benefits of its actions before promulgating a regulation under the 
CEA or issuing certain orders.\76\ CEA section 15(a) further specifies 
that the costs and benefits shall be evaluated in light of five broad 
areas of market and public concern: (1) Protection of market 
participants and the public; (2) efficiency, competitiveness, and 
financial integrity of futures markets; (3) price discovery; (4) sound 
risk management practices; and (5) other public interest 
considerations. The CFTC considers the costs and benefits resulting 
from its discretionary determinations with respect to the section 15(a) 
factors below.
---------------------------------------------------------------------------

    \76\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    Where reasonably feasible, the CFTC has endeavored to estimate 
quantifiable costs and benefits. Where quantification is not feasible, 
the CFTC identifies and describes costs and benefits qualitatively.
    The CFTC requests comment on the costs and benefits associated with 
the proposed rule amendments. In particular, the CFTC requests that 
commenters provide data and any other information or statistics that 
the commenters relied on to reach any conclusions regarding the CFTC's 
proposed considerations of costs and benefits.
2. Economic Baseline
    The CFTC's economic baseline for this proposed rule amendment 
analysis is the SFP position limits rule requirement that exists today. 
In the 2001 Final SFP Rules, the Commission adopted an SFP position 
limits rule that is consistent with the statutory requirements of CEA 
section 2(a)(1)(D). In particular, CEA section 2(a)(1)(D)(i)(VII) 
requires generally that

[[Page 36809]]

trading in an SFP is not readily susceptible to manipulation of the 
price of that SFP or its underlying security. The CFTC regulation that 
is in effect currently states that, ``the [DCM] shall have rules in 
place establishing position limits or position accountability 
procedures for the expiring futures contract month.'' \77\ The 2001 
Final SFP Rules also provide criteria for a maximum level of position 
limits and criteria that permit a DCM to adopt an exchange rule for 
position accountability in lieu of position limits.\78\ In addition, 
the 2001 Final SFP Rules permit a DCM to approve exemptions from 
position limits pursuant to exchange rules that are consistent with 
CFTC regulation 150.3.
---------------------------------------------------------------------------

    \77\ 17 CFR 41.25(a)(3).
    \78\ 17 CFR 41.25(a)(3).
---------------------------------------------------------------------------

    The CFTC will analyze the costs and benefits of the rules in this 
proposal against the current default net position limit level of 13,500 
(100-share) contracts; or a higher net position limit level of 22,500 
(100-share) contracts for equity SFPs meeting either a criterion of at 
least 20 million shares of average daily trading volume, or criteria of 
at least 15 million shares of average daily trading volume and more 
than 40 million shares of the underlying security outstanding.
    The current regulation permits (but does not require) a DCM to 
adopt an exchange rule for position accountability in lieu of position 
limits, provided that average daily trading volume in the underlying 
security exceeds 20 million shares and there are more than 40 million 
shares of the underlying security outstanding.
3. Summary of Proposed Requirements
    For equity SFPs, the proposed amendment would increase the default 
position limit level from 13,500 (100-share) contracts to 25,000 (100-
share) contracts. The proposed amendment also permits a DCM to 
establish a higher position limit level than 25,000 (100-share) 
contracts, equivalent to 12.5 percent of estimated deliverable supply 
of the underlying security (which, under proposed guidance, should not 
exceed the free float of the underlying security). In connection with 
this change, a DCM would be required to estimate deliverable supply at 
least semi-annually, rather than to calculate the average daily trading 
volume at least monthly.
    Also for equity SFPs, the proposed amendment would change one of 
the criteria that permit a DCM to adopt an exchange rule for position 
accountability in lieu of position limits, from more than 40 million 
shares of the underlying security outstanding, to an estimated 
deliverable supply of more than 40 million shares. The proposal 
generally would retain the other criterion, namely six-month average 
daily trading volume in the underlying security exceeding 20 million 
shares, but convert that criterion to 2.5 billion shares of six-month 
total trading volume, based on 125 trading days in a typical six-month 
period.
    For physically-delivered basket equity SFPs, the proposed amendment 
would change the criteria for the position limit to the underlying 
security with the lowest estimated deliverable supply, from the 
security in the index with the lowest average daily trading volume. The 
proposed amendment also would clarify that an appropriate adjustment 
would be made to the level of the limit for a contract size different 
than 100 shares per underlying security.
    For SFPs that are cash settled to a narrow-based security index of 
equity securities, the proposed amendment provides guidance that a DCM 
may set the limit level to that of a similar narrow-based security 
index equity option. The proposal also provides guidance and an 
acceptable practice, which would provide a safe harbor for a DCM itself 
to set such a limit level.
    For SFPs in debt securities, the proposal would establish a 
requirement that a DCM must adopt a position limit either net or on the 
same side of the market, and would provide guidance that the level of 
such limit generally should be set no greater than the equivalent of 
12.5 percent of the par value of the estimated deliverable supply of 
the underlying debt security. There currently are no SFPs in debt 
securities listed for trading.
    The proposal would establish a required minimum position limit time 
period beginning no later than the first day that a holder of a long 
position may be assigned a delivery notice, if such period is longer 
than the last five trading days, where the SFP permits delivery before 
the close of trading. There currently are no SFPs listed for trading 
that provide for delivery before the close of trading.
    The proposed amendment would provide DCMs with the discretion to 
alter the basis for applying a position limit from a net position to a 
gross position on the same side of the market.\79\
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    \79\ In this regard, OneChicago, LLC (``OneChicago''), a DCM 
listing SFPs, permits concurrent long and short positions to be 
held. See OneChicago exchange rule 424, available at https://www.onechicago.com/wp-content/uploads/content/OneChicago_Current_Rulebook.pdf.
---------------------------------------------------------------------------

    The proposal would establish guidance that a DCM may adopt an 
exchange rule for position accountability in addition to an exchange 
rule for a position limit.
    The proposal would amend the guidance for exemptions from position 
limits by changing the reference to CFTC regulation 150.3, regarding 
exemptions to federal position limits, to CFTC regulation 150.5, 
regarding guidance for exchange-set limits. The proposal also would add 
guidance for exemptions from position limits to permit a DCM to provide 
exemptions consistent with those of a NSE regarding securities options 
position limits or exercise limits.
    The proposal would amend the requirements for re-setting levels of 
position limits by changing the required review period from monthly to 
semi-annually; and imposing a requirement that a DCM must lower the 
position limit for an SFP with data that no longer justifies a higher 
limit level, rather than guidance that a DCM may lower such position 
limit. The proposal also would make clear that a DCM must impose a 
position limit for an SFP with data that no longer justifies an 
exchange rule for position accountability in lieu of a position limit. 
The proposal would continue to permit a DCM to use discretion as to 
whether to increase the level of a position limit for an SFP with data 
that justifies a higher level.
    The proposal would establish a general definition of estimated 
deliverable supply, consistent with the guidance on estimating 
deliverable supply in appendix C to part 38, and provide guidance on 
estimating delivery supply that is specific to an SFP.
    Finally, the proposal would establish a definition of same side of 
the market, for clarity in the proposed limit levels on a gross basis. 
The definition would distinguish long positions for an SFP in the same 
security from short positions in an SFP in the same security.\80\
---------------------------------------------------------------------------

    \80\ These two definitions would be added into a new paragraph 
(a) of 17 CFR 41.25; in conjunction with the addition of the new 
paragraph (a), current paragraphs (a) through (d) would be re-
designated as paragraphs (b) through (e).
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4. Costs
    The proposal would as a general matter reduce costs relative to the 
existing Commission regulation 41.25(a)(3),\81\ since it will reduce 
the frequency of hedge exemption requests (as discussed in the benefits 
section) and reduce the frequency of required DCM reviews of position 
limits from monthly to semi-annually. Under the

[[Page 36810]]

proposal, DCMs that list SFPs for trading would continue to be required 
to adopt position limits or position accountability, but the proposal 
would generally increase the levels of position limits. The Commission 
preliminarily believes that the proposal would impose certain costs on 
such DCMs, and that these costs are necessary to establish appropriate 
position limits or position accountability trigger levels based on 
deliverable supply and such additional criteria that the listing DCM 
determines to be appropriate. The Commission also believes that these 
costs are comparable to those incurred under current regulations 
(whereby DCMs must calculate average daily trading volume) and notes 
that these costs will be incurred only semi-annually under the proposal 
rather than monthly as under current regulations. The Commission 
believes that DCMs would be able to exercise control over the extent of 
these costs depending on the degree of standardization such DCMs use to 
determine position limits and accountability and the Commission 
anticipates that DCMs will choose from among the lower-cost options. 
For example, a DCM could, consistent with the proposal, adopt a simple 
rule for equity securities based on the number of free-float 
outstanding shares. For equity securities, free-float information is 
readily available on certain publicly-available market websites and on 
Bloomberg terminals and similar services (which DCMs are likely to have 
access to for other business reasons). Reducing the frequency with 
which DCMs are required to review position limits and accountability to 
semi-annually from monthly will reduce costs to DCMs. Thus, the 
Commission anticipates that estimating deliverable supply would not be 
more costly (and would likely be less costly) than estimating average 
daily trading volume as required under current regulations.
---------------------------------------------------------------------------

    \81\ Re-designated under the proposal as 17 CFR 41.25(b)(3).
---------------------------------------------------------------------------

    The Commission notes that under the proposed rule, DCMs have the 
discretion to implement the default position limit of 25,000 contracts 
regardless of deliverable supply and that this may result in position 
limit levels in some contracts greater than 12.5 percent of deliverable 
supply. However, this discretion is limited by Core Principle 5 (which 
requires DCMs to set position levels at necessary and appropriate 
levels to deter manipulation) and by Core Principle 3 (which requires 
that DCMs may only list contracts that are not readily susceptible to 
manipulation). To the extent that DCMs comply with these core 
principles, this DCM discretion should not impair the protection of 
market participants and the public or otherwise impose significant 
costs on the markets for SFPs market or related securities.
    To the extent that a DCM lists equity SFPs on deliverable baskets, 
the costs of implementing the proposed position limit provisions for 
such SFPs would be similar to the costs of the analogous provisions for 
single stock SFPs, but there are no current costs associated with those 
proposed changes to the regulations since such SFPs are not currently 
listed for trading. There are also no listed SFPs at this time on debt 
securities. To the extent that there is less publicly-available 
information related to the deliverable supply of debt securities, 
estimating deliverable supply may be more costly for debt securities 
than for equity securities. However, these costs will only be incurred 
in the event that a DCM begins listing security futures on non-exempted 
debt securities. Moreover, these deliverable supply provisions are set 
out as guidance so that DCMs are free to implement less costly methods 
to comply with the rule, which provides only that futures on debt 
securities must have position limits. While DCMs have not listed debt 
security SFPs absent the proposed changes to the regulation, it is 
theoretically possible that the costs associated with estimating 
deliverable supply or otherwise determining position limit levels may 
affect future decisions regarding whether or not to list such SFPs. The 
costs of the proposed regulation for debt securities would be otherwise 
similar to the costs of the proposed regulation for equity securities.
    The proposal to permit DCMs to implement position limits on a net 
basis or on positions on the same side of the market (e.g., on 
physically-delivered and cash settled contracts on the same security, 
should a DCM ever list both types of contracts) would not require DCMs 
to change their current practice, and will thus not impose new costs on 
DCMs. Any change that imposes new costs on market participants would be 
made at the discretion of the DCM.
    The proposal to establish a required minimum position limit time 
period beginning no later than the first day that a holder of a long 
position may be assigned a delivery notice, if such period is longer 
than the last five trading days, in instances where the SFP permits 
delivery before the close of trading currently imposes no costs since 
contracts of this nature are not currently listed for trading. If a DCM 
listed such contracts, the proposal would require market participants 
to incur the costs of complying with position limits or applying for 
hedge exemptions (and would require DCMs to incur the costs of 
reviewing such applications) earlier in the life of the contract than 
absent the proposal.
5. Benefits
    The Commission reviews its regulations to help ensure they keep 
pace with technological developments and industry trends, and to reduce 
regulatory burden where needed. The proposal would allow DCMs to adopt 
position limits that they deem to be appropriate. The Commission 
preliminarily believes that DCMs will adopt position limits that are 
large enough not to significantly inhibit liquidity, but will 
appropriately mitigate against potential manipulations and other 
concerns that may be associated with overly large positions in SFPs. 
Moreover, to the extent that the proposal would lead to position limits 
that are higher than current position limits, the proposal could 
alleviate the costs to hedgers of filing hedge exemptions for positions 
that are larger than a current position limit, but lower than a new 
position limit under the proposal. In that regard, Commission staff 
reviewed the largest positions in SFPs that were held during the 
calendar year 2017 and found that there were 16 positions held during 
the last five trading days of expiring SFP contract months across all 
listed SFPs on OneChicago, currently the only DCM to list SFPs for 
trading. These positions generally appear to have been associated with 
securities lending agreements \82\ and thus appear to have been 
eligible for hedge exemptions. These 16 positions exceeded the current 
applicable limit for their underlying securities of the default 13,500 
contracts. If the proposed default position limit of 25,000 contracts 
had been in effect in 2017, fewer than four positions would have been 
above that default position limit and would have required hedge 
exemptions. While the Commission believes that the monetary cost of 
filing a hedge exemption form is very small for an entity large enough 
to maintain a position that exceeds a position limit (perhaps less than 
$100), it is possible that the burden of filing a hedge exemption may 
discourage hedging at sizes exceeding position limits and, thus, that 
raising position limits may encourage larger hedges. The Commission 
also notes that to the extent SFPs are now or in the future used for

[[Page 36811]]

speculation,\83\ speculators could establish larger positions under the 
proposal without a need for concern about position limits and may thus 
increase their trading activity. Any potential increase in trading 
activity could improve liquidity in the SFP markets.
---------------------------------------------------------------------------

    \82\ OneChicago describes itself on its website, https://onechicago.com, as ``the Securities Finance Exchange'' and states 
that ``single stock futures are ideally suited to replace 
`agreements' in equity repo and securities lending transactions.''
    \83\ As noted above, SFPs may be used for securities finance 
transactions that are not speculative in nature.
---------------------------------------------------------------------------

    Requiring DCMs to set position limits and accountability based on 
semi-annual deliverable supply estimates should help ensure on an 
ongoing basis that position limits and accountability are set at levels 
that are necessary and appropriate to deter manipulation consistent 
with DCM Core Principles 3 and 5.
    The Commission preliminarily believes that the proposed frameworks 
for position limits in SFPs on deliverable equity baskets and debt 
securities (all based on deliverable supply estimates) should help 
ensure that such products, if they are ever listed for trading, are 
reasonably protected from manipulation. Further, the Commission 
preliminarily believes that the proposal may help foster position 
limits consistent with those in analogous securities options (where 
applicable).
    The proposal to permit DCMs to implement position limits on a net 
basis or on positions on the same side of the market (such as 
physically-delivered or cash settled contracts on the same security, 
should a DCM ever list both types of contracts) will give DCMs the 
discretion to implement position limits in a manner that they see fit.
    The proposal to establish a required minimum position limit time 
period beginning no later than the first day that a holder of a long 
position may be assigned a delivery notice, if such period is longer 
than the last five trading days, where the SFP permits delivery before 
the close of trading currently provides no benefits since contracts of 
this nature are not listed for trading. If a DCM listed such contracts, 
the proposal would help ensure that such contracts are not readily 
susceptible to manipulation during the entire delivery period.
6. CEA Section 15(a) Factors
i. Protection of Market Participants and the Public
    The Commission preliminarily believes that this proposal maintains 
the protection of market participants and the public provided by the 
current regulation. The proposal will continue to protect market 
participants and the public by maintaining the requirement that DCMs 
that list SFPs adopt and enforce appropriate position limits or 
position accountability consistent with DCM Core Principle 5 and 
implementing for SFPs the longstanding Commission policy that spot-
month position limits should be set based on estimates of deliverable 
supply. Linking the levels of position limits and accountability to 
deliverable supply protects market participants and the public by 
helping prevent congestion, manipulation, or other problems that can be 
associated with speculative positions in expiring contracts that are 
overly large relative to deliverable supply.
ii. Efficiency, Competitiveness, and Financial Integrity of Markets
    As discussed above, under the proposal, it is reasonable to 
anticipate that many or most SFPs would be subject to higher position 
limits compared to the current position limits. Therefore, hedgers may 
be able to take larger positions without the need to apply for hedge 
exemptions. This also could alleviate the DCM's need to review hedge 
exemptions improving resource allocation efficiency for exchanges and 
certain market participants. Moreover, with less restrictive position 
limits, it is theoretically possible that more traders could be enticed 
into the market and thus improve the liquidity and pricing efficiency 
of the SFP market.
    The current position limit regulation (a default of 13,500 
contracts) often leads to position limits that are tighter than 
analogous position limits for security options (a default of 25,000 
contracts). The proposal would raise the default limit level in SFPs to 
match that in securities options. More closely aligning the position 
limits in SFPs to those in securities options may enhance the 
competitiveness of the SFP market relative to the securities option 
market.
iii. Price Discovery
    The Commission believes that price discovery typically occurs in 
the liquid and generally transparent security markets underlying 
existing SFPs rather than the relatively low-volume SFPs themselves. 
Nevertheless, as noted above, to the extent that trading activity in 
SFP markets increases due to less restrictive position limits, the 
price discovery function of SFPs could be enhanced by reducing 
liquidity risk and thereby facilitating arbitrage between the 
underlying security and SFP markets.
iv. Sound Risk Management Practices
    The current position limit regulation often leads to position 
limits that are tighter than analogous position limits for security 
options. It is conceivable that this could discourage potential hedgers 
or other risk managers from using SFPs rather than security options 
because of burdens associated with the hedge exemption process. Risk 
managers might also find that the liquidity risk in the current SFP 
market is too high, due to a lack of speculators in the SFP market 
(among other causes). In this regard, it is possible that the current 
position limits might be too tight for speculators to perform 
adequately their role of providing liquidity in a futures market. 
Because the proposal raises the default limit to 25,000 contracts to 
match the default in security options, and thus would likely lead to 
higher position limits for many SFPs, it is possible that both risk 
managers and speculators enter or increase trading in the SFP market 
under the proposal.
v. Other Public Interest Considerations
    The Commission has not identified any additional public interest 
considerations associated with the proposal.
7. Consideration of Alternatives
    The Commission considered regulations that would require DCMs to 
conform the position limits in SFPs to those in securities options to a 
greater degree than under the proposal (consistent with comments to the 
original SFP rule proposal), including applying position limits 
throughout the life of the contract (rather than only in the last five 
trading days) and no longer permitting position accountability for SFPs 
on securities with higher trading volume and deliverable supply. The 
Commission believes that permitting position accountability for certain 
SFPs and only requiring spot month limits is consistent with Core 
Principle 5 and that these requirements are sufficient to ensure that 
SFPs are not readily susceptible to manipulation as required by Core 
Principle 3. Thus, not permitting position accountability and requiring 
DCMs to apply position limits throughout the life of the contract would 
significantly increase costs on market participants while not 
significantly enhancing protection of market participants and the 
public or providing significant benefits beyond those of the proposed 
position limits framework.
    The Commission also considered not setting default position limits 
for equity

[[Page 36812]]

SFPs and simply requiring that position limits and accountability be 
set based on deliverable supply, as is done in many other futures 
products. However, the Commission preliminarily determined not to make 
such a proposal because some exchanges and market participants (based 
on past comments) \84\ appear to believe that there are benefits to 
conforming position limits in SFPs to those in securities options to 
the extent practicable.
---------------------------------------------------------------------------

    \84\ See supra discussion of the 2001 Final SFP Rules.
---------------------------------------------------------------------------

8. Request for Comments
    The Commission invites public comment on its cost-benefit 
considerations, including the CEA section 15(a) factors described 
above. Commenters are also invited to submit any data or other 
information that they may have quantifying or qualifying the costs and 
benefits of the proposal with their comment letters.
    The Commission specifically seeks comment on the following:
    1. Are there alternatives to the proposal (whether discussed in 
this release or not) that would be superior from a cost-benefit 
standpoint?
    2. Would the proposal affect costs for those market participants 
that seek hedge exemptions?
    3. Would DCMs that list for trading SFPs face additional costs in 
adopting and setting position limits and position accountability levels 
for SFPs under the proposal that are not discussed in this 
consideration of costs and benefits?
    4. Do DCMs and market participants expect to see benefits under the 
proposal that are not discussed in this consideration of costs and 
benefits? Please quantify or describe such benefits.
    5. Should the Commission eliminate default position limits for 
equity SFPs and instead simply require that position limits and 
accountability be set based on deliverable supply, as is done in many 
other futures products?
    6. Is it feasible to estimate deliverable supply for debt 
securities at reasonable cost?
    7. Are there benefits associated with the Commission implementing 
rules for types of SFPs that are not currently listed for trading? Does 
implementing such rules have the potential to impose costs associated 
with possibly deterring innovation?

D. Anti-Trust Considerations

    CEA Section 15(b) requires the Commission to take into 
consideration the public interest to be protected by the antitrust laws 
and endeavor to take the least anticompetitive means of achieving the 
objectives, polices and purposes of the CEA, in issuing any order or 
adopting any Commission rule or regulation (including any exemption 
under section 4(c) or 4c(b)), or in requiring or approving any bylaw, 
rule, or regulation of a contract market or registered futures 
association established pursuant to CEA section 17.\85\
---------------------------------------------------------------------------

    \85\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The Commission believes that the public interest to be protected by 
the antitrust laws is generally to protect competition. The Commission 
requests comment on whether the proposal implicates any other specific 
public interest to be protected by the antitrust laws. The Commission 
has considered the proposal to determine whether it is anticompetitive 
and has preliminarily identified no anticompetitive effects. The 
Commission requests comment on whether the proposal is anticompetitive 
and, if it is, what the anticompetitive effects are.
    Because the Commission has preliminarily determined that the 
proposal is not anticompetitive and has no anticompetitive effects, the 
Commission has not identified any less anticompetitive means of 
achieving the purposes of the Act. The Commission requests comment on 
whether there are less anticompetitive means of achieving the relevant 
purposes of the Act that would further the objective of this proposal, 
such as leveling the regulatory playing field between SFPs and security 
options listed on NSEs.

List of Subjects in 17 CFR Part 41

    Position accountability, Position limits, Security futures 
products.

    For the reasons discussed in the preamble, the Commodity Futures 
Trading Commission proposes to amend 17 CFR part 41 as set forth below:

PART 41--SECURITY FUTURES PRODUCTS

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1. The authority citation for part 41 continues to read as follows:

    Authority:  Sections 206, 251 and 252, Pub. L. 106-554, 114 
Stat. 2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).

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2. In Sec.  41.25:
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a. Redesignate paragraphs (a) through (d) as paragraphs (b) through 
(e);
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b. Add new paragraph (a);
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c. Revise newly redesignated paragraphs (b)(3), (c)(2) and (3), and 
(e).
    The addition and revisions read as follows:


Sec.  41.25  Additional conditions for trading for security futures 
products.

    (a) Definitions. For purposes of this section:
    Estimated deliverable supply means the quantity of the security 
underlying a security futures product 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 during the specified 
delivery period. For guidance on estimating deliverable supply, 
designated contract markets may refer to appendix A of this subpart.
    Same side of the market means the aggregate of long positions in 
physically-delivered security futures products and cash-settled 
security futures products, in the same security, and, separately, the 
aggregate of short positions in physically-delivered security futures 
products and cash-settled security futures products, in the same 
security.
    (b) * * *
    (3) Speculative position limits. A designated contract market shall 
have rules in place establishing position limits or position 
accountability procedures for the expiring futures contract month as 
specified in this paragraph (b)(3).
    (i) Limits for equity security futures products. For a security 
futures product on a single equity security, including a security 
futures product on an underlying security that represents ownership in 
a group of securities, e.g., an exchange traded fund, a designated 
contract market shall adopt a position limit no greater than 25,000 
100-share contracts (or the equivalent if the contract size is 
different than 100 shares), either net or on the same side of the 
market, applicable to positions held during the last five trading days 
of an expiring contract month; except where:
    (A) For a security futures product on a single equity security 
where the estimated deliverable supply of the underlying security 
exceeds 20 million shares, a designated contract market may adopt, if 
appropriate in light of the liquidity of trading in the underlying 
security, a position limit no greater than the equivalent of 12.5 
percent of the estimated deliverable supply of the underlying security, 
either net or on the same side of the market, applicable to positions 
held during the last five trading days of an expiring contract month; 
or
    (B) For a security futures product on a single equity security 
where the six-month total trading volume in the underlying security 
exceeds 2.5 billion shares and there are more than 40

[[Page 36813]]

million shares of estimated deliverable supply, a designated contract 
market may adopt a position accountability rule, either net or on the 
same side of the market, applicable to positions held during the last 
five trading days of an expiring contract month. Upon request by a 
designated contract market, traders who hold positions greater than 
25,000 100-share contracts (or the equivalent if the contract size is 
different than 100 shares), or such lower level specified pursuant to 
the rules of the designated contract market, must provide information 
to the designated contract market and consent to halt increasing their 
positions when so ordered by the designated contract market.
    (ii) Limits for physically-delivered basket equity security futures 
products. For a physically-delivered security futures product on more 
than one equity security, e.g., a basket of deliverable securities, a 
designated contract market shall adopt a position limit, either net or 
on the same side of the market, applicable to positions held during the 
last five trading days of an expiring contract month and the criteria 
in paragraph (b)(3)(i) of this section must apply to the underlying 
security with the lowest estimated deliverable supply. For a 
physically-delivered security futures product on more than one equity 
security with a contract size different than 100 shares per underlying 
security, an appropriate adjustment to the limit must be made. If each 
of the underlying equity securities in the basket of deliverable 
securities is eligible for a position accountability level under 
paragraph (b)(3)(i)(B) of this section, then the security futures 
product is eligible for a position accountability level in lieu of 
position limits.
    (iii) Limits for cash-settled equity index security futures 
products. For a security futures product cash settled to a narrow-based 
security index of equity securities, a designated contract market shall 
adopt a position limit, either net or on the same side of the market, 
applicable to positions held during the last five trading days of an 
expiring contract month. For guidance on setting limits for a cash-
settled equity index security futures product, designated contract 
markets may refer to section (b) of appendix A of this subpart.
    (iv) Limits for debt security futures products. For a security 
futures product on one or more debt securities, a designated contract 
market shall adopt a position limit, either net or on the same side of 
the market, applicable to positions held during the last five trading 
days of an expiring contract month. For guidance on setting limits for 
a debt security futures product, designated contract markets may refer 
to section (c) of appendix A of this subpart.
    (v) Required minimum position limit time period. For position 
limits required under this section where the security futures product 
permits delivery before the termination of trading, a designated 
contract market shall apply such position limits for a period beginning 
no later than the first day that long position holders may be assigned 
delivery notices, if such period is longer than the last five trading 
days of an expiring contract month.
    (vi) Requirements for re-setting levels of position limits. A 
designated contract market shall calculate estimated deliverable supply 
and six-month total trading volume no less frequently than semi-
annually.
    (A) If the estimated deliverable supply data supports a lower 
speculative limit for a security futures product, then the designated 
contract market shall lower the position limit for that security 
futures product pursuant to the submission requirements of Sec.  41.24. 
If the data require imposition of a reduced position limit for a 
security futures product, the designated contract market may permit any 
trader holding a position in compliance with the previous position 
limit, but in excess of the reduced limit, to maintain such position 
through the expiration of the security futures contract; provided, that 
the designated contract market does not find that the position poses a 
threat to the orderly expiration of such contract.
    (B) If the estimated deliverable supply or six-month total trading 
volume data no longer supports a position accountability rule in lieu 
of a position limit for a security futures product, then the designated 
contract market shall establish a position limit for that security 
futures product pursuant to the submission requirements of Sec.  41.24.
    (C) If the estimated deliverable supply data supports a higher 
speculative limit for a security futures product, as provided under 
paragraph (b)(3)(i)(A) of this section, then the designated contract 
market may raise the position limit for that security futures product 
pursuant to the submission requirements of Sec.  41.24.
    (vii) Restriction on netting of positions. If the designated 
contract market lists both physically-delivered contracts and cash 
settled-contracts in the same security, it shall not permit netting of 
positions in the physically-delivered contract with that of the cash-
settled contract for purposes of determining applicability of position 
limits.
    (c) * * *
    (2) Notwithstanding paragraph (c)(1) of this section, if an opening 
price for one or more securities underlying a security futures product 
is not readily available, the final settlement price of the security 
futures product shall fairly reflect:
    (i) The price of the underlying security or securities during the 
most recent regular trading session for such security or securities; or
    (ii) The next available opening price of the underlying security or 
securities.
    (3) Notwithstanding paragraph (c)(1) or (2) of this section, if a 
derivatives clearing organization registered under Section 5b of the 
Act or a clearing agency exempt from registration pursuant to Section 
5b(a)(2) of the Act, to which the final settlement price of a security 
futures product is or would be reported determines, pursuant to its 
rules, that such final settlement price is not consistent with the 
protection of customers and the public interest, taking into account 
such factors as fairness to buyers and sellers of the affected security 
futures product, the maintenance of a fair and orderly market in such 
security futures product, and consistency of interpretation and 
practice, the clearing organization shall have the authority to 
determine, under its rules, a final settlement price for such security 
futures product.
* * * * *
    (e) Exemptions. The Commission may exempt a designated contract 
market from the provisions of paragraphs (b)(2) and (c) of this 
section, either unconditionally or on specified terms and conditions, 
if the Commission determines that such exemption is consistent with the 
public interest and the protection of customers. An exemption granted 
pursuant to this paragraph shall not operate as an exemption from any 
Securities and Exchange Commission rules. Any exemption that may be 
required from such rules must be obtained separately from the 
Securities and Exchange Commission.
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3. Add appendix A to subpart C to read as follows:

Appendix A to Subpart C of Part 41--Guidance on and Acceptable 
Practices for Position Limits and Position Accountability for Security 
Futures Products

    (a) Guidance for estimating deliverable supply. (1) For an 
equity security, deliverable supply should be no greater than the 
free float of the security.
    (2) For a debt security, deliverable supply should not include 
securities that are committed for long-term agreements (e.g., 
closed-end investment companies, structured products, or similar 
securities).

[[Page 36814]]

    (3) Further guidance on estimating deliverable supply, including 
consideration of whether the underlying security is readily 
available, is found in appendix C to part 38 of this chapter.
    (b) Guidance and acceptable practices for setting limits on 
cash-settled equity index security futures products--(1) Guidance 
for setting limits on cash-settled equity index security futures 
products. For a security futures product cash settled to a narrow-
based security index of equity securities, a designated contract 
market:
    (i) May set the level of a position limit to that of a similar 
equity index option listed on a national security exchange or 
association; or
    (ii) Should consider the deliverable supply of equity securities 
underlying the index, and should consider the index weighting and 
contract multiplier.
    (2) Acceptable practices for setting limits on cash-settled 
equity index security futures products. For a security futures 
product cash settled to a narrow-based security index of equity 
securities weighted by the number of shares outstanding, a 
designated contract market may set a position limit as follows: 
First, determine the limit on a security futures product on each 
underlying equity security pursuant to Sec.  41.25(b)(3)(i); second, 
multiply each such limit by the ratio of the 100-share contract size 
and the shares of the equity securities in the index; and third, 
determine the minimum level from step two and set the limit to that 
level, given a contract size of one U.S. dollar times the index, or 
for a larger contract size, reduce the level proportionately. If 
under these procedures each of the equity securities underlying the 
index is determined to be eligible for position accountability 
levels, the security futures product on the index itself is eligible 
for a position accountability level.
    (c) Guidance and acceptable practices for setting limits on debt 
security futures products--(1) Guidance for setting limits on debt 
security futures products. A designated contract market should set 
the level of a position limit to no greater than the equivalent of 
12.5 percent of the par value of the estimated deliverable supply of 
the underlying debt security. For a security futures product on more 
than one debt security, the limit should be based on the underlying 
debt security with the lowest estimated deliverable supply.
    (2) Acceptable practices for setting limits on debt security 
futures products.
    [Reserved.]
    (d) Guidance on position accountability. A designated contract 
market may adopt a position accountability rule for any security 
futures product, in addition to a position limit rule required or 
adopted under this section. Upon request by the designated contract 
market, traders who hold positions, either net or on the same side 
of the market, greater than such level specified pursuant to the 
rules of the designated contract market must provide information to 
the designated contract market and consent to halt increasing their 
positions when so ordered by the designated contract market.
    (e) Guidance on exemptions from position limits. A designated 
contract market may approve exemptions from these position limits 
pursuant to rules that are consistent with Sec.  150.5 of this 
chapter, or to rules that are consistent with rules of a national 
securities exchange or association regarding exemptions to 
securities option position limits or exercise limits.

    Issued in Washington, DC, on July 24, 2018, by the Commission.
Robert Sidman,
Deputy Secretary of the Commission.

    Note: The following appendices will not appear in the Code of 
Federal Regulations.

Appendices to Position Limits and Position Accountability for Security 
Futures Products--Commission Voting Summary and Commissioner's 
Statement

Appendix 1--Commission Voting Summary

    On this matter, Chairman Giancarlo and Commissioners Quintenz 
and Behnam voted in the affirmative. No Commissioner voted in the 
negative.

Appendix 2--Concurring Statement of Commissioner Rostin Behnam

    I respectfully concur with the Commodity Futures Trading 
Commission's approval of its proposed rule regarding Position Limits 
and Position Accountability for Security Futures Products (the 
``Proposal''). I commend staff on their hard work in producing this 
Proposal, and for their thoughtful responses to my questions. I look 
forward to hearing from market participants and other stakeholders 
regarding the amendments to the existing position limits rules for 
security futures products. In particular, I will be interested in 
comments regarding the appropriateness of increasing the default 
level of equity security futures products position limits from 
13,500 contracts to 25,000 contracts. While today's Proposal only 
would amend the Commission's Part 41 rules regarding security 
futures products, I nonetheless encourage market participants and 
interested stakeholders to consider how the Proposal might impact or 
interplay with the Commission's position limits rules in Part 150 
and any future amendments to them.

[FR Doc. 2018-16079 Filed 7-30-18; 8:45 am]
 BILLING CODE 6351-01-P