71626 Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / Rules and Regulations 

1See Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Public Law 111–203, 124 

Stat. 1376 (2010). The text of the Dodd-Frank Act 

may be accessed at http://www.cftc.gov/Law

Regulation/OTCDERIVATIVES/index.htm. 

2Pursuant to Section 701 of the Dodd-Frank Act, 

Title VII may be cited as the ‘‘Wall Street 

Transparency and Accountability Act of 2010.’’ 

3 7 U.S.C. 1 et seq. 

4Section 1a(20) of the CEA defines the term 

‘‘exempt commodity’’ to mean a commodity that is 

not an excluded or an agricultural commodity. 7 

U.S.C. 1a(20). Section 1a(19) defines the term 

‘‘excluded commodity’’ to mean, among other 

things, an interest rate, exchange rate, currency, 

credit risk or measure, debt or equity instrument, 

measure of inflation, or other macroeconomic index 

or measure. 7 U.S.C. 1a(19). Although the CEA does 

not specifically define the term ‘‘agricultural 

commodity,’’ section 1a(9) of the CEA, 7 U.S.C. 

1a(9), enumerates a non-exclusive list of 

agricultural commodities, and the Commission 

recently added section 1.3(zz) to the Commission’s 

regulations defining the term ‘‘agricultural 

commodity.’’ See 76 FR 41048, Jul. 13, 2011. 

5See Position Limits for Derivatives, 76 FR 4752, 

4753 Jan. 26, 2011. Specifically, the Commission 

proposed to withdraw its part 150 regulations, 

which set out the current position limit and 

aggregation policies, and replace them with new 

part 151 regulations. 

6See e.g., Letter from Professor Greenberger, 

University of Maryland School of Law on March 28, 

2011 (‘‘CL–Prof. Greenberger’’) at 6–7; and 

Petroleum Marketers Association of America 

(‘‘PMAA’’) and New England Fuel Institute 

(‘‘NEFI’’) on March 28, 2011 (‘‘CL–PMAA/NEFI’’) at 

5. Also, over 6,000 comment letters urged the 

Commission to ‘‘act quickly’’ to adopt position 

limits. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 150 and 151 

RIN 3038–AD17 

Position Limits for Futures and Swaps 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Final rule and interim final rule. 

SUMMARY: On January 26, 2011, the 

Commodity Futures Trading 

Commission (‘‘Commission’’ or 

‘‘CFTC’’) published in the Federal 

Register a notice of proposed 

rulemaking (‘‘proposal’’ or ‘‘Proposed 

Rules’’), which establishes a position 

limits regime for 28 exempt and 

agricultural commodity futures and 

options contracts and the physical 

commodity swaps that are economically 

equivalent to such contracts. The 

Commission is adopting the Proposed 

Rules, with modifications. 

DATES: Effective date: The effective date 

for this final rule and the interim rule 

at § 151.4(a)(2) is January 17, 2012. 

Comment date: The comment period 

for the interim final rule will close 

January 17, 2012. 

Compliance dates: For compliance 

dates for these final rules, see 

SUPPLEMENTARY INFORMATION. 

FOR FURTHER INFORMATION CONTACT: 

Stephen Sherrod, Senior Economist, 

Division of Market Oversight, at (202) 

418–5452, ssherrod@cftc.gov; B. Salman 

Banaei, Attorney, Division of Market 

Oversight, at (202) 418–5198, 

bbanaei@cftc.gov, Neal Kumar, 

Attorney, Office of General Counsel, at 

(202) 418–5353, nkumar@cftc.gov, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Background 

A. Introduction 

On July 21, 2010, President Obama 

signed the Dodd-Frank Wall Street 

Reform and Consumer Protection Act 

(‘‘Dodd-Frank Act’’).1 Title VII of the 

Dodd-Frank Act 2 amended the 

Commodity Exchange Act (‘‘CEA’’) 3 to 

establish a comprehensive new 

regulatory framework for swaps and 

security-based swaps. The legislation 

was enacted to reduce risk, increase 

transparency, and promote market 

integrity within the financial system by, 

among other things: (1) Providing for the 

registration and comprehensive 

regulation of swap dealers and major 

swap participants; (2) imposing clearing 

and trade execution requirements on 

standardized derivative products; (3) 

creating robust recordkeeping and realtime reporting regimes; and (4) 

enhancing the Commission’s 

rulemaking and enforcement authorities 

with respect to, among others, all 

registered entities and intermediaries 

subject to the Commission’s oversight. 

As amended by the Dodd-Frank Act, 

section 4a(a)(2) of the CEA mandates 

that the Commission establish position 

limits for futures and options contracts 

traded on a designated contract market 

(‘‘DCM’’) within 180 days from the date 

of enactment for exempt commodities 

and 270 days from the date of enactment 

for agricultural commodities.4 Under 

section 4a(a)(5), Congress required the 

Commission to concurrently establish 

limits for swaps that are economically 

equivalent to such futures or options 

contracts traded on a DCM. In addition, 

the Commission must establish 

aggregate position limits for contracts 

based on the same underlying 

commodity that include, in addition to 

the futures and options contracts: (1) 

Contracts listed by DCMs; (2) swaps that 

are not traded on a registered entity but 

which are determined to perform or 

affect a ‘‘significant price discovery 

function’’; and (3) foreign board of trade 

(‘‘FBOT’’) contracts that are price-linked 

to a DCM or swap execution facility 

(‘‘SEF’’) contract and made available for 

trading on the FBOT by direct access 

from within the United States. 

To implement the expanded mandate 

under the Dodd-Frank Act, the 

Commission issued Proposed Rules that 

would establish federal position limits 

and limit formulas for 28 physical 

commodity futures and option contracts 

(‘‘Core Referenced Futures Contracts’’) 

and physical commodity swaps that are 

economically equivalent to such 

contracts (collectively, ‘‘Referenced 

Contracts’’).5 The Commission also 

proposed aggregate position limits that 

would apply across different trading 

venues to contracts based on the same 

underlying commodity. In addition to 

developing position limits for the 

Referenced Contracts, the Proposed 

Rules would implement a new statutory 

definition of bona fide hedging 

transactions, revise the standards for 

aggregation of positions, and establish 

position visibility reporting 

requirements. The Proposed Rules 

would require DCMs and SEFs that are 

trading facilities to set position limits 

for exempt and agricultural commodity 

contracts and establish acceptable 

practices for position limits and 

position accountability rules in other 

commodities. 

B. Overview of Public Comments 

The Commission received 15,116 

comments from a broad range of the 

industry and other interested persons, 

including DCMs, trade organizations, 

banks, investment companies, 

commercial end-users, academics, and 

the general public. Of the total 

comments received, approximately 100 

comment letters provided detailed 

comments and recommendations 

concerning whether, and how, the 

Commission should exercise its 

authority to set position limits pursuant 

to amended section 4a, as well as other 

specific aspects of the proposal. The 

majority of the over 15,000 comment 

letters received were generally 

supportive of the proposal. Many urged 

the Commission promptly to ‘‘restore 

balance to commodities markets.’’ 6 On 

the other hand, approximately 55 

commenters requested that the 

Commission either significantly alter or 

withdraw the proposal. The 

Commission considered all of the 

comments received in formulating the 

final regulations. 


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Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / Rules and Regulations 71627 

7A more detailed background on the statutory 

and legislative history is provided in the proposal. 

See 76 FR at 4753–4755. 

8See e.g., CME Group, Inc. (‘‘CME I’’) on March 

28, 2011 (‘‘CL–CME I’’) at 4, 7. 

9See section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1). 

10As further detailed in the Proposed Rules, this 

long-standing statutory mandate is based on 

Congressional findings that market disruptions can 

result from excessive speculative trading. In the 

1920s and into the 1930s, a series of studies and 

reports found that large speculative positions in the 

futures markets for grain, even without 

manipulative intent, can cause ‘‘disturbances’’ and 

‘‘wild and erratic’’ price fluctuations. To address 

such market disturbances, Congress was urged to 

adopt position limits to restrict speculative trading 

notwithstanding the absence of manipulation. In 

1936, based upon such reports and testimony, 

Congress provided the Commodity Exchange 

Authority (the predecessor of the Commission) with 

the authority to impose Federal speculative position 

limits. In doing so, Congress expressly observed the 

potential for market disruptions resulting from 

excessive speculative trading alone and the need for 

measures to prevent or minimize such occurrences. 

This mandate and underlying Congressional 

determination of its need has been re-affirmed 

through successive amendments to the CEA. See 76 

FR at 4754–55. 

11 In particular, Congress expanded the scope of 

transactions that could be subject to position limits 

to include swaps traded on a DCM or SEF, and 

swaps not traded on a DCM or SEF, but that 

perform or affect a significant price discovery 

function with respect to registered entities. See 

section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1). 

Congress also directed the Commission to establish 

aggregate limits on the amount of positions held in 

the same underlying commodity across markets for 

DCM contracts, FBOTs (with respect to certain 

linked contracts) and swaps that perform a 

‘‘significant price discovery function.’’ section 

4a(a)(6) of the CEA, 7 U.S.C. 6a(a)(6). 

12See sections 4a(a)(3) to 4a(a)(5) of the CEA, 7 

U.S.C. 6a(a)(3) to 6a(a)(5). Additionally, new section 

4a(a)(2)(c) states that, in establishing limits, the 

Commission ‘‘shall strive to ensure’’ that FBOTs 

trading in the same commodity will be subject to 

‘‘comparable’’ limits and that any limits imposed by 

the Commission will not cause the price discovery 

in the commodity to shift to FBOTs. 

13See section 4a(a)(4) of the CEA, 7 U.S.C. 

6a(a)(4). 

14See section 4a(a)(7) of the CEA, 7 U.S.C. 

6a(a)(7). 

15See 76 FR at 4754. 

16Section 4a(a)(3)(B)(i) of the CEA, 7 U.S.C. 

6a(a)(3)(B)(i). 

17See e.g., American Public Gas Association 

(‘‘APGA’’) on March 28, 2011 (‘‘CL–APGA’’) at 2– 

3; Americans for Financial Reform (‘‘AFR’’) on 

March 28, 2011 (‘‘CL–AFR’’) at 5; U.S. Senator 

Harkin on December 15, 2010 (‘‘CL–Sen. Harkin’’). 

See also CL–PMAA/NEFI supra note 6 at 4–5. 

18CL–Prof. Greenberger supra note 6 at 4 

(emphasis added). 

II. The Final Rules 

A. Statutory Framework 

In the proposal, the Commission 

provided general background on the 

scope of its statutory authority under 

section 4a (as amended by the DoddFrank Act), together with the related 

legislative history, in support of the 

Proposed Rules.7 Many commenters 

responded with their views and 

interpretations of the Commission’s 

mandate under the CEA, and in 

particular whether the Commission 

must first make findings that position 

limits are ‘‘necessary’’ to diminish, 

eliminate, or prevent undue burdens on 

interstate commerce resulting from 

excessive speculation before imposing 

them.8

As discussed in the proposal, CEA 

section 4a states that ‘‘excessive 

speculation’’ in any commodity traded 

on a futures exchange ‘‘causing sudden 

or unreasonable fluctuations or 

unwarranted changes in the price of 

such commodity is an undue and 

unnecessary burden on interstate 

commerce’’ and directs the Commission 

to establish such limits on trading ‘‘as 

the Commission finds necessary to 

diminish, eliminate, or prevent such 

burden.’’ 9 This basic statutory mandate 

has remained unchanged since its 

original enactment in 1936 and through 

subsequent amendments to section 4a, 

including the Dodd-Frank Act.10

In section 737 of the Dodd-Frank Act, 

Congress made major changes to CEA 

section 4a; among other things, Congress 

extended the Commission’s reach to the 

heretofore unregulated swaps market.11

In doing so, Congress reinforced and 

reaffirmed the Commission’s broad 

authority to set position limits to 

prevent undue and unnecessary burdens 

associated with excessive speculation. 

Specifically, section 4a, as amended by 

the Dodd-Frank Act, provides that the 

Commission ‘‘shall’’ set position limits 

‘‘as appropriate’’ and ‘‘to the maximum 

extent practicable, in its discretion’’ in 

order to protect against excessive 

speculation and manipulation while 

ensuring that the markets retain 

sufficient liquidity for bona fide hedgers 

and that their price discovery functions 

are not disrupted.12 Further, the DoddFrank Act amended the CEA to direct 

the Commission to define the relevant 

factors to be considered in identifying 

swaps that serve a ‘‘significant price 

discovery’’ function and thus become 

subject to position limits.13 Congress 

also authorized the Commission to 

exempt persons or transactions 

‘‘conditionally or unconditionally’’ from 

position limits.14

In reaffirming the Commission’s broad 

authority to set position limits, Congress 

also made clear that the Commission 

must impose them expeditiously. Under 

amended section 4a(a)(2), Congress 

directed that the Commission ‘‘shall’’ 

establish limits on the amount of 

positions, as appropriate, that may be 

held by any person in physical 

commodity futures and options 

contracts traded on a DCM. In section 

4a(a)(5), Congress directed the 

Commission to establish, concurrently 

with the limits established under 

section 4a(a)(2), limits on the amount of 

positions, as appropriate, that may be 

held by any person with respect to 

swaps that are economically equivalent 

to the DCM contracts subject to the 

required limits under section 4a(a)(2). 

The Commission was directed to 

establish the limits within 180 days 

after enactment for exempt commodities 

and 270 days after enactment for 

agricultural commodities. 

As discussed in the proposal, the 

Commission construes the amended 

CEA to mandate the Commission to 

impose position limits at the level it 

determines to be appropriate to 

diminish, eliminate, or prevent 

excessive speculation and market 

manipulation.15 In setting such limits, 

the Commission is not required to find 

that an undue burden on interstate 

commerce resulting from excessive 

speculation exists or is likely to occur. 

Nor is the Commission required to make 

an affirmative finding that position 

limits are necessary to prevent sudden 

or unreasonable fluctuations in prices. 

Instead, the Commission must set 

position limits prophylactically, 

according to Congress’ mandate in 

section 4a(a)(2), and, in establishing the 

limits Congress has required, exercise 

its discretion to set a limit that, to the 

maximum extent practicable, will, 

among other things, ‘‘diminish, 

eliminate, or prevent excessive 

speculation.’’ 16

Commenters were divided on the 

scope of the Commission’s authority 

under CEA section 4a. A number of 

commenters supported the view that the 

Dodd-Frank Act, in extending the 

Commission’s authority to swaps, 

imposed on the Commission a 

mandatory obligation to impose position 

limits.17 For example, Professor Michael 

Greenberger stated that ‘‘[s]ection 737 

emphatically provides that the 

Commission ‘shall by rule, regulation, 

or order establish limits on the amount 

of positions, as appropriate, other than 

bona fide hedge positions that may be 

held by any person[.]’ The language 

could not be clearer. The Commission is 

required to establish position limits as 

Congress intentionally used the word, 

‘shall,’ to impose the mandatory 

obligation.’’ 18 Professor Greenberger 

further noted, ‘‘the plain reading of the 

phrase ‘as appropriate’ modifies only 

those position limits mandated to be 

imposed, i.e., the mandatory position 

limits must be promulgated ‘as 

appropriate.’ The term ‘as appropriate’ 

does not modify the heavily emphasized 


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19 Id. at 5. In addition, Professor Greenberger 

noted that 

Section 719 of the Dodd-Frank Act specifically 

requires the Commission ‘to conduct a study of the 

effects of the position limits imposed pursuant to 

the other provisions of this title on excessive 

speculation and on the movement of transactions.’ 

The Commission is required to submit the report 

‘within 12 months after the imposition of position 

limits pursuant to the other provisions of this title.’ 

Why would Congress specifically require the 

Commission to submit a report after imposing 

position limits if it had provided by statute (as 

opponents of position limits mistakenly argue) that 

the data must be available before the position limit 

rule is finally promulgated? The short answer is 

that Congress clearly understood the imminent 

danger excessive speculation and passive betting on 

price direction had caused by uncontrollable 

increases in the prices of energy and agricultural 

commodities. Therefore, the Commission is 

statutorily obligated to impose the ‘appropriate’ 

position limits. 

Id. at 6–7. 

20CL–PMAA/NEFI supra note 6 at 5. See also 

Delta Airlines, Inc. (‘‘Delta’’) on March 28, 2011 

(‘‘CL–Delta’’) at 11. Delta believes that the 

Commission should instead strive to establish 

meaningful speculative position limits using 

sampling and other statistical techniques to make 

reasonable, working assumptions about positions in 

various market segments and refining the 

speculative limits based upon market experience 

and better data as it is developed. See also CL–Sen. 

Harkin supra note 17 at 1 (opposing any delay in 

the implementation of position limits); and 56 

National coalitions and organizations and 28 

International coalitions and organizations from 16 

countries (‘‘ICPO’’) on March 28, 2011 (‘‘CL–ICPO’’) 

at 1 (stating that the proposal regarding position 

limits should be implemented fully). 

21See e.g., CL–CME I supra note 8; Commodity 

Markets Council (‘‘CMC’’) on March 28, 2011 (‘‘CL– 

CMC’’); PIMCO on March 28, 2011 (‘‘CL–PIMCO’’); 

Edison Electric Institute (‘‘EEI’’) and Electric Power 

Supply Association (‘‘EPSA’’) on March 28, 2011 

(‘‘CL–EEI/EPSA’’); BlackRock, Inc. (‘‘BlackRock’’) 

on March 28, 2011 (‘‘CL–BlackRock’’); International 

Working Group on Trade-Finance Linkages 

(‘‘IWGTFL’’) on March 28, 2011(‘‘CL–IWGTFL’’); 

Coalition of Physical Energy Companies (‘‘COPE’’) 

on March 28, 2011 (‘‘CL–COPE’’); Utility Group on 

March 28, 2011 (‘‘CL–Utility Group’’);ISDA/SIFMA 

on March 28, 2011 (‘‘CL–ISDA/SIFMA’’); Futures 

Industry Association (‘‘FIA I’’) on March 25, 2011 

(‘‘CL–FIA I’’); Katten Muchin Rosenman LLP 

(‘‘Katten’’) on March 31, 2011 (‘‘CL–Katten’’); 

Colorado Public Employees’ Retirement (‘‘PERA’’) 

on March28, 2011 (‘‘CL–PERA’’); American 

Petroleum Institute (‘‘API’’) on March 28, 2011 

(‘‘CL–API’’); Sullivan & Cromwell LLP (‘‘Centaurus 

Energy’’) on March 28, 2011 (‘‘CL–Centaurus 

Energy’’); ICI on March 28, 2011 (‘‘CL–ICI’’); 

Morgan Stanley on March 28, 2011 (‘‘CL–Morgan 

Stanley’’); Asset Management Group (‘‘AMG’’), 

Securities Industry and Financial Markets 

Association (‘‘SIFMA’’) on April 5, 2011(‘‘CL– 

SIFMA AMG I’’); World Gold Council (‘‘WGC’’) on 

March 28, 2011 (‘‘CL–WGC’’); and Managed Funds 

Association (‘‘MFA’’) on March 28, 2011 (‘‘CL– 

MFA’’). 

22CME argued the Commission’s interpretation of 

section 4a(a)(1) of the CEA would render the ‘‘as the 

Commission finds are necessary’’ language a 

nullity, effectively replacing it with statutory 

language imposing a lower threshold than is found 

elsewhere in the CEA. See CL–CME I supra note 8 

at 3, citing Keene Corp. v. United States, 508 U.S. 

200, 208 (1993) (‘‘where Congress includes 

particular language in one section of a statute but 

omits it in another * * *, it is generally presumed 

that Congress acts intentionally and purposely in 

the disparate inclusion or exclusion’’ quoting 

Russello v. United States, 464 U.S. 16, 23 (1983). 

23CL–ISDA/SIFMA, supra note 21 at 3; and CL– 

Centaurus Energy, supra note 21 at 2. See also CL– 

COPE supra note 21 at 2–3; and CL–Utility Group 

supra note 21 at 3. Along similar lines, COPE and 

the Utility Group opined that ‘‘the deadline of 180 

days after the date of enactment in clause (B)(i) is 

only triggered upon a determination that such 

limits are appropriate. Congress unambiguously 

modified the word ‘shall’ with the requirement that 

limits only be established ‘as appropriate.’’ Id. 

24CL–CME I, supra note 8 at 11. 

25See also CL–Sen. Harkin, supra note 17 at 1 

(opposing any delay in the implementation of 

position limits); and CL–ICPO, supra note 20 at 1 

(stating that the Proposed Rules regarding position 

limits should be implemented fully). 

26See sections 4a(a)(2)(B)(i)–(ii), 4a(a)(2)(C), and 

4a(a)(3) of the CEA, 7 U.S.C. 6a(a)(2)(B)(i)–(ii), 

6a(a)(2)(C), 6a(a)(3). 

mandate that there ‘shall’ be position 

limits.’’ 19

Other commenters expressed similar 

views, asserting that the Commission is 

not required to demonstrate price 

fluctuations caused by excessive 

speculation or the efficacy of position 

limits in reducing excessive speculation 

or market manipulation. The Petroleum 

Marketers Association of America and 

the New England Fuel Institute 

(‘‘PMAA/NEFI’’) in a joint comment 

letter argued, for example, that 

the purpose of position limits is not to 

punish past wrongdoing, but rather to deter 

and prevent potential future dysfunctions in 

the commodity staples derivatives markets 

and to prevent harm to market participants 

and burdens on interstate commerce. Because 

the purpose of position limits is to prevent 

future violations, the Commission should not 

be required to appreciate the complete and 

precise level of excessive speculation prior to 

taking action.’’20

On the other hand, numerous 

commenters posited that the 

Commission did not adequately 

demonstrate, or perform sufficient 

analysis establishing, the need for or 

appropriateness of the proposed limits 

and related requirements.21 For 

example, according to the CME Group, 

Inc. (‘‘CME’’), 

the CEA sets up a two-pronged approach for 

imposing limits on speculative positions. 

First, [under CEA section 4a(a)(1)] the 

Commission must ‘find’ that any position 

limits are ‘necessary’—a directive that 

Congress reaffirmed in [the Dodd-Frank Act]. 

Second, once the Commission makes the 

‘necessary’ finding, [CEA sections 4a(a)(2)(A) 

and 4a(a)(3) provide that the Commission] 

must establish a particular position limit 

regime only ‘as appropriate’—a statutory 

requirement added by Dodd-Frank.’’22

In this connection, CME and many other 

commenters asserted that because the 

Commission did not make a finding that 

position limits are necessary to prevent 

undue burdens on interstate commerce 

resulting from excessive speculation, it 

did not satisfy the pre-condition to 

establishing position limits. 

Some of these commenters, such as 

the International Swaps and Derivatives 

Association and the Securities Industry 

and Financial Markets Association 

(‘‘ISDA/SIFMA’’) (in a joint comment 

letter) and the Futures Industry 

Association (‘‘FIA’’), argued that the 

Commission is directed to set position 

limits ‘‘as appropriate,’’ and ‘‘as 

appropriate’’ requires empirical 

evidence demonstrating that such limits 

would diminish, eliminate, or prevent 

excessive speculation. FIA claimed that 

in the absence of evidence concerning 

the impact of excessive speculation, it 

would be impossible to set position 

limits that comply with the statutory 

objectives of section 4a(a)(3). Similarly, 

Centaurus Energy Master Fund, LP 

(‘‘Centaurus’’) and ISDA/SIFMA 

commented that the ‘‘as appropriate’’ 

language in section 4a(a)(2)(A) requires 

factual support before imposing position 

limits, and that ‘‘the imposition of 

position limits ‘prophylactically’ is not 

mandated by Dodd-Frank and is not 

supported by the facts.’’ 23

CME also contended that imposing 

position limits on ‘‘economically 

equivalent swaps’’ would be counter to 

Dodd-Frank because it will encourage 

market participants to enter into 

bespoke, uncleared, non-DCM or SEFtraded swaps.24 Finally, CME and other 

commenters, suggested that position 

limits and position accountability levels 

should be set and administered by 

futures exchanges. 

Upon careful consideration of the 

commenters’ views, the Commission 

reaffirms its interpretation of amended 

section 4a. The Commission disagrees 

that it must first determine that position 

limits are necessary before imposing 

them or that it may set limits only after 

it has conducted a complete study of the 

swaps market. Congress did not give the 

Commission a choice. Congress directed 

the Commission to impose position 

limits and to do so expeditiously.25

Section 4a(a)(2)(B) states that the limits 

for physical commodity futures and 

options contracts ‘‘shall’’ be established 

within the specified timeframes, and 

section 4a(a)(2)(5) states that the limits 

for economically equivalent swaps 

‘‘shall’’ be established concurrently with 

the limits required by section 4a(a)(2). 

The congressional directive that the 

Commission set position limits is 

further reflected in the repeated 

references to the limits ‘‘required’’ 

under section 4a(a)(2)(A).26 Section 

4a(a)(6) similarly states, without 

qualification, that the Commission 

‘‘shall’’ establish aggregate position 


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27Section 4a(a)(6) of the CEA directs the 

Commission to impose aggregate limits for contracts 

based on the same underlying commodity across: 

(a) DCM contracts, (b) FBOT contracts offered via 

direct access from inside the United States that are 

linked to contracts listed on a registered entity; and 

(c) swap contracts that perform or affect a 

significant price discovery function (‘‘SPDF’’) with 

respect to registered entities. 7 U.S.C. 6a(a)(6). 

Although the scope of SPDF swaps is currently 

limited to economically equivalent swaps discussed 

herein, the Commission intends to address in a 

subsequent rulemaking, as was discussed in the 

proposal, a process by which SPDF swaps can be 

identified. See Position Limits for Derivatives, 76 

FR 4752, 4753, Jan. 26, 2011. 

28Section 719 of the Dodd-Frank Act requires the 

Commission to submit a report on the effects of the 

position limits imposed pursuant to the other 

provisions of this title. Such a provision gives 

further support to the Commission’s view that 

Congress mandated that the Commission impose 

position limits, setting levels as appropriate, 

because the reporting requirement presupposes that 

limits will be imposed. Congress did not intend the 

Commission to have to demonstrate that such limits 

are ‘‘necessary’’ or that position limits in general are 

‘‘appropriate’’ before imposing them and reporting 

on their operation. See also CL–Prof. Greenberger 

supra note 6 at 6–7. 

29The Commission has applied those limits to 

specified Referenced Contracts based on their high 

levels of open interest and significant notional 

value or their capacity to serve as a reference price 

for a significant number of cash market 

transactions. 

30Consistent with the congressional findings and 

objectives, the Commission has previously set 

position limits without finding excessive 

speculation or an undue burden on interstate 

commerce, and in so doing has expressly stated that 

such additional determinations by the Commission 

were not necessary in light of the congressional 

findings in section 4a of the Act. In its 1981 

rulemaking to require all exchanges to adopt 

position limits for commodities for which the 

Commission itself had not established limits, the 

Commission stated, in response to similar 

comments that it had not made any factual 

determinations that excessive speculation had 

occurred or analytically demonstrated that the 

proposed limits were necessary to prevent excessive 

speculation in the future: 

[T]he prevention of large or abrupt price 

movements which are attributable to the 

extraordinarily large speculative positions is a 

congressionally endorsed regulatory objective of the 

Commission. Further, it is the Commission’s view 

that this objective is enhanced by the speculative 

position limits since it appears that the capacity of 

any contract to absorb the establishment and 

liquidation of large speculative positions in an 

orderly manner is related to the relative size of such 

positions, i.e., the capacity of the market is not 

unlimited. 

Establishment of Speculative Position Limits, 46 

FR 50938, Oct. 16, 1981 (adopting then § 1.61 (now 

part of § 150.5)). The Commission reiterated this 

point in the proposed rulemaking in early 2010, 

before enactment of the Dodd-Frank Act. Federal 

Speculative Position Limits for Referenced Energy 

Contracts and Associated Regulations,75 FR 4144, 

at 4146, 4148–49, Jan. 26, 2010 (‘‘[t] he 

Congressional endorsement [in section 4a] of the 

Commission’s prophylactic use of position limits 

rendered unnecessary a specific finding that an 

undue burden on interstate commerce had actually 

occurred’’ because section 4a(a) represents an 

explicit Congressional finding that extreme or 

abrupt price fluctuations attributable to unchecked 

speculative positions are harmful to the futures 

markets and that position limits can be an effective 

prophylactic regulatory tool to diminish, eliminate 

or prevent such activity’’); withdrawn, 75 FR 50950, 

Aug. 18, 2010. During the consideration of the 

Dodd-Frank Act—as well as in the nearly three 

decades since the Commission issued its 

interpretation of section 4a in 1981—Congress was 

aware of the Commission’s longstanding approach 

to position limits, including its interpretation that 

the Commission is not required to make a predicate 

finding prior to establishing limits. Congress did 

not disturb the language under which the 

Commission previously acted to impose position 

limits, and added new language that makes clear 

that the types of limits described in sections 

4a(a)(2), (a)(5), and (a)(6) are required. 

31The Commission also notes that Congress has 

reauthorized the Commission several times, both 

before and after the Commission established a 

position limit regime, without making a finding that 

position limits were ‘‘necessary’’ to combat 

excessive speculation. In this regard, Congress was 

aware of the Commission’s historical interpretation 

of section 4a and has not elected to amend the 

relevant text, including in the Dodd-Frank Act, of 

that section. If Congress intended a different 

interpretation, Congress would have amended the 

language of section 4a. See Commodity Futures 

Trading Commission v. Schor, 478 U.S. 833, 846 

(1986) (‘‘It is well established that when Congress 

revisits a statute giving rise to a longstanding 

administrative interpretation without pertinent 

change, the ‘congressional failure to revise or repeal 

the agency’s interpretation is persuasive evidence 

that the interpretation is the one intended by 

Congress’’’) citing NLRB v. Bell Aerospace Co., 416 

U.S. 267, 274–275 (1974). 

32Some commenters submitted a number of 

studies and reports addressing the issue of whether 

position limits are effective or necessary to address 

excessive speculation. For the reasons explained 

above, the Commission is not required to make a 

finding as to whether position limits are effective 

or necessary to address excessive speculation. 

Accordingly, these studies and reports do not 

present facts or analyses that are material to the 

Commission’s determinations in finalizing the 

Proposed Rules. A discussion of these studies is 

provided in section III A infra. 

33 76 FR at 4752, 4753. These Core Referenced 

Futures Contracts are: Chicago Board of Trade 

(‘‘CBOT’’) Corn, Oats, Rough Rice, Soybeans, 

Soybean Meal, Soybean Oil and Wheat; Chicago 

Mercantile Exchange Feeder Cattle, Lean Hogs, Live 

Cattle and Class III Milk; Commodity Exchange, Inc. 

Gold, Silver and Copper; ICE Futures U.S. Cocoa, 

Coffee C, FCOJ–A, Cotton No.2, Sugar No. 11 and 

Sugar No. 16; Kansas City Board of Trade (‘‘KCBT’’) 

Hard Winter Wheat; Minneapolis Grain Exchange 

Hard Red Spring Wheat; and New York Mercantile 

Exchange Palladium, Platinum, Light Sweet Crude 

Oil, New York Harbor No. 2 Heating Oil, New York 

Harbor Gasoline Blendstock and Henry Hub Natural 

Gas. 

34CL–EEI/EPSA, supra note 21 at 5. 

limits.27 While some commenters seize 

on the phrase ‘‘as appropriate,’’ which 

appears in sections 4a(a)(2)(A), 4a(a)(3), 

and 4a(a)(5), that phrase, when 

considered in the context of the position 

limits provisions as a whole, is most 

sensibly read as directing the 

Commission to exercise its discretion in 

determining the extent of the limits that 

Congress required the Commission to 

impose.28

In accordance with the statutory 

mandate, the Commission has 

established position limits and has 

exercised its discretion to set position 

limit levels to further the congressional 

objectives set out in section 4a(a)(3)(B) 

based upon the Commission’s 

experience with existing position 

limits.29 In adding section 4a(a)(3)(B), 

Congress reaffirmed the Commission’s 

broad discretion to fix position limit 

levels (and to adopt related 

requirements) aimed at combating 

excessive speculation and market 

manipulation, while also protecting 

market liquidity (for bona fide hedgers) 

and price discovery. The provision 

reflects the Commission’s historical 

approach to setting position limits, and 

it is consistent with the longstanding 

congressional directive in section 

4a(a)(1) that the Commission set 

position limits in its discretion to 

prevent or minimize burdens that could 

result from excessive speculative 

trading.30

In sum, the contention that the 

Commission is required to demonstrate 

that position limits (or position limit 

levels) are necessary is contrary not only 

to the language of, and congressional 

objectives underlying, amended section 

4a, but also to the regulatory history of 

position limits and to the choices 

Congress made in the Dodd-Frank Act 

in light of that history.31

For the reasons stated above, and for 

the reasons provided in the proposal, 

the Commission finds that it has 

authority under CEA section 4a, as 

amended by the Dodd-Frank Act, to 

impose the position limits herein.32

B. Referenced Contracts 

The Commission identified 28 Core 

Referenced Futures Contracts and 

proposed to apply aggregate limits on a 

futures equivalent basis across all 

derivatives that are (i) Directly or 

indirectly linked to the price of a Core 

Referenced Futures Contract; or (ii) 

based on the price of the same 

underlying commodity for delivery at 

the same delivery location as that of a 

Core Referenced Futures Contract, or 

another delivery location having 

substantially the same supply and 

demand fundamentals (such derivative 

products are collectively defined as 

‘‘Referenced Contracts’’).33 These Core 

Referenced Futures Contracts were 

selected on the basis that such contracts: 

(1) Have high levels of open interest and 

significant notional value; or (2) serve as 

a reference price for a significant 

number of cash market transactions. 

Edison Electric Institute and the 

Electric Power Supply Association 

argued that the Commission did not 

provide a reasoned explanation for 

selecting the 28 Referenced Contracts.34

Other commenters requested that the 

Commission clarify the definition of 

Referenced Contracts or restrict it to 


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35Alternative Investment Management 

Association (‘‘AIMA’’) on March 28, 2011 (‘‘CL– 

AIMA’’) at 2; CL–API supra note 21 at 5; BG 

Americas & Global LNG (‘‘BGA’’) on March 28, 2011 

(‘‘CL–BGA’’) at 18; Chris Barnard on March 28, 

2011 at 1; CL–COPE supra note 21 at 6; CL–ISDA/ 

SIFMA supra note 21 at 20; Shell Trading (‘‘Shell’’) 

on March 28, 2011 (‘‘CL–Shell’’) at 7–8; CL–Utility 

Group supra note 21 at 7; and Working Group of 

Commercial Energy Firms (‘‘WGCEF’’) on March 28, 

2011 (‘‘CL–WGCEF’’) at 22. 

36CL–API, supra note 21 at 13; and CL–BGA, 

supra note 35 at 18. American Petroleum Institute 

explained that extending the definition of 

‘‘Referenced Contract’’ beyond standardized cleared 

contracts would not be cost-effective. Similarly, 

BGA argued that because the Commission cannot 

identify uncleared contracts until they are executed, 

the scope of economically equivalent swaps should 

be limited to only those that are cleared. 

37Better Markets, Inc. (‘‘Better Markets’’) on 

March 28, 2011 (‘‘CL–Better Markets’’) at 68–69. 

38CL–EEI/EPSA, supra note 21 at 12. 

39CL–ISDA/SIFMA supra note 21 at 23. 

40The proposed definition of a Referenced 

Contract included contracts (i) Directly or indirectly 

linked, including being partially or fully settled on, 

or priced at a differential to, the price of any Core 

Referenced Futures Contract; or (ii) directly or 

indirectly linked, including being partially or fully 

settled on, or priced at a differential to, the price 

of the same commodity for delivery at the same 

location, or at locations with substantially the same 

supply and demand fundamentals, as that of any 

Core Referenced Futures Contract. 

41Proposed § 151.1 defined ‘‘intercommodity 

spread’’ contracts as those contracts that 

‘‘represent[] the difference between the settlement 

price of a Referenced Contract and the settlement 

price of another contract, agreement, or transaction 

that is based on a different commodity.’’ 

42See e.g., CL–Utility Group supra note 21 at 7– 

8; CL–COPE supra note 21 at 6; Commercial 

Alliance (‘‘Commercial Alliance I’’) on June 5, 2011 

(‘‘CL–Commercial Alliance I’’) at 5–10 (arguing for 

the extension of the bona fide hedge exemption for 

physical market transactions and anticipated 

physical market transactions that could be hedged 

with a basis contract position). 

43CL–Utility Group supra note 21 at 7–8 (arguing 

that ‘‘virtual tolling swaps’’ that utilize a 

Referenced Contract-derived price series as a 

component of a floating price appear to be covered 

by the definition of ‘‘Referenced Contract’’); and 

CL–COPE supra note 21 at 6. 

44 Id. 

45E.g., a swap with a floating price based on the 

average of the settlement price of the New York 

Mercantile Exchange (‘‘NYMEX’’) Light, Sweet 

Crude Oil futures contract and the settlement price 

of the IntercontinentalExchange (‘‘ICE’’) Brent 

Crude futures contract. 

46Under amended section 4a(a)(1), the 

Commission is required to establish aggregate 

position limits on contracts based on the same 

underlying commodity, including those swaps that 

are not traded on a DCM or SEF but which are 

determined to perform or affect a significant price 

discovery function (‘‘SPDF’’). 7 U.S.C. 6a(a)(1). The 

Commission currently lacks the data necessary to 

evaluate the pricing relationships between potential 

SPDF swaps and Referenced Contracts and 

therefore has determined not to set forth, at this 

time, standards for determining significant price 

discovery function swaps. As the Commission 

gathers additional data on the effect of position 

limits on the 28 Referenced Contracts and these 

contracts’ relationship with other contracts, it 

could, in its discretion, extend position limits to 

additional contracts beyond the current set of 

Referenced Contracts. The Commission could 

determine, for example, that a contract, due to 

certain shared qualitative or quantitative 

characteristics with Referenced Contracts, performs 

a SPDF with respect to Referenced Contracts. 

those contracts sharing a common 

delivery point.35

Some commenters argued that the 

Commission should narrow the 

definition of economically equivalent 

swaps to cleared swaps.36 Conversely, 

other commenters asked the 

Commission to broaden its definition of 

Referenced Contracts. For example, 

Better Markets asked the Commission to 

consider a ‘‘market-based approach’’ to 

determine whether to include a contract 

within a Referenced Contract category, 

including hedging relationships used by 

market participants, cross-contract 

netting practices of clearing 

organizations, enduring price 

relationships, and physical 

characteristics.37

The Edison Electric Institute and 

Electrical Power Suppliers Association 

opined that the Commission should 

allow market participants to define what 

constitutes an economically equivalent 

contract consistent with commercial 

practices and to allow for a good-faith 

exemption for market participants 

relying on their own determination 

consistent with Commission guidance.38

ISDA/SIFMA argued that the 

Commission should ensure that the 

concept of an economically equivalent 

derivative contract covers contracts 

whose correlation with futures can be 

established through accepted models 

that address features such as maturity, 

payout structure, locations basis, 

product basis, etc.39

The proposed § 151.1 definition of 

Referenced Contract excluded basis 

contracts and commodity index 

contracts.40 Proposed § 151.1 defined 

basis contract as those contracts that are 

‘‘cash settled based on the difference in 

price of the same commodity (or 

substantially the same commodity) at 

different delivery points.’’ Commodity 

index contracts were defined in the 

proposal as contracts that are ‘‘based on 

an index comprised of prices of 

commodities that are not the same nor 

[sic] substantially the same.’’ The 

proposal further excluded 

intercommodity spread contracts,41

calendar spread contracts, and basis 

contracts from the definition of 

‘‘commodity index contract.’’ Many 

commenters appeared to interpret the 

proposal as subjecting positions in basis 

contracts or commodity index contracts 

to the position limits set forth in 

proposed § 151.4.42 The Coalition of 

Physical Energy Companies and the 

Utility Group found that the definition 

of Referenced Contract was ‘‘vague’’ and 

‘‘clearly extraordinarily broad’’ because, 

inter alia, it appeared to include some 

over-the-counter (‘‘OTC’’) swaps that 

utilized a Core Referenced Futures 

Contract price as a component of a 

floating price calculation.43 The 

Coalition of Physical Energy Companies 

and the Utility Group opined that even 

if the proposed class of Referenced 

Contracts that are priced based on 

‘‘locations with substantially the same 

supply and demand fundamentals, as 

that of any Core Referenced Futures 

Contract’’ it is unclear whether the 

definition of Referenced Contract 

extends to ‘‘those [swaps] that are 

actually economically equivalent, e.g., 

look alikes.’’ 44

The Commission is adopting the 

proposal regarding Referenced Contracts 

with modifications and clarifications 

responsive to the comments. The 

Commission clarifies that the term 

‘‘Referenced Contract’’ includes: (1) The 

Core Referenced Futures Contract; (2) 

‘‘look-alike’’ contracts (i.e., those that 

settle off of the Core Referenced Futures 

Contract and contracts that are based on 

the same commodity for the same 

delivery location as the Core Referenced 

Futures Contract); (3) contracts with a 

reference price based only on the 

combination of at least one Referenced 

Contract price and one or more prices in 

the same or substantially the same 

commodity as that underlying the 

relevant Core Referenced Futures 

Contract;45 and (4) intercommodity 

spreads with two components, one or 

both of which are Referenced Contracts. 

These criteria capture contracts with 

prices that are or should be closely 

correlated to the prices of the Core 

Referenced Futures Contract.46

In response to commenters, the 

Commission is eliminating a proposed 

category of Referenced Contracts, 

namely, those based on ‘‘substantially 

the same supply and demand 

fundamentals.’’ The Commission notes 

that the ‘‘substantially the same supply 

and demand fundamentals’’ criterion 

would require individualized evaluation 

of certain trading data to determine 

whether the price of a commodity may 

or may not be substantially related to a 

Core Referenced Futures Contract. Such 

analysis may require access to, among 

other things, data concerning bids and 

offers and transaction information 

regarding the cash market, which are 

not readily available to the Commission 

at this time. 

The remaining categories of 

Referenced Contract, i.e., derivatives 

that are directly or indirectly linked to 

or based on the same commodity for 

delivery at the same delivery location as 


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47 In finalizing the Commission’s Large Trader 

Reporting for Physical Commodity Swaps 

rulemaking, and also in response to comments, the 

Commission modified the proposed definition of 

‘‘paired swap’’ to exclude contracts based on the 

same commodity at different locations with 

substantially the same supply and demand 

fundamentals as that of any Core Referenced 

Futures Contract. See 76 FR 43855, Jul. 22, 2011. 

48An ‘‘indirect’’ price link to a Core Referenced 

Futures Contract includes situations where the 

swap reference price is linked to prices of a cashsettled Referenced Contract that itself is cash-settled 

based on a physical-delivery Referenced Contract 

settlement price. 

49The Commission clarifies, by way of example, 

that a swap based on the difference in price of a 

commodity (or substantially the same commodity) 

at different delivery locations is a ‘‘basis contract’’ 

and therefore not subject to the limits set forth in 

§ 151.4. In addition, if a swap is based on prices of 

multiple different commodities comprising an 

index, it is a ‘‘commodity index contract’’ and 

therefore is not subject to the limits set forth in 

§ 151.4. In contrast, if a swap is based on the 

difference between two prices of two different 

commodities, with one linked to a Core Referenced 

Futures Contract price (and the other either not 

linked to the price of a Core Referenced Futures 

Contract or linked to the price of a different Core 

Referenced Futures Contract), then the swap is an 

‘‘intercommodity spread contract,’’ is not a 

commodity index contract, and is a Referenced 

Contract subject to the position limits specified in 

§ 151.4. The Commission further clarifies that a 

contract based on the prices of a Referenced 

Contract and the same or substantially the same 

commodity (and not based on the difference 

between such prices) is not a commodity index 

contract and is a Referenced Contract subject to 

position limits specified in § 151.4. 

50The Commission has clarified in its definition 

of ‘‘Referenced Contract’’ that position limits extend 

to contracts traded at a fixed differential to a Core 

Referenced Futures Contract (e.g., a swap with the 

commodity reference price NYMEX Light, Sweet 

Crude Oil +$3 per barrel is a Referenced Contract) 

or based on the same commodity at the same 

delivery location as that covered by the Core 

Referenced Futures Contract, and not to unfixed 

differential contracts (e.g., a swap with the 

commodity reference price Argus Sour Crude Index 

is not a Referenced Contract because that index is 

computed using a variable differential to a 

Referenced Contract). 

51Nevertheless, a trader may decide to assume 

the risk that the historical price relationship might 

not hold and enter into a cross-hedging transaction 

in a derivative that has been and is expected to be 

price-fluctuation-related to that trader’s cash market 

commodity and seek (and obtain) a bona fide hedge 

exemption. 

52For example, the commenters did not address 

whether a derivatives contract on a commodity 

should be included if there were observed historical 

associated price correlations but no identified 

causation relationship. 

53 In the final rulemaking, the term ‘‘legacy’’ 

replaced the term ‘‘enumerated’’ used in the 

proposal. The Commission has made this change in 

order to avoid unnecessary confusion. 

54As discussed in the proposal, the Commission 

retained the position limits for the enumerated 

agricultural Referenced Contracts ‘‘as an exception 

to the general open interest based formula.’’ 76 FR 

at 4752, 4760. 

55CL–FIA I, supra note 21 at 8; CL–COPE, supra 

note 21 at 4; CL–Utility Group, supra note 21 at 5; 

CL–EEI/EPSA supra note 21 at 2; CL–Centaurus 

Energy, supra note 21 at 3; CL–PIMCO supra note 

21 at 6; CL–SIFMA AMG I, supra note 21 at 15– 

16; CL–PERA, supra note 21 at 2; CL–Morgan 

Stanley, supra note 21 at 1; and CL–CMC, supra 

note 21 at 2. 

56CL–CME I, supra note 8 at 7–8. 

57CL–Delta, supra note 20 at 11. 

58See e.g., Gary Krasilovsky on February 6, 2011 

(‘‘CL–Krasilovsky’’); and Alan Murphy (‘‘Murphy’’) 

on January 6, 2011 (‘‘CL–Murphy’’). 

a Core Referenced Futures Contract, are 

based on objective criteria and readily 

available data, which should provide 

market participants with clarity as to the 

scope of economically equivalent 

contracts.47 The Commission clarifies 

that if a swap contract that utilizes as its 

sole floating reference price the prices 

generated directly or indirectly 48 from 

the price of a single Core Referenced 

Futures Contract, then it is a look-alike 

Referenced Contract and subject to the 

limits set forth in § 151.4.49 If such a 

swap is priced based on a fixed 

differential to a Core Referenced Futures 

Contract, it is similarly a Referenced 

Contract.50

With respect to comments that the 

Commission should broaden the scope 

of Referenced Contracts, the 

Commission notes that expanding the 

scope of position limits based, for 

example, on cross-hedging relationships 

or other historical price analysis would 

be problematic. Historical relationships 

may change over time and, additionally, 

would require individualized 

determinations. For example, if the 

standard for determining economic 

equivalence was some level of historical 

correlation, then a commodity 

derivative might have met the 

correlation metric yesterday, fail it 

today, and again meet the metric 

tomorrow.51 Under these circumstances, 

the Commission does not believe that it 

is necessary to expand the scope of 

position limits beyond those proposed. 

In this regard, the Commission notes 

that the commenters did not provide 

specific criteria or thresholds for making 

determinations as to which pricecorrelated commodity contracts should 

be subject to limits.52 The Commission 

further notes that it would consider 

amending the scope of economically 

equivalent contracts (and the relevant 

identifying criteria) as it gains 

experience in this area. For clarity, the 

Commission has deleted the definition 

of the proposed term ‘‘Referenced 

paired futures contract, option contract, 

swap, or swaption’’ since that term was 

only used in the definitions section and 

incorporated the relevant provisions of 

that proposed term into the definition of 

Referenced Contracts. Lastly, the 

Commission has made amendments in 

§ 151.2 that clarify that ‘‘Core 

Referenced Futures Contracts’’ include 

options that expire into outright 

positions in such contracts. 

C. Phased Implementation 

The Commission proposed to 

implement the position limit rule in two 

phases. In the first phase, the spotmonth limits for Referenced Contracts 

would be set at a level based on existing 

limits determined by the appropriate 

DCM. In the second phase, the spotmonth limits would be adjusted on a 

regular schedule, set to 25 percent of the 

Commission’s determination of 

estimated deliverable supply, which 

would be based on DCM-provided 

estimates or the Commission’s own 

estimates. The Commission believes that 

spot-month position limits can be 

implemented on an advanced schedule, 

because such limits will initially be 

based on existing DCM limits or on 

estimates of deliverable supply for 

which data is available. 

In the proposal, non-spot-month 

energy, metal, and ‘‘non-enumerated’’ 53

agricultural Referenced Contract limits 

would be based on open interest and 

would be set in the second phase 

pending the availability of certain 

positional data on physical commodity 

swaps.54

In general, commenters were divided 

on whether the Commission should, in 

whole or in part, delay the imposition 

of position limits. Some commenters 

stated that the Commission should stay 

or withdraw its proposal until such time 

that the Commission has gathered and 

analyzed data to determine if position 

limits are necessary or appropriate.55

CME asserted that the Commission 

cannot impose spot-month limits until it 

has received and analyzed data on 

economically equivalent swaps since 

the limits cover such swaps.56

Conversely, some commenters rejected 

the phased implementation of non-spotmonth position limits and urged the 

Commission to implement such limits 

on a more expedited timeframe. One 

such commenter, Delta, argued ‘‘that the 

Commission should instead strive to 

establish meaningful speculative 

position limits using sampling and other 

statistical techniques to make 

reasonable, working assumptions about 

positions in various market segments 

and refining the speculative limits based 

upon market experience and better data 

as it is developed.’’ 57 The Commission 

also received many letters requesting 

that the Commission impose position 

limits generally on an expedited basis.58

The Commission is finalizing the 

phased implementation schedule 

generally as proposed and in 

furtherance of the congressional 

directive that the Commission 

establishes position limits on an 


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59Non-spot-month limits for agricultural 

contracts currently subject to Federal position 

limits under part 150 are referred to herein as 

‘‘legacy limits.’’ As noted earlier, such Referenced 

Contracts are generally referred to as ‘‘enumerated’’ 

agricultural contracts. 17 CFR 150.2. 

60The Commission recently adopted reporting 

regulations that require routine position reports 

from clearing organizations, clearing members, and 

swap dealers. See 76 FR 43851, Jul. 22, 2011. The 

swaps positional data obtained through these 

reports are expected to serve as a primary source 

for determining open interests. 

61Prior to the compliance date, persons shall 

continue to comply with applicable exchange-set 

position limits and accountability levels. 

62See § 20.2, 17 CFR 20.11 for a list of covered 

contracts. 

63While requiring reporting entities to submit 

data sufficient to allow the Commission to 

distinguish pre-existing positions from other 

positions would be helpful to the Commission, the 

Commission does not currently believe it would be 

cost-effective to impose this requirement broadly as 

it would require reporting entities to revisit 

transaction trade confirmation records that may or 

may not be readily linked to position-tracking 

databases. Moreover, the Commission could 

develop a reasonable estimate of the extent of a 

trader’s pre-existing positions by comparing their 

positions as of the effective date with the positions 

held on a date in interest (e.g., when a trader 

appears to establish a position exceeding a position 

limit). 

64Proposed § 151.4(e)(3) based the uncleared 

swap component of the open interest figure used to 

set non-spot-month position limits on open interest 

attributed to swap dealers. Section 20.4 requires 

position reporting from swap dealers as well as 

clearing organizations and clearing members. Final 

rule § 151.4(b)(2)(ii) permits estimation of the 

uncleared swap component using clearing 

organization or clearing member data obtained 

under § 20.4 reports. 

65See supra under II.B. discussing the definition 

of Referenced Contract. 

expedited timeframe. As stated above, 

spot-month limits, which are based on 

existing DCM limits and data that is 

available, can be implemented on an 

expedited timeframe. In addition, nonspot-month legacy limits do not require 

swap positional data to set the limits, 

and, thus, can be set on an expedited 

timeframe.59 With respect to non-spotmonth limits for non-legacy Referenced 

Contracts, which are dependent on open 

interest levels and thus dependent on 

swaps positional data, the Commission 

will initially set such limits following 

the collection of approximately 12 

months of swaps positional data.60

1. Compliance Dates 

In light of the above referenced 

timeframe for implementation, the 

compliance date for all spot-month 

limits and non-spot-month legacy limits 

shall be 60 days after the term ‘‘swap’’ 

is further defined pursuant to section 

721 of the Dodd-Frank Act (i.e., 60 days 

after the further definition of ‘‘swap’’ as 

adopted by the Commission and the 

Securities and Exchange Commission is 

published by the Federal Register). 

Prior to the Commission further 

defining the term swap, market 

participants shall continue to comply 

with the existing position limits regime 

contained in part 150 and any 

applicable DCM position limits or 

accountability levels. After the 

compliance date, the Commission will 

revoke part 150, and persons will be 

required to comply with all the 

provisions of this part 151, including 

§ 151.5 for bona fide hedging and 

§ 151.7 related to the aggregation of 

accounts. For non-spot-month nonlegacy Referenced Contracts, the 

compliance date shall be set forth by 

Commission order establishing such 

limits approximately 12 months after 

the collection of swap positional data.61

Although the Commission proposed 

to revoke part 150 in the Proposed 

Rules, the Commission is retaining this 

provision until the compliance dates set 

forth above. 

2. Transitional Compliance 

As discussed below in detail in 

section II.B. of this release, § 151.1 

excludes ‘‘basis contracts’’ and 

‘‘commodity index contracts’’ from the 

definition of Referenced Contract. 

However, part 20 of the Commission’s 

regulations requires reporting entities to 

report commodity reference price data 

sufficient to distinguish between basis 

and non-basis swaps and between 

commodity index contract and noncommodity index contract positions in 

covered contracts.62 Therefore, the 

Commission intends to rely on the data 

elements in § 20.4(b) to distinguish data 

records subject to § 151.4 position limits 

from those contracts that are excluded 

from § 151.4. This will enable the 

Commission to set position limits using 

the narrower data set (i.e., Referenced 

Contracts subject to § 151.4 position 

limits) as well as conduct surveillance 

using the broader data set. 

In addition, § 151.9 provides that 

traders may determine to either exclude 

(i.e., not aggregate) or net their preexisting swap positions (as discussed 

below), while part 20 does not require 

a distinction to be made for reporting 

pre-existing swap positions. The 

Commission believes it is appropriate to 

include pre-existing swap positions in 

the basis for setting position limits and, 

thus, the part 20 data collection will 

provide this broader data set. This is 

because limits based on a narrower data 

set (that is, excluding pre-existing 

swaps) may be overly restrictive and, 

thus, may not provide adequate 

liquidity for bona fide hedgers, in light 

of the biennial reset of most non-spotmonth position limits under 

§ 151.4(d)(3). Nonetheless, and 

consistent with the statutory exclusion 

of swaps pre-existing the Dodd-Frank 

Act, position limits will not apply to 

such pre-existing swap positions.63

The Commission understands that 

most uncleared swaps are executed 

opposite a clearing member or swap 

dealer and would therefore result in 

positions reportable to the Commission 

under part 20. Part 20 reports will not 

provide data on positions where neither 

party to a swap is a clearing member or 

swap dealer, but these positions 

represent a small fraction of all 

uncleared swaps. Since most uncleared 

swaps will be reportable under part 20, 

the Commission believes the swaps’ 

data set will be adequate to set position 

limits.64

In order to determine a trader’s 

compliance with position limits in light 

of the pre-existing position exemption 

and the sampling inherent in requiring 

swap position data reporting from 

clearing members and swap dealers, the 

Commission will utilize one existing 

and one new means to conduct the 

necessary market surveillance. First, the 

Commission may issue special calls 

under § 20.6(b) in instances where 

traders appear to have positions 

exceeding part 151 position limits. 

Traders subject to these special calls 

would then be afforded an opportunity 

to provide information on their 

positions demonstrating compliance 

with a part 151 position limit. Second, 

the Commission notes that traders are 

required to provide position visibility 

on their uncleared swaps positions 

under § 151.6(c) in 401 filings that 

would reflect all of their uncleared swap 

positions in Referenced Contracts as 

well as their total positions in 

Referenced Contracts, irrespective of 

whether these swaps were executed 

opposite a clearing member or swap 

dealer. These filings would allow the 

Commission to determine whether the 

trader is in compliance with part 151 

position limits. The Commission 

clarifies that such 401 filings require the 

reporting of gross long and gross short 

positions in Referenced Contracts, 

excluding those positions that are not 

included in the definition of Referenced 

Contracts (e.g., excluding those 

positions arising from basis contract 

positions, pre-existing swap positions, 

and diversified commodity index 

positions).65

D. Spot-Month Limits 

Proposed § 151.4 would apply spotmonth position limits separately for 

physically-delivered contracts and cashsettled contracts (i.e., cash-settled 


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66For the ICE Futures U.S. Sugar No. 16 (SF) and 

CME Class III Milk (DA), the Commission proposed 

to adopt the DCM single-month limits for the 

nearby month or first-to-expire Referenced Contract 

as spot-month limits. These contracts currently 

have single-month limits that are enforced in the 

spot month. 

67Thus, for example, if the spot-month limit for 

a Referenced Contract is 1,000 contracts, then a 

trader could hold up to 1,000 contracts long in the 

physical-delivery contract and 1,000 contracts long 

in the cash-settled contract. However, the same 

trader could not hold 1,001 contracts long in the 

physical-delivery contract and hold 1 contract short 

in the cash-settled and remain under the limit for 

the physical-delivery contract. A trader’s cashsettled contract position would be a function of the 

trader’s position in Referenced Contracts based on 

the same commodity that are cash-settled futures 

and swaps. For purposes of applying the limits, a 

trader shall convert and aggregate positions in 

swaps on a futures equivalent basis consistent with 

the guidance in the Commission’s Appendix A to 

Part 20, Large Trader Reporting for Physical 

Commodity Swaps. See 76 FR 43851, 43865 Jul. 22, 

2011. 

68 76 FR at 4752, 4757. 

69See CL–AFR supra note 17 at 7–8; CL–AIMA 

supra note 35 at 2; CL–Prof. Greenberger supra note 

6 at 17; InterContinental Exchange, Inc. (‘‘ICE I’’) on 

March 28, 2011 (‘‘CL–ICE I’’) at 5; and Natural Gas 

Exchange (‘‘NGX’’) on March 28, 2011 (‘‘CL–NGX’’) 

at 3. 

70CL–ISDA/SIFMA supra note 21 at 21; and 

CL–FIA I supra note 21 at 9. 

71 ‘‘Available deliverable supply’’ includes: 

(1) All available local supply (including supply 

committed to long-term commitments); (2) all 

deliverable non-local supply; and (3) all comparable 

supply (based on factors such as product and 

location). See CL–ISDA/SIFMA supra note 21 at 21. 

Another commenter, the Alternative Investment 

Management Association, similarly advocated a 

more expansive definition of ‘‘deliverable supply.’’ 

CL–AIMA supra note 35 at 3 (‘‘This may include 

all supplies available in the market at all prices and 

at all locations, as if a party were seeking to buy 

a commodity in the market these factors would be 

relevant to the price.’’) 

72National Grain and Feed Association (‘‘NGFA’’) 

on March 28, 2011 (‘‘CL–NGFA’’) at 5; and CL–CME 

I supra note 8 at 9 (suggesting that if the 

Commission decides to retain this exclusion, it 

should define what it understands a ‘‘long-term’’ 

agreement to be and ensure consistency with the 

deliverable supply definition in the Core Principles 

and Other Requirements for Designated Contract 

Markets proposed rulemaking). Id. citing Appendix 

C of Part 38, 75 FR 80572, 80631, Dec. 22, 2010. 

(In Appendix C, the Commission states that 

commodity supplies that are ‘‘committed to some 

commercial use’’ should be excluded from 

deliverable supply, and requires DCMs to consult 

with market participants to estimate these supplies 

on a monthly basis). 

73 64 FR 24038, 24039, May 5, 1999. 

74Minneapolis Grain Exchange, Inc. (‘‘MGEX’’) 

on March 28, 2011 (‘‘CL–MGEX’’) at 4; CL–MFA 

supra note 21 at 16; Niska Gas Storage LLC 

(‘‘Niska’’) on March 28, 2011 (‘‘CL–Niska’’) at 2. See 

also CL–AIMA supra note 35 at 2 (asking the 

Commission to reconsider position limits on cashsettled contracts). 

75CL–Niska supra note 75 at 2. 

76CL–BGA supra note 35 at 19. See also Cargill, 

Incorporated (‘‘Cargill’’) on March 28, 2011 (‘‘CL– 

Cargill’’) at 13 (urging the Commission to study the 

impact of applying any position limit based on 

‘‘deliverable supply’’ to the swaps market). 

77Core Principle 3 specifies that a board of trade 

shall list only contracts that are not readily 

susceptible to manipulation, while Core Principle 5 

obligates a DCM to establish position limits or 

position accountability provisions where necessary 

and appropriate ‘‘to reduce the threat of market 

manipulation or congestion, especially during the 

delivery month.’’ 

78See e.g., the discussion of deliverable supply in 

Guideline No. 1. 17 CFR part 40, app. A. See also 

the discussion of deliverable supply in the first 

publication of Guideline No. 1. 47 FR 49832, 49838, 

Nov. 3, 1982. 

79 Indeed, with three exceptions, the § 151.2- 

listed contracts with DCM-defined spot months are 

currently subject to exchange-set spot-month 

position limits, which would have been established 

in this manner. The only contracts based on a 

physical commodity that currently do not have 

spot-month limits are the COMEX mini-sized gold, 

silver, and copper contracts that are cash settled 

based on the futures settlement prices of the 

physical-delivery contracts. The cash-settled 

contracts have position accountability provisions in 

the spot month, rather than outright spot-month 

limits. These cash-settled contracts have relatively 

small levels of open interest. 

futures and swaps).66 A trader could 

therefore hold positions up to the spotmonth position limit in both the 

physical-delivery and cash-settled 

contracts but a trader could not net 

cash-settled contracts with the physicaldelivery contracts.67 The proposed spotmonth position limits for physicaldelivery Core Referenced Futures 

Contracts initially would be set at 

existing DCM levels; cash-settled 

Referenced Contracts would be subject 

to limits set at the same level. As 

discussed above, during the second 

phase of implementation, the spotmonth limits would be based on 25 

percent of estimated deliverable supply, 

as determined by the Commission in 

consultation with DCMs. The 

Commission has determined to adopt 

the spot-month limits substantially as 

proposed but with certain changes to 

address commenters’ concerns. 

1. Definition of ‘‘Deliverable Supply’’ 

In the proposal, the Commission 

defined ‘‘deliverable supply’’ generally 

as ‘‘the quantity of the commodity 

meeting a derivative contract’s delivery 

specifications that can reasonably be 

expected to be readily available to short 

traders and saleable by long traders at 

its market value in normal cash 

marketing channels at the derivative 

contract’s delivery points during the 

specified delivery period, barring 

abnormal movement in interstate 

commerce.’’ 68 Several commenters 

supported ‘‘deliverable supply’’ as an 

appropriate basis for spot-month limits 

for physical-delivery contracts.69 Other 

commenters disagreed, stating that 

‘‘deliverable supply’’ was inappropriate, 

even for physical-delivery contracts, 

because it would result in overly 

stringent limits.70 ISDA/SIFMA 

suggested that the Commission instead 

base spot-month limits on ‘‘available 

deliverable supply,’’ a broader measure 

of physical supply.71

Similarly, two commenters suggested 

that the Commission include supply 

committed to long-term supply 

contracts in its definition of 

‘‘deliverable supply’’ to avoid 

artificially reduced spot-month position 

limits.72 In the Commission’s 

experience overseeing the position 

limits established at the exchanges as 

well as federally-set position limits, 

‘‘spot-month speculative position limits 

levels are ‘based most appropriately on 

an analysis of current deliverable 

supplies and the history of various spotmonth expirations.’ ’’ 73

Other commenters argued that 

‘‘deliverable supply’’ should not be the 

basis for position limits on cash-settled 

Referenced Contracts.74 Niska, for 

example, asked the Commission to 

explain why spot-month limits for cashsettled contracts should be linked to 

deliverable supply.75 Another 

commenter, BGA, opined that the 

Commission should set position limits 

for cash-settled swap Referenced 

Contracts based on the size of the swap 

market because swap contracts do not 

contemplate delivery of the underlying 

contract and therefore are not ‘‘tied to 

the physical limits of the market.’’ 76

The Commission finds that the use of 

deliverable supply to set spot-month 

limits is wholly consistent with its 

historical approach to setting spotmonth limits and overseeing DCMs’ 

compliance with Core Principles 3 and 

5.77 Currently, in determining whether a 

physical-delivery contract complies 

with Core Principle 3, the Commission 

staff considers whether the specified 

contract terms and conditions may 

result in a deliverable supply that is 

sufficient to ensure that the contract is 

not conducive to price manipulation or 

distortion. In this context, the term 

‘‘deliverable supply’’ generally means 

the quantity of the commodity meeting 

a derivative contract’s delivery 

specifications that can reasonably be 

expected to be readily available to short 

traders and saleable by long traders at 

its market value in normal cash 

marketing channels at the derivative 

contract’s delivery points during the 

specified delivery period, barring 

abnormal movement in interstate 

commerce.78 The spot-month limit 

pursuant to Core Principle 5 is similarly 

established based on the analysis of 

deliverable supplies. The Acceptable 

Practices for Core Principle 5 state that, 

with respect to physical-delivery 

contracts, the spot-month limit should 

not exceed 25 percent of the estimated 

deliverable supply.79 Lastly, with 


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80CL–ICE I supra note 69 at 5. 

81CL–AFR supra note 17 at 5; American Trucking 

Association (‘‘ATA’’) on March 28, 2011 (‘‘CL– 

ATA’’) at 3; Food & Water Watch (‘‘FWW’’) on 

March 28, 2011 (‘‘CL–FWW’’) at 10; National 

Farmers Union (‘‘NFU’’) on March 28, 2011 (‘‘CL– 

NFU’’) at 2; and CL–PMAA/NEFI supra note 6 at 

7. 

82CL–AFR supra note 17 at 7–8. 

83See CL–AFR supra note 17 at 5, 7. 

84CL–FIA I supra note 21 at 9; CL–ISDA/SIFMA 

supra note 21 at 21; and CL–MFA supra note 21 at 

18. 

85Core Principle 5 obligates a DCM to establish 

position limits and position accountability 

provisions where necessary and appropriate ‘‘to 

reduce the threat of market manipulation or 

congestion, especially during the delivery month.’’ 

86 In this respect, the proposed limits formula is 

not intended to address speculation by a class or 

group of traders. 

87As under current practice, DCM estimates of 

deliverable supplies (and the supporting data and 

analysis) will be subject to Commission staff 

review. 

88For example, the NYMEX Henry Hub Natural 

Gas Last Day Financial Swap, the NYMEX Henry 

Hub Natural Gas Look-Alike Last Day Financial 

Futures, and the ICE Henry LD1 swap are all cashsettled contracts subject to a conditional-spotmonth limit that, with the exception of the 

requirement that a trader not hold large cash 

commodity positions, is identical in structure to the 

proposed limit. 

89CL–ISDA/SIFMA supra note 21 at 6–7, 19; 

Goldman, Sachs & Co. (‘‘Goldman’’) on March 28, 

2011 (‘‘CL–Goldman’’) at 5; CL–ICI supra note 21 

at 10; CL–MGEX supra note 74 at 4 (particularly 

current MGEX Index Contracts that do not settle to 

a Referenced Contract should be considered exempt 

from position limits because cash-settled index 

contracts are not subject to potential market 

manipulation or creation of market disruption in 

the way that physical-delivery contracts might be); 

CL–WGCEF supra note 35 at 20 (‘‘the Commission 

should reconsider setting a limit on cash-settled 

contracts as a function of deliverable supply and 

establish a much higher, more appropriate spotmonth limit, if any, on cash-settled contracts’’); 

CL–MFA supra note 21 at 16–17; and CL–SIFMA 

AMG I supra note 21 at 7. 

90CL–BGA supra note 35 at 19; CL–ICI supra note 

21 at 10; CL–MFA supra note 21 at 16–17; 

CL–WGCEF supra note 35 at 20; CL–Cargill supra 

note 76 at 13; CL–EEI/EPSA supra note 21 at 9; and 

CL–AIMA supra note 35 at 2. 

91CL–BGA supra note 35 at 10. 

92See e.g., CL–FIA I supra note 21 at 10; and CL– 

ICE I supra note 69 at 6 

93See e.g., CL–ISDA/SIFMA supra note 21 at 8. 

94American Feed Industry Association (‘‘AFIA’’) 

on March 28, 2011 (‘‘CL–AFIA’’) at 3; CL–AFR 

supra note 17 at 6; Air Transport Association of 

America (‘‘ATAA’’) on March 28, 2011 (‘‘CL– 

ATAA’’) at 7; CL–BGA supra note 35 at 11–12; CL– 

Centaurus Energy supra note 21 at 3; CL–CME I 

supra note 8 at 10; CL–WGCEF supra note 35 at 21– 

22; and CL–PMAA/NEFI supra note 6 at 14. 

respect to cash-settled contracts on 

agricultural and exempt commodities, 

the spot-month limit is set at some 

percentage of calculated deliverable 

supply. Accordingly, the Commission is 

adopting deliverable supply as the basis 

of setting spot-month limits. In response 

to commenters, the Commission added 

§ 151.4(d)(2)(iv) to clarify that, for 

purposes of estimating deliverable 

supply, DCMs may use any guidance 

issued by the Commission set forth in 

the Acceptable Practices for Core 

Principle 3. 

2. Twenty-Five Percent as the 

Deliverable Supply Formula 

ICE commented that spot-month 

limits for physical-delivery contracts 

(but not cash-settled contracts) set at 25 

percent of deliverable supply are 

necessary to prevent corners and 

squeezes.80 Other commenters, 

however, opined that spot-month 

position limits based on 25 percent of 

deliverable supply are insufficient to 

prevent excessive speculation.81

Americans for Financial Reform 

(‘‘AFR’’), for example, argued that while 

‘‘deliverable supply’’ is an appropriate 

basis for setting spot-month limits,82 the 

proposed spot-month limit addresses 

manipulation by a single actor and 

would not be set low enough to combat 

excessive speculation in the market as a 

whole and the volatility and delinking 

of commodities prices from economic 

fundamentals caused by excessive 

speculation.83 Some commenters 

recommended that the Commission set 

the spot-month limits based on the 

‘‘individual characteristics’’ of each 

Core Referenced Futures Contract, and 

not necessarily an exchange’s 

deliverable supply estimate.84

The Commission has determined to 

adopt the 25 percent level of deliverable 

supply for setting spot-month limits. 

This formula is consistent with the longstanding Acceptable Practices for Core 

Principle 5,85 which provides that, for 

physical-delivery contracts, the spotmonth limit should not exceed 25 

percent of the estimated deliverable 

supply. The use of the existing industry 

standard would provide clarity 

concerning the underlying 

methodology. Further, the Commission 

believes that, based on its experience, 

the formula has appeared to work 

effectively as a prophylactic tool to 

reduce the threat of corners and 

squeezes and promote convergence 

without compromising market 

liquidity.86 In making an estimate of 

deliverable supply, the Commission 

reminds DCMs to take into 

consideration the individual 

characteristics of the underlying 

commodity’s supply and the specific 

delivery features of the futures 

contract.87

3. Cash-Settled Contracts 

With respect to cash-settled contracts, 

proposed § 151.4 incorporated a 

conditional spot-month limit permitting 

traders without a hedge exemption to 

acquire position levels that are five 

times the spot-month limit if such 

positions are exclusively in cash-settled 

contracts (i.e., the trader does not hold 

positions in the physical-delivery 

Referenced Contract) and the trader 

holds physical commodity positions 

that are less than or equal to 25 percent 

of the estimated deliverable supply. The 

proposed conditional-spot-month 

position limits generally tracked 

exchange-set position limits currently 

implemented for certain cash-settled 

energy futures and swaps.88

Currently, with the exception of 

significant price discovery contracts, 

traders’ swaps positions are not subject 

to position limit restrictions. The 

Commission is aware that 

counterparties to uncleared swaps may 

impose prudential credit restrictions 

that may directly (for example, by one 

party setting a maximum notional 

amount restriction that it will execute 

with a particular counterparty) or 

indirectly (for example, by one party 

setting a credit annex requirement such 

as posting of initial collateral by a 

counterparty) restrict the amount of 

bilateral transactions between the 

parties. However, the proposed spot 

month limits would be the first broad 

position limit re ́gime imposed on 

swaps. 

Several commenters questioned the 

application of proposed spot-month 

position limits to cash-settled 

contracts.89 Some of these commenters 

suggested that cash-settled contracts, if 

subject to any spot-month position 

limits at all, should be subject to 

relatively less restrictive limits that are 

not based on estimated deliverable 

supply.90 BGA, for example, argued that 

position limits on swaps should be set 

based on the size of the open interest in 

the swaps market because swap 

contracts do not provide for physical 

delivery.91 Further, certain commenters 

argued that imposing a single 

speculative limit on all cash-settled 

contracts would substantially reduce the 

cash-settled positions that a trader can 

hold because currently, each cashsettled contract is subject to a separate 

limit.92 Other commenters urged the 

Commission to eliminate class limits 

and allow for netting across futures and 

swaps contracts so as not to impact 

liquidity.93

A number of commenters objected to 

limiting the availability of a higher limit 

in the cash-settled contract to traders 

not holding any physical-delivery 

contract.94 For example, CME argued 

that the proposed conditional limits 

would encourage price discovery to 

migrate to the cash-settled contracts, 

rendering the physical-delivery contract 

‘‘more susceptible to sudden price 


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95CL–CME I supra note 8 at 10. Similarly, BGA 

argued that conditional limits incentivize the 

migration of price discovery from the physical 

contracts to the financial contracts and have the 

unintended effect of driving participants from the 

market and thereby increasing the potential for 

market manipulation with a very small volume of 

trades. CL–BGA supra note 35 at 12. 

96CL–AIMA supra note 35 at 2. 97CL–CME I supra note 8 at 10; Kansas City 

Board of Trade (‘‘KCBT I’’) on March 28, 2011 

(‘‘CL–KCBT I’’) at 4; and CL–APGA supra note 17 

at 6, 8. Specifically, KCBT argued that parity should 

exist in all position limits (including spot-month 

limits) between physical-delivery and cash-settled 

Referenced Contracts; otherwise, these limits would 

unfairly advantage the look-alike cash-settled 

contracts and result in the cash-settled contract 

unduly influencing price discovery. Moreover, the 

higher spot-month limit for the financial contract 

unduly restricts the physical market’s ability to 

compete for spot-month trading, which provides 

additional liquidity to commercial market 

participants that roll their positions forward. CL– 

KCBT I at 4. 

98CL–AIMA supra note 35 at 2; and CL–ICE I 

supra note 70 at 8. 99CL–ICE I supra note 69 at 8. ICE also 

recommended that the Commission remove the 

prohibition on holding a position in the physicaldelivery contract or shorten the duration to a 

narrower window of trading than the final three 

days of trading. 

100CME Group, Inc. (‘‘CME III’’) on August 15, 

2011 (‘‘CL–CME III’’). 

101 ‘‘Outright volume’’ means the volume of 

electronic outright transactions that the DCM used 

for purposes of calculating settlement prices and 

excludes, for example, spread exemptions executed 

at a differential. 

movements during the critical 

expiration period.’’ 95 AIMA commented 

that the prohibition against holding 

positions in the physical-delivery 

Referenced Contract will cause investors 

to trade in the physical commodity 

markets themselves, resulting in greater 

price pressure in the physical 

commodity.96

Some of these commenters, including 

the CME and the KCBT, argued against 

the proposed restriction with respect to 

cash-settled contracts and 

recommended that cash-settled 

Referenced Contracts and physicaldelivery contracts should be subject to 

the same position limits.97 Two 

commenters opined that if the 

conditional limits are adopted, they 

should be increased from five times 25 

percent of deliverable supply.98 ICE 

recommended that they be increased to 

at least ten times 25 percent of 

deliverable supply.99

In support of their view, the CME 

submitted data concerning its natural 

gas physical-delivery contract.100 The 

data, however, generally indicates that 

the trading volume in the contract in the 

spot month has increased since the 

implementation of a conditional-spotmonth limit, suggesting little (if any) 

adverse impact on market liquidity for 

the contract. Moreover, according to the 

same data set, both the outright volume 

and the average price range in the 

settlement period on the last trade day 

in the closing range have declined.101

Other measures of average price range in 

the spot period also have declined. 

The CME also submitted, for the same 

physical-delivery contract, a measure of 

the relative closing range as a ratio to 

volatility (‘‘RCR’’)—that is, the ratio of 

the closing range to the 20-day standard 

deviation of settlement prices. The RCR 

measure has declined on average after 

implementation of the conditional 

limits across 17 expirations, while the 

RCR on two individual expirations was 

higher after implementation of the 

conditional limits, indicating a higher 

relative price volatility on those two 

days. However, during one of those two 

days, certain traders were active in the 

physical-delivery futures contracts and 

concurrently held cash-settled contracts, 

in excess of one times the limit on the 

physical-delivery contract; in the other 

day, this was not the case. In summary, 

the Commission does not believe that 

the data submitted by CME supports the 

assertion that setting the existing 

conditional limits on cash-settled 

contracts in the natural gas market has 

materially diminished the price 

discovery function of physical-delivery 

contracts. 

Considering the comments that were 

received, the Commission is adopting, 

on an interim final rule basis, the 

proposed spot-month position limit 

provisions with modifications. Under 

the interim final rule, the Commission 

will apply spot-month position limits 

for cash-settled contracts using the same 

methodology as applied to the physicaldelivery Core Referenced Future 

Contracts, with the exception of natural 

gas contracts, which will have a class 

limit and aggregate limit of five times 

the level of the limit for the physicaldelivery Core Referenced Futures 

Contract. As further described below, 

the Commission is adopting these spotmonth limit methodologies as interim 

final rules in order to solicit additional 

comments on the appropriate level of 

spot-month position limits for cashsettled contracts. 

Specifically, the Commission is 

adopting, on an interim final rule basis, 

a spot-month position limit for cashsettled contracts (other than natural gas) 

that will be set at 25 percent of 

estimated deliverable supply, in parity 

with the methodology for setting spotmonth limit levels for the physicaldelivery Core Referenced Futures 

Contracts. The Commission believes, 

consistent with the comments, that 

parity should exist in all position limits 

(including spot-month limits) between 

physical-delivery and cash-settled 

Referenced Contracts (other than in 

natural gas); otherwise, these limits 

would permit larger position in lookalike cash-settled contracts that may 

provide an incentive to manipulate and 

undermine price discovery in the 

underlying physical-delivery futures 

contract. However, the Commission has 

a reasonable basis to believe that the 

cash-settled market in natural gas is 

sufficiently different from the cashsettled markets in other physical 

commodities to warrant a different spotmonth limit methodology. 

With respect to NYMEX Light, Sweet 

Crude Oil (‘‘WTI crude oil’’), NYMEX 

New York Harbor Gasoline Blendstock 

(‘‘RBOB’’), and NYMEX New York 

Harbor Heating Oil (‘‘heating oil’’) 

contracts, administrative experience, 

available data, and trade interviews 

indicate that the sizes of the markets in 

cash-settled Referenced Contracts (as 

measured in notional value) are likely to 

be no greater in size than the related 

physical-delivery Core Referenced 

Futures Contracts. This is because there 

are alternative markets which may 

satisfy much of the demand by 

commercial participants to engage in 

cash-settled contracts for crude oil. 

These include a market for generally 

short-dated WTI crude oil forward 

contracts, as well as a well-developed 

forward market for Brent oil and an 

active cash-settled WTI futures contract 

(the cash-settled ICE Futures (Europe) 

West Texas Intermediate Light Sweet 

Crude Oil futures contract). That futures 

contract had, as of October 4, 2011, an 

open interest of less than one-third that 

of the physical-delivery NYMEX Light 

Sweet Crude Oil futures contract, as 

reported in the Commission’s 

Commitment of Traders Report. That 

contract is subject to a spot-month limit 

equal to the spot-month limit imposed 

by NYMEX on the relevant physicaldelivery futures contract, as a condition 

of a Division of Market Oversight noaction letter issued on June 17, 2008, 

CFTC Letter No. 08–09. A review of the 

Commission’s large trader reporting 

system data indicated fewer than five 

traders recently held a position in that 

cash-settled ICE contract in excess of 

3,000 contracts in the spot month, 

pursuant to exemptions granted by the 

exchange. Accordingly, given that the 

size of the cash-settled swaps market 

involving WTI does not appear to be 

materially larger than that of the 

physical-delivery Core Referenced 

Futures Contract, parity in spot month 

limits in WTI crude oil between 

physical-delivery and cash-settled 

contracts should ensure sufficient 


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71636 Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / Rules and Regulations 

102The Commission is removing the proposed 

restrictions for claiming the higher limit in cashsettled Referenced Contracts in the spot month. 

Unlike the proposed conditional limit, under the 

aggregate limit, a trader in natural gas can utilize 

the five times limit for the cash-settled Referenced 

Contract and still hold positions in the physicaldelivery Referenced Contract. In addition, there is 

no requirement that the trader not hold cash or 

forward positions in the spot month in excess of 25 

percent of deliverable supply of natural gas. 

Although the Commission’s experience with DCMs 

using the more restrictive conditional limit in 

natural gas has been generally positive, the 

Commission, in agreeing with commenters, will 

wait to impose similar conditions until the 

Commission gains additional experience with the 

limits in the interim final rule. In this regard, the 

Commission will monitor closely the spot-month 

limits in these final rules and may revert to a 

conditional limit in the future in response to market 

developments. 

liquidity for bona fide hedgers in the 

cash-settled contracts. 

With respect to the other energy 

commodities, based on administrative 

experience, available data, and trade 

interviews, the Commission 

understands the swaps markets in RBOB 

and heating oil are small relative to the 

relevant Core Referenced Futures 

Contracts. In this regard, unlike natural 

gas, there has been a small amount of 

trading in exempt commercial markets 

in RBOB and heating oil. Thus, parity in 

spot month limits in RBOB and heating 

oil between physical-delivery and cashsettled contracts should ensure 

sufficient liquidity for bona fide hedgers 

in the cash-settled contracts. 

With respect to agricultural 

commodities, administrative 

experience, available data, and trade 

interviews indicate that the sizes of the 

markets in cash-settled Referenced 

Contracts (as measured in notional 

value) are small and not as large as the 

related Core Referenced Futures 

Contracts. This is likely due to the fact 

that, currently, off-exchange agricultural 

commodity swaps (that are not options) 

may only be transacted pursuant to part 

35 of the Commission’s regulations. 

Under current rules, exempt commercial 

markets and exempt boards of trade 

have not been permitted to, and have 

not, listed agricultural swaps (although 

the Commission has repealed and 

replaced part 35, effective December 31, 

2011, at which point the Commission 

regulations would permit agricultural 

commodity swaps to be transacted 

under the same requirements governing 

other commodity swaps). Regarding offexchange agricultural trade options, part 

35 is not available; such transactions 

must be pursuant to the Commission’s 

agricultural trade option rules found in 

Commission regulation 32.13. Under 

regulation 32.13, parties to the 

agricultural trade option must have a 

net worth of at least $10 million and the 

offeree must be a producer, processor, 

commercial user of, or merchant 

handling the agricultural commodity 

which is the subject of the trade option. 

Based on interviews with offerors of 

agricultural trade options believed to be 

the largest participants, administrative 

experience is that the off-exchange 

markets are smaller than the relevant 

Core Referenced Futures Contracts. 

Accordingly, parity in spot month limits 

in agricultural commodities between 

physical-delivery and cash-settled 

contracts should ensure sufficient 

liquidity for bona fide hedgers in the 

cash-settled contracts. 

With respect to the metal 

commodities, based on administrative 

experience, available data, and trade 

interviews, the Commission 

understands the cash-settled swaps 

markets also are small. Based on 

interviews with market participants, the 

Commission understands there is an 

active cash forward market and lending 

market in metals, particularly in gold 

and silver, which may satisfy some of 

the demand by commercial participants 

to engage in cash-settled contracts. The 

cash-settled metals contracts listed on 

DCMs generally are characterized by a 

low level of open interest relative to the 

physical-delivery metals contracts. 

Moreover, as is the case for RBOB and 

heating oil, there has not been 

appreciable trading in exempt 

commercial markets in metals. 

Accordingly, parity in spot month limits 

in metals commodities between 

physical-delivery and cash-settled 

contracts should ensure sufficient 

liquidity for bona fide hedgers in the 

cash-settled contracts. 

In contrast, regarding natural gas, 

there are very active cash-settled 

markets both at DCMs and exempt 

commercial markets. NYMEX lists a 

cash-settled natural gas futures contract 

linked to its physical-delivery futures 

contract that has significant open 

interest. Similarly, ICE, an exempt 

commercial market, lists natural gas 

swaps contracts linked to the NYMEX 

physical-delivery futures contract. 

Moreover, both NYMEX and ICE have 

gained experience with conditional 

spot-month limits in natural gas where 

the cash-settled limit is five times the 

limit for the physical-delivery futures 

contract. In this regard, NYMEX 

imposed the same limit on its cashsettled natural contract as ICE imposed 

on its cash-settled natural gas contract 

when ICE complied with the 

requirements of part 36 of the 

Commission’s regulations regarding 

SPDCs. As discussed above, the 

Commission believes the existing 

conditional limits on cash-settled 

natural gas contracts have not materially 

diminished the price discovery function 

of physical-delivery contracts. The final 

rules relax the conditional limits by 

removing the condition, but impose a 

tighter limit on cash-settled contracts by 

aggregating all economically similar 

cash-settled natural gas contracts.102

Thus, the Commission has 

determined that the one-to-one ratio 

(between the level of spot-month limits 

on physical-delivery contracts and the 

level of the spot-month limits on cashsettled contracts in the agricultural, 

metals, and energy commodities other 

than natural gas) maximizes the 

objectives enumerated in section 

4a(a)(3). Specifically, such limits ensure 

market liquidity for bona fide hedgers 

and protect price discovery, while 

deterring excessive speculation and the 

potential for market manipulation, 

squeezes, and corners. The Commission 

further notes that the formula is 

consistent with the level the 

Commission staff has historically 

deemed acceptable for cash-settled 

contracts, as well as the formula for 

physical-delivery contracts under 

Acceptable Practices for Core Principle 

5 in part 38. Nevertheless, the 

Commission recognizes that after 

experience with the one-to-one ratio and 

additional reporting of swap 

transactions, it may be possible to 

maximize further these objectives with 

a different ratio and therefore will 

revisit the issue after it evaluates the 

effects of the interim final rule. 

In addition to the spot-month limit for 

cash-settled natural gas contracts, the 

interim final rule also provides for an 

aggregate spot-month limit set at five 

times the level of the spot-month limit 

in the relevant physical-delivery natural 

gas Core Referenced Futures Contract. A 

trader therefore must at all times fall 

within the class limit for the physicaldelivery natural gas Core Referenced 

Futures Contract, the five-times limit for 

cash-settled Referenced Contracts in 

natural gas, and the five-times aggregate 

limit. 

To illustrate the application of the 

spot-month limits in natural gas 

contracts, assume a physical-delivery 

Core Referenced Futures Contract limit 

on a particular commodity is set to a 

level of 100. Thus, a trader may hold a 

net position (long or short) of 100 

contracts in that Core Referenced 

Futures Contract and a net position 

(long or short) of 500 contracts in the 

cash-settled Referenced Contracts on 

that same commodity, provided that the 

total directional position of both 

contracts is below the aggregate limit. 

Therefore, to comply with the aggregate 


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103Further to this example, if a trader wanted to 

hold 100 contracts in the physical-delivery contract 

in one direction, the trader could hold 500 cashsettled contracts in the opposite direction as the 

physical-delivery contract. 

104See § 151.4(a). 105As discussed above, the Commission is 

eliminating the conditional spot-month limit. 106As will be discussed further below, the 

Commission is eliminating class limits outside of 

the spot month. 107 76 FR at 4752, 4758. 

limit, if a trader wanted to hold the 

maximum directional position of 100 

contracts in the physical-delivery 

contract, the trader could hold only 400 

contracts on the same side of the market 

in cash-settled contracts.103 Thus, while 

the aggregate limit in isolation may 

appear to allow a trader to establish a 

position of 600 contracts in cash-settled 

contracts and 100 contracts on the 

opposite side of the market in the 

physical-delivery contract (that is, an 

aggregate net position of 500 contracts), 

the class limits restrict that trader to no 

more than 500 contracts net in cashsettled contracts. The aggregate limit is 

less restrictive than the proposed 

conditional limit in that a trader may 

elect to hold positions in both physicaldelivery and cash-settled contracts, 

subject to the aggregate limit. 

The Commission believes that, based 

on current experience with existing 

DCM and exempt commercial market 

(‘‘ECM’’) conditional limits, the one-tofive ratio for natural gas contracts 

maximizes the statutory objectives, as 

set forth in section 4a(a)(3)(B) of the 

CEA, of preventing excessive 

speculation and market manipulation, 

ensuring market liquidity for bona fide 

hedgers, and promoting efficient price 

discovery. Nevertheless, the 

Commission recognizes that after 

experience with the one-to-five ratio 

and additional reporting of swap 

transactions, it may be possible to 

maximize further these objectives with 

a different ratio and therefore will 

revisit the issue after it evaluates the 

effects of the interim final rule. 

Accordingly, the Commission is 

implementing the one-to-five ratio in 

natural gas contracts on an interim final 

rule basis and is seeking comments on 

whether a different ratio can further 

maximize the statutory objectives in 

section 4a(a)(3)(B) of the CEA. 

The Commission notes that, as would 

have been the case with the proposed 

conditional limits, the spot-month 

limits on cash-settled natural gas 

contracts will be more restrictive than 

the current natural gas conditional spotmonth limits. The NYMEX Henry Hub 

Natural Gas (‘‘NG’’) physical-delivery 

futures contract has a spot-month limit 

of 1,000 contracts. Both the NYMEX 

cash-settled natural gas futures contract 

(‘‘NN’’) and the ICE Henry Hub Physical 

Basis LD1 contract (‘‘LD1’’) have 

conditional-spot-month limits 

equivalent to 5,000 contracts in the NG 

futures contract. In contrast to the LD1 

contract, swap contracts that are not 

significant price discovery contracts 

(‘‘SPDCs’’) have not been subject to any 

position limits. However, the final rule 

aggregates the related cash-settled 

contracts, whether swaps or futures. For 

example, a trader under current rules 

may hold a position equivalent to 5,000 

NG contracts in each of the NN and LD1 

contracts (10,000 in total), but under the 

final rule, a speculative trader may hold 

only 5,000 cash-settled contracts net 

under the aggregate spot month limit 

(since a trader must add its NN position 

to its LD1 position). Further, other 

economically-equivalent contracts 

would be aggregated with a trader’s 

cash-settled contracts in NN and LD1. 

Proposed § 151.11(a)(2) required that 

a DCM or SEF that is a trading facility 

adopt spot-month limits on cash-settled 

contracts for which no federal limits 

apply, based on the methodology in 

proposed § 151.4 (i.e., 25 percent of 

deliverable supply). Proposed § 151.4(a) 

did not establish spot-month limits in 

the cash-settled Core Referenced 

Futures Contracts (i.e., Class III Milk, 

Feeder Cattle, and Lean Hog contracts). 

Thus, under the proposal, a DCM or SEF 

that is a trading facility would be 

required to set a spot-month limit on 

such contracts at a level no greater than 

25 percent of deliverable supply. 

The final rules provide that the spotmonth position limit for cash-settled 

Core Referenced Futures Contracts (i.e., 

Class III Milk, Feeder Cattle, and Lean 

Hog contracts) and related cash-settled 

Referenced Contracts will be set by the 

Commission at a level equal to 25 

percent of deliverable supply.104

The Commission is also retaining 

class limits in the spot month for 

physical-delivery and cash-settled 

contracts. Under the class limit 

restriction, a trader may hold positions 

up to the spot-month limit in the 

physical-delivery contracts, as well as 

positions up to the applicable spotmonth limit in cash-settled contracts 

(i.e., cash-settled futures and swaps), 

but a trader in the spot month may not 

net across physical-delivery and cashsettled contracts.105 Absent such a 

restriction in the spot month, a trader 

could stand for 100 percent of 

deliverable supply during the spot 

month by holding a large long position 

in the physical-delivery contract along 

with an offsetting short position in a 

cash-settled contract, which effectively 

would corner the market.106

In the Commission’s view, the 

aggregate limit for natural gas will 

ensure that no trader amasses a 

speculative position greater than five 

times the level of the physical-delivery 

Referenced Contract position limit and 

thereby, the limit ‘‘diminishes the 

incentive to exert market power to 

manipulate the cash-settlement price or 

index to advantage a trader’s position in 

the cash-settlement contract.’’ 107

As noted above, the Commission has 

developed the limits on economically 

equivalent swaps concurrently with 

limits established for physical 

commodity futures contracts and has 

established aggregate requirements for 

cash-settled futures and swaps. In 

establishing the spot-month limits for 

cash-settled futures, options, and swaps, 

the Commission seeks to ensure, to the 

maximum extent practicable, that there 

will be sufficient market liquidity for 

bona fide hedgers in swaps, especially 

those seeking to offset open positions in 

such contracts. Permitting traders to 

hold larger positions in natural gas cashsettled contracts near expiration should 

not materially affect the potential for 

market abuses, as the current 

Commission surveillance system serves 

to detect and prevent market 

manipulation, squeezes, and corners in 

the physical-delivery futures contracts 

as well as market abuses in cash-settled 

contracts on which position information 

is collected. In this regard, the Swaps 

Large Trader Reporting system will 

enhance the Commission’s surveillance 

efforts by providing the Commission 

with transparency for the positions of 

traders holding large swap positions. 

The Commission will monitor closely 

the effects of its spot-month position 

limits to ensure that they do not disrupt 

the price discovery function of the 

underlying market and that they are 

effective in addressing the potential for 

market abuses in cash-settled contracts. 

4. Interim Final Rule 

The Commission believes that, based 

on administrative experience, available 

data, and trade interviews, the spot 

month limits formulas for energy, 

agricultural and metals contracts, as 

described above, at this time best 

maximizes the statutory objectives set 

forth in CEA section 4a(a)(3)(B) of 

preventing excessive speculation and 

market manipulation, ensuring market 

liquidity for bona fide hedgers, and 

promoting efficient price discovery. 

However, commenters presented a range 

of views as to the appropriate formula 

with respect to cash settled contracts. 

Some commenters believed that either a 


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108See e.g., CL–ICE I, supra note 69 at 8, CL– 

Centaurus, supra note 21 at 3; CL–BGA, supra note 

35 at 12. 

109See e.g., CL–CME I, supra note 8 at 10; CL– 

KCBT, supra note 97 at 4; CL–APGA, supra note 17 

at 6,8. 

110See § 151.4(c). Under the Proposed Rules, 

spot-month legacy limits would not be subject to 

periodic resets. 

111CL–CME I supra note 8 at 9; and CL–MGEX 

supra note 75 at 2. In addition, the MGEX stated 

that it is impractical to try to ascertain an accurate 

estimate of deliverable supply because there are too 

many variable and unknown factors that affect an 

agricultural commodity’s production and the 

amount that is sent to delivery points. CL–MGEX 

supra note 74 at 2. 

112CL–MFA supra note 21 at 18. 

113 IATP on March 28, 2011 (‘‘CL–IATP’’) at 5. 

114 Id. at 3. 

115CL–BGA supra note 35 at 20. 

116 Id. 

117CL–ISDA/SIFMA supra note 21 at 22. 

larger ratio was appropriate or there 

should be no limit on cash-settled 

contracts at all.108 Other commenters 

believed there should be parity in the 

limits between physical-delivery 

contracts and cash-settled contracts.109

Accordingly, the Commission is 

implementing the spot month limits on 

an interim rule basis and is seeking 

comments on whether a different ratio 

(e.g., one-to-three or one-to-four) can 

maximize further the statutory 

objectives in section 4a(a)(3)(B). 

Specifically, the Commission invites 

commenters to address whether the 

interim final rule best maximizes the 

four objectives in section 4a(a)(3)(B). 

The Commission also seeks comments 

on whether it should set a different ratio 

for different commodities. Should the 

Commission consider setting the ratio 

higher than one-to-one and, if so, in 

which commodities? Commenters are 

encouraged, to the extent feasible, to be 

comprehensive and detailed in 

providing their approach and rationale. 

Commenters are requested to address 

how their suggested approach would 

better maximize the four objectives in 

section 4a(a)(3). 

Additionally, commenters are 

encouraged to address the following 

questions: 

Should the Commission consider the 

relationship between the open interest 

in cash-settled contracts in the spot 

month and open interest in the 

physical-delivery contract in the spot 

month in setting an appropriate ratio? 

Are there other metrics that are 

relevant to the setting of a spot-month 

limit on cash-settled contracts (e.g., 

volume of trading in the physicaldelivery futures contract during the 

period of time the cash-settlement price 

is determined)? 

What criteria, if any, could the 

Commission use to distinguish among 

physical commodities for purposes of 

setting spot-month limits (e.g., 

agricultural contracts of relatively 

limited supplies constrained by crop 

years and limited storage life) and how 

would those criteria be related to the 

levels of limits? 

The Commission also invites 

comments on the costs and benefits 

considerations under CEA section 15a. 

The Commission further requests 

commenters to submit additional 

quantitative and qualitative data 

regarding the costs and benefits of the 

interim final rule and any suggested 

alternatives. Thus, the Commission is 

seeking comments on the impact of the 

interim final rule or any alternative ratio 

on: (1) The protection of market 

participants and the public; (2) the 

efficiency, competitiveness, and 

financial integrity of the futures 

markets; (3) the market’s price discovery 

functions; (4) sound risk management 

practices; and (5) other public interest 

considerations. 

The comment period for the interim 

final rule will close January 17, 2012. 

After the Commission gains some 

experience with the interim final rule 

and has reviewed swaps data obtained 

through the Swaps Large Trader 

Reports, the Commission may further 

reevaluate the appropriate ratio between 

physical-delivery and cash-settled spotmonth position limits and, in that 

connection, seek additional comments 

from the public. 

5. Resetting Spot-Month Limits 

The Proposed Rules required that 

DCMs submit estimates of deliverable 

supply to the Commission by the 31st of 

December of each calendar year. The 

Proposed Rules also provided that the 

Commission would rely on either these 

DCM estimates or its own estimates to 

revise spot-month position limits on an 

annual basis.110 Two commenters 

commented that the Commission’s 

proposed process for DCMs providing 

their deliverable supply estimates 

within the proposed timeframe was 

operationally infeasible.111

Others criticized the setting of spotmonth limits on an annual basis. MFA 

commented that the limits should 

reflect seasonal deliverable supply by 

using either data based on the prior 

year’s deliverable supply estimates or 

more frequent re-setting.112 The 

Institute for Agriculture and Trade 

Policy (‘‘IATP’’) commented that the 

spot-month position limits for legacy 

agricultural commodities will likely 

require more than annual revision due 

to the effects of climate change on the 

estimated deliverable supply for each 

Referenced Contract.113 IATP also urged 

the Commission to amend the proposal 

to provide for emergency meetings to 

estimate deliverable supply if prices or 

supply become volatile.114

Two commenters expressed concern 

about the potential volatility in the limit 

levels introduced by the Commission’s 

proposed annual process for setting 

spot-month limits. BGA commented that 

spot-month limits that are changed too 

frequently (annually would be too 

frequent in their view) could result in a 

‘‘flash crash’’ as traders make large 

position changes in order to comply 

with a potentially new lower limit.115

BGA suggested that this concern could 

be addressed through, among other 

things, less frequent changes to the spotmonth position limit levels and by 

providing the market a several-month 

‘‘cure period.’’ 116 ISDA/SIFMA 

suggested that year-to-year spot-month 

limit level volatility could be addressed 

by using a five-year rolling average of 

estimated deliverable supply.117

The Commission recognizes the 

concerns regarding the necessity and 

desirability of an annual updating of the 

deliverable supply calculations on a 

single anniversary date, and that under 

normal market conditions, agricultural, 

energy, and metal commodities 

typically do not exhibit dramatic and 

sustained changes in their supply and 

demand fundamentals from year-toyear. Accordingly, the Commission has 

determined to update spot-month limits 

biennially (every two years) for energy 

and metal Referenced Contracts instead 

of annually, and to stagger the dates on 

which estimates of deliverable supply 

shall be submitted by DCMs. These 

changes should mitigate the costs of 

compliance for DCMs to prepare and 

submit estimates of deliverable supply 

to the Commission. Under the final rule, 

DCMs may petition the Commission to 

update the limits on a more frequent 

basis should supply and demand 

fundamentals warrant it. 

Finally, in response to comments, the 

Commission has made minor 

modifications to the definition of the 

‘‘spot month’’ to provide for consistency 

with DCMs’ current practices in the 

administration of spot-month limits for 

the Referenced Contracts. 

E. Non-Spot-Month Limits 

The Commission proposed to impose 

aggregate position limits outside of the 

spot month in order to prevent a 

speculative trader from acquiring 

excessively large positions and, thereby, 

to help prevent excessive speculation 

and deter and prevent market 


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118 76 FR at 4752, 4759. 

119 Id. 

120By way of example, assuming a Referenced 

Contract has average all-months-combined 

aggregate open interest of 1 million contracts, the 

level of the non-spot-month position limits would 

equal 26,900 contracts. This level is calculated as 

the sum of 2,500 (i.e., 10 percent times the first 

25,000 contracts open interest) and 24,375 (i.e., 2.5 

percent of the 975,000 contracts remaining open 

interest), which equals 26,875 (rounded up to the 

nearest 100 under the rules (i.e., 26,900)). 

121CL–ATA supra note 81 at 3–4; CL–ATAA 

supra note 94 at 7; CL–Better Markets supra note 

37 at 70–71; CL–Delta supra note 20 at 2–6; CL– 

FWW supra note 81 at 11; and CL–PMAA/NEFI 

supra note 6 at 7, 10. 3,178 form comment letters 

asked the Commission to impose a limit of 1,500 

contracts on Referenced Contracts in silver. 

122See e.g., CL–Better Markets supra note 37 at 

61–64. 

123CL–ATA supra note 81 at 4–5; CL–AFR supra 

note 17 at 5–6; CL–ATAA supra note 94 at 3, 6, 9– 

10, 12; CL–Better Markets supra note 37 at 70–71 

(recommending the Commission to limit noncommodity index and commodity index speculative 

participation in the market to 30 percent and 10 

percent of open interest, respectively); CL–Delta 

supra note 20 at 5; and CL–PMAA/NEFI supra note 

6 at 7. See also Daniel McKenzie on March 28, 2011 

(‘‘CL–McKenzie’’) at 3. The Petroleum Marketers 

Association of America and the New England Fuel 

Institute, for example, suggested that the 

distribution of large speculative traders’ positions 

in the market may be an appropriate factor to be 

considered in developing these speculative target 

limits. 

124American Gas Association (‘‘AGA’’) on March 

28, 2011 (‘‘CL–AGA’’) at 13; CL–AIMA supra note 

35 at 3; CL–BlackRock supra note 21 at 18; CL–CME 

I supra note 8 at 21; CL–FIA I supra note 21 at 11 

(Commission’s prior guidance does not provide a 

basis today for an exemption from hard speculative 

position limits for markets with large open-interest, 

high trading volumes and liquid cash markets); CL– 

Goldman supra note 89 at 6; CL–ISDA/SIFMA 

supra note 21 at 18; CL–MGEX supra note 74 at 1 

(Commission’s proposed formulaic approach to 

non-spot-month position limits seems arbitrary); 

Natural Gas Supply Association (‘‘NGSA’’) and 

National Corn Growers Association (‘‘NCGA’’) on 

March 28, 2011, (‘‘CL–NGSA/NCGA’’) at 4–5 

(position limits outside the spot month should be 

eliminated or be increased substantially because 

threats of manipulation and excessive speculation 

are primarily of concern in the physical-delivery 

spot month contract); CL–PIMCO supra note 21 at 

6; Global Energy Management Institute, Bauer 

College of Business, University of Houston (‘‘Prof. 

Pirrong’’) on January 27, 2011 (‘‘CL–Prof. Pirrong’’) 

at para. 21 (Commission has provided no evidence 

that the limits it has proposed are necessary to 

reduce the Hunt-like risk that the Commission uses 

as a justification for its limits); CL–SIFMA AMG I 

supra note 21 at 8; Teucrium Trading LLC 

(‘‘Teucrium’’) on March 28, 2011 (‘‘CL–Teucrium’’) 

at 2 (limiting the size of positions that a noncommercial market participant can hold in forward 

(non-spot) futures contracts or financially-settled 

swaps, the Commission will restrict the flow of 

capital into an area where it is needed most—the 

longer term price curve); and CL–WGCEF supra 

note 35 at 4. 

125CL–AIMA supra note 35 at 3. 

126CL–FIA I supra note 21 at 11. 

127See CL–AIMA supra note 35 at 3; CL–CME I 

supra note 8 at 12 (for energy and metals); CL–FIA 

I supra note 21 at 12 (10 percent of open interest 

for first 25,000 contracts and then 5 percent); CL– 

ICI supra note 21 at 10 (10 percent of open interest 

until requisite market data is available); CL–ISDA/ 

SIFMA supra note 21 at 20; CL–NGSA/NCGA supra 

note 125 at 5 (25 percent of open interest); and CL– 

PIMCO supra note 21 at 11. 

128See CL–Prof. Greenberger supra note 6 at 13; 

and CL–FWW supra note 82 at 12. 

129CL–PMAA/NEFI supra note 6 at 9 (PMAA/ 

NEFI commented that as open interest in markets 

has grown well beyond the open interest 

assumptions made in 1992, the size of large 

speculative positions has not grown 

commensurately and that therefore the Commission 

should decrease the marginal multiplier in the 

position limit formula as open interest increases. 

PMAA/NEFI commented further that the 

Commission should look at the actual positions by 

traders and set limits to constrain the largest 

positions in the resulting distribution). 

130See CL–Goldman supra note 90 at 6–7. 

131The Commission has used the 10 and 2.5 

percent formula in administering the level of the 

legacy all-months position limits since 1999. See 

e.g., 64 FR 24038, 24039, May 5, 1999. See also 17 

CFR 150.5(c)(2). 

manipulations, squeezes, and 

corners.118 Furthermore, the 

Commission provided that the 

‘‘resultant limits are purposely designed 

to be high in order to ensure sufficient 

liquidity for bona fide hedgers and 

avoid disrupting the price discovery 

process given the limited information 

the Commission has with respect to the 

size of the physical commodity swap 

markets.’’ 119

In the proposal, the formula for the 

non-spot-month position limits is based 

on total open interest for all Referenced 

Contracts in a commodity. The actual 

position limit is based on a formula: 10 

percent of the open interest for the first 

25,000 contracts and 2.5 percent of the 

open interest thereafter.120 The limits 

for each Referenced Contracts included 

class limits with one class comprised of 

all futures and option contracts and the 

second class comprised of all swap 

contracts. A trader could net positions 

within the same class, but could not net 

its position across classes. The limits 

also included an aggregate all-monthscombined limit and a single month 

limit; however, the limit for the single 

month would be the same size as the 

limit for all months. 

The Commission received many 

comments about the rationale for and 

design of the proposed non-spot-month 

limits. Many commenters opined that 

the proposed aggregate non-spot-month 

limits would not be sufficiently 

restrictive to prevent excessive 

speculation.121 Better Markets 

explained, for example, that the 

proposed non-spot-month limits address 

manipulation by limiting the position 

size of a single individual while 

position limits intended to reduce 

excessive speculation should aim to 

reduce total speculative participation in 

the market.122 These commenters 

recommended that, in order to address 

excessive speculation, the Commission 

should set limits designed to limit 

speculative activity to a target level.123

Other commenters questioned the 

utility of non-spot-month limits 

generally.124 AIMA, for example, opined 

that ‘‘[a]lthough * * * limits within the 

spot-month may be effective to prevent 

‘corners and squeezes’ at settlement, the 

case for placing position limits in nonspot-months is less convincing and has 

not been made by the Commission.’’ 125

The FIA commented that non-spotmonth position limits are not necessary 

to prevent excessive speculation.126

A number of commenters opined that 

the Commission should increase the 

open interest multipliers in the formula 

used in determining the non-spot-month 

position limits.127 Other commenters 

opined that the Commission should 

decrease the open interest multipliers to 

5 percent of open interest for first 

25,000 contracts and then 2.5 

percent.128 PMAA and the NEFI 

commented that the formula, which was 

developed in 1992 in the context of 

agricultural commodities, is 

inappropriate for current markets with 

larger open interest relative to the 

agricultural markets.129

Goldman Sachs recommended that 

the Commission use a longer 

observation period than one year for 

setting position limits and provided as 

an example five years in order to reduce 

pro-cyclical effects (e.g., a decrease in 

open interest due to decreased 

speculative activity in one period 

results in a limit in the subsequent 

period that is excessively restrictive or 

vice-versa).130

As stated in the proposal, the nonspot-month position limits are intended 

to maximize the CEA section 4a(a)(3)(B) 

objectives, consistent with the 

Commission’s historical approach to 

setting non-spot-month speculative 

position limits.131 Such a limits 

formula, in the Commission’s view, 

prevents a speculative trader from 

acquiring excessively large positions 

and thereby would help prevent 

excessive speculation and deter and 

prevent market manipulations, 

squeezes, and corners. The Commission 

also believes, based on its experience 

under part 150, that the 10 and 2.5 

percent formula will ensure sufficient 

liquidity for bona fide hedgers and 

avoids disruption to the price discovery 

process. 

The Commission notes that Congress 

implicitly recognized the inherent 

uncertainty regarding future effects 

associated with setting limits 

prophylactically and therefore directed 

the Commission, under section 719(a) of 

the Dodd-Frank Act, to study on a 


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132 Dodd-Frank Act, supra note 1, section 719(a). 

133CL–APGA supra note 17 at 2–3; CL–ATAA 

supra note 94 at 6, 13; CL–PMAA/NEFI supra note 

6 at 11. 6,074 form comment letters asked the 

Commission to adopt ‘‘single-month limits that are 

no higher than two-thirds of the all-monthscombined levels.’’ 

134CL–ATAA supra note 94 at 6. They also 

asserted that the Commission did not provide 

adequate justification for substantially raising the 

single month limit to the same level as the allmonths combined limit. Id. at 13. 

135CL–ICE I supra note 69 at 9–10; CL–ISDA/ 

SIFMA supra note 21 at 19; and CL–Teucrium 

supra note 124 at 2. 

136CL–ICE I supra note 69 at 9–10. 137CL–Teucrium supra note 124 at 2. 138The Commission notes that commenters 

arguing for more restrictive individual month limits 

did not provide any supporting data. 139CEA section 4a(a)(3)(A), 7 U.S.C. 6a(a)(3)(A). 

140CL–BGA supra note 35 at 11; GFI Group 

(‘‘GFI’’) on January 31, 2011 (‘‘CL–GFI’’) at 2 

(progressively tighter limits should apply for 

physically-delivered energy contracts as they near 

expiration/delivery); and CL–PMAA/NEFI supra 

note 6 at 11. 

141CL–BGA supra note 35 at 11. 

retrospective basis the effects (if any) of 

the position limits imposed pursuant to 

section 4a on excessive speculation and 

on the movement of transactions from 

DCMs to foreign venues.132 This study 

will be conducted in consultation with 

DCMs and is to be completed within 12 

months after the imposition of position 

limits. Following Congress’ direction, 

the Commission will conduct an 

evaluation of position limits in 

performing this study and, thereafter, 

the Commission plans to continue 

monitoring these limits, considering the 

statutory objectives under section 

4a(a)(3), and, if warranted, amend by 

rulemaking, after notice and comment, 

the formula adopted herein to determine 

non-spot-month position limits. The 

Commission may determine to reassess 

the formula used to set non-spot-month 

position limits based on the study’s 

findings. 

1. Single-Month, Non-Spot Position 

Limits 

Under proposed § 151.4(d)(1), the 

Commission proposed to set the singlemonth limit at the same level as the allmonths-combined position limit. 

Several commenters requested that the 

Commission reconsider this 

approach.133 The Air Transportation 

Association of America, for example, 

argued that the proposed level would 

exacerbate the problem of speculative 

trading in the nearby (next to expire) 

futures month, the month upon which 

energy prices typically are 

determined.134

Three commenters, including ICE, 

cautioned the Commission not to 

impose position limits that constrain 

speculative liquidity in the outer month 

expirations of Referenced Contracts, that 

is, in contracts that expire in distant 

years, as opposed to nearby contract 

expirations.135 ICE further asked the 

Commission to consider whether allmonths-combined limits are necessary 

or appropriate in energy markets in the 

outer months. ICE stated that such 

limits would decrease liquidity for 

hedgers in the outer months and, 

moreover, all-months limits are not 

appropriate for energy markets where 

hedging is done on a much longer term 

basis relative to the agricultural markets 

where hedging is primarily conducted 

to hedge the next year’s crops.136

Teucrium Trading argued that by 

limiting the size of positions that a noncommercial market participant can hold 

in forward (non-spot) futures contracts 

or financially-settled swaps, the 

Commission would restrict the flow of 

capital into an area where it is needed 

most—the longer term price curve, that 

is, contracts that expire in distant 

years.137

The Commission has determined to 

set the single-month position limit 

levels at the same level as the allmonths-combined limits, consistent 

with the proposal. Under current part 

150, the Commission sets a singlemonth limit at a level that is lower than 

the all-months-combined limit; it also 

provides a limited exemption for 

calendar spread positions to exceed that 

single-month limit under § 150.4(a)(3), 

as long as the single month position 

(including calendar spread positions) is 

no greater than the level of the allmonths-combined limit. Further, the 

Commission does not have a standard 

methodology for determining how much 

smaller the level of the single-month 

limit is set in comparison to the level of 

the all-months-combined limit. 

The Commission has made this 

determination for two reasons. First, 

setting the single-month limit to the 

same level as that of the all-monthscombined limit simplifies the 

compliance burden on market 

participants and renders the calendar 

spread exemption unnecessary. Second, 

setting the limits at the same level for 

both spreaders and other speculative 

traders will permit parity in position 

size between these speculative traders 

in a single calendar month and, thus, 

may serve to diminish unwarranted 

price fluctuations.138

With respect to objections to deferredmonth limits, the Commission notes 

that Congress instructed the 

Commission to set limits on the spot 

month, each other month, and the 

aggregate number of positions that may 

be held by any person for all months.139

Finally, the Commission will 

continually monitor the size, behavior, 

and impact of large speculative 

positions in single contract months in 

order to determine whether it should 

adjust the single-month limit levels. 

2. ‘‘Step-Down’’ Position Limit 

Three commenters recommended that 

the Commission adopt, in addition to 

the spot-month limit and the singlemonth and all-months-combined limits, 

an intermediate ‘‘step-down’’ limit 

between the spot-month position limit 

and the single-month non-spot-month 

position limit.140 This ‘‘step-down’’ 

limit would be less restrictive than the 

spot-month limit, but more restrictive 

than the single-month limit. BGA 

recommended that the single-month 

limit should be scaled down rationally 

before it reaches the spot month so that 

the market will not be disrupted by 

panic selling on the day before the spotmonth limit becomes effective.141 The 

commenters did not propose alternative 

criteria for imposing a step-down 

provision. 

Currently, the Commission and DCMs 

establish a single date when the spotmonth limit becomes effective. DCMs 

publicly disseminate this date as part of 

their contracts’ rules. The advance 

notice provides sufficient time for 

market participants to reduce their 

positions as necessary. The Commission 

is not aware of material issues related to 

these provisions regarding the 

implementation of spot month limits. 

The Commission further believes this 

practice ensures sufficient market 

liquidity for bona fide hedgers and 

helps to deter and prevent squeezes and 

corners in the spot period while 

providing trader flexibility to manage 

positions and remain in compliance 

with the limits. The Commission notes, 

however, that it will monitor trading 

activity and resulting changes in prices 

in the transition period into the spot 

month in order to determine whether it 

should impose a new ‘‘step-down’’ limit 

for Referenced Contracts nearing the 

spot-month period. 

3. Setting and Resetting Non-SpotMonth Limits 

The Commission proposed allmonths-combined aggregate limits and 

single-month aggregate limits in 

proposed § 151.4(d)(1). The Commission 

is adopting those proposed limits in 

final § 151.4(b)(1), which sets forth 

single-month and all-months-combined 

position limits for non-legacy 

Referenced Contracts (i.e., those 

agricultural contracts that currently are 

not subject to Federal position limits as 

well as energy and metal contracts). 


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142CL–FIA I supra note 21 at 12; CL–BlackRock 

supra note 21 at 18; CL–CME I supra note 8 at 12; 

CL–EEI/EPSA supra note 21 at 11; CL–KCBT I 

supra note 97 at 3; CL–NGFA supra note 72 at 3; 

CL–WGC supra note 21 at 5; and CL–ISDA/SIFMA 

supra note 21 at 21. 

143CL–BlackRock supra note 21 at 18; CL–CME 

I supra note 8 at 12; CL–EEI/EPSA supra note 21 

at 11; CL–KCBT I supra note 97 at 3; CL–NGFA 

supra note 70 at 3; and CL–WGC supra note 21 at 

5. BlackRock argued that a formal rulemaking 

process for adjusting position limit levels would 

provide market participants with advanced notice 

of any potential changes and an opportunity to 

express their views on such changes. 

144CL–WGC supra note 21 at 5. 

145Encana Marketing (USA) Inc. (‘‘Encana’’) on 

March 28, 2011 (‘‘CL–Encana’’) at 2. 

146See e.g., CL–Delta supra note 20 at 11. 

147An appropriate ratio is the ratio of uncleared 

open interest submitted by swap dealers in such 

later periods to the uncleared open interest 

submitted by clearing members in such later 

periods. 

148For example, assume in a particular 

Referenced Contract that open interest has declined 

over a 24-month period; the average all-monthscombined aggregate open interest levels are 900,000 

contracts for the most recent 12 months and 

1,000,000 contracts for the most recent 24 months. 

Position limits would be based on the higher 24- 

month average level of 1,000,000 contracts. 

Thereby, the higher level of the position limit may 

serve to ensure sufficient market liquidity for bona 

fide hedgers in the event, for example, a decline in 

use of derivatives occurred in the historical 

measurement period that may be associated with a 

recession. Because position limits apply to 

prospective time periods, the use of the higher level 

may be appropriate, for example, with a subsequent 

expansionary period. 

These limits would be fixed based on 

the following formula: 10 percent of the 

first 25,000 contracts of average allmonths-combined aggregated open 

interest and 2.5 percent of the open 

interest for any amounts above 25,000 

contracts of average all-monthscombined aggregated open interest. 

Under proposed § 151.4(b)(1)(i), 

aggregated open interest is derived from 

month-end open interest values for a 12- 

month time period. The Commission 

would use open interest to determine 

the average all-months-combined open 

interest for the relevant period, which, 

in turn, will form the basis for the nonspot-month position limits. 

Under the Proposed Rules, the 

Commission would calculate, for all 

Referenced Contracts, open interest on 

an annual basis for a 12-month period, 

January to December, and then, based 

on those calculations, publish the 

updated non-spot-month position limits 

by January 31st of the following 

calendar year. The updated limits 

would become effective 30 business 

days after such publication. With 

respect to the initial limits, they would 

become effective pursuant to a 

Commission order under proposed 

§ 151.4(h)(3) and would be based on 12 

months of open interest data. 

Several commenters urged the 

Commission to use a transparent and 

accessible methodology to determine 

non-spot-month position limits.142

Some of these commenters 

recommended that updated non-spotmonth limits be determined through 

rulemaking, and not through automatic 

annual recalculations as proposed.143

The World Gold Council argued that 

uncertainty associated with floating, 

annually-set position limits may 

inadvertently discourage market 

participants from providing the 

requisite long-term hedges.144 Encana 

asked the Commission to consider 

adopting procedures for a periodic 

reevaluation of the formulas to ensure 

that they do not reduce liquidity or 

impair the price discovery function of 

the markets.145

Many commenters objected to the 

proposed timeline for setting initial 

limits.146 For example, many comments 

urged the Commission to act 

‘‘expeditiously.’’ Delta recommended 

the Commission should use sampling 

and other statistical techniques to make 

reasonable, working assumptions about 

positions in various market segments to 

set initial limits. 

In response to comments, the 

Commission has determined to amend 

the proposed process for setting initial 

and subsequent non-spot-month 

position limits. With respect to initial 

non-spot-month position limits, under 

§ 151.4(d)(3)(i) the initial non-spotmonth limits for non-legacy Referenced 

Contracts will be calculated and 

published after the Commission has 

received data sufficient to determine 

average all-months-combined aggregate 

open interest for a full 12-month period. 

The aggregate open interest will be 

derived from various sources, including 

data received from DCMs pursuant to 

part 16, swaps data under part 20, and 

data regarding linked, direct access 

FBOT contracts under a condition of a 

no-action letter and subsequently under 

part 48 regarding FBOT registration 

with the Commission, when finalized 

and made effective. The Commission 

accepts part of Delta’s recommendation 

to utilize reasonable, working 

assumptions about positions in various 

market segments to set initial limits. In 

this regard, the Commission will strive 

to establish non-spot-month position 

limits in an expedited manner that 

complies with the directives of 

Congress, while ensuring that it has 

sufficient swaps data to properly 

estimate open interest levels for 

Referenced Contracts. 

To compute 12 months of open 

interest data in uncleared all-monthscombined swaps open interest, prior to 

the timely reporting of all swap dealers’ 

net uncleared open swaps and 

swaptions positions by counterparty, 

the Commission may estimate uncleared 

open swaps positions, based upon 

uncleared open interest data submitted 

by clearing organizations or clearing 

members under part 20, in lieu of the 

aggregate of swap dealers’ net uncleared 

open swaps. In developing accurate 

estimates of aggregate open interest 

under § 151.4(b)(2)(i), the Commission 

will adjust such uncleared open interest 

data submitted by clearing organizations 

or clearing members by an appropriate 

ratio if it determines, using data 

regarding later periods submitted by 

swap dealers and clearing members, that 

the uncleared open interest data 

submitted by clearing members differ 

significantly from the open interest data 

submitted by swap dealers.147 The 

Commission has accordingly provided, 

under § 151.4(b)(2)(ii), that, based on 

data provided to the Commission under 

part 20, it may estimate uncleared 

swaps open positions for the purpose of 

setting initial non-spot-month position 

limits. 

Under final § 151.4(d)(3)(i), the 

Commission will review the staff 

computations, including the 

assumptions made in estimating 12 

months of uncleared all-monthscombined swap open interest, for 

consistency with the formula in the 

final rules. Once the Commission 

determines that the staff computations 

conform to the established formula, the 

Commission will approve and issue an 

order under final § 151.4(d)(3)(iii), 

publishing the initial levels of the nonspot-month position limits. 

Under final § 151.4(d)(3)(ii), 

subsequent non-spot-month limits for 

non-legacy Referenced Contracts will be 

updated and published every two years, 

commencing two years after the initial 

determinations. These subsequent 

position limits would be based on the 

higher of the most recent 12 months 

average all-months-combined aggregate 

open interest or 24 months average allmonths-combined aggregate open 

interest.148 Under § 151.4(e), these 

limits would be made effective on the 

first calendar day of the third calendar 

month after the date of publication on 

the Commission’s Web site. 

This procedure may provide for limits 

that would be generally less restrictive 

than the proposed limits, since, by way 

of example, a continued decline in open 

interest over two years under the 

Proposed Rule would result in a lower 


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71642 Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / Rules and Regulations 

149For example, any limits fixed during the 

month of October would take effect on January 1. 

150American Bakers Association (‘‘ABA’’) on 

March 28, 2011 (‘‘CL–ABA’’) at 3–4; CL–AFIA 

supra note 94 at 3; Amcot on March 28, 2011 (‘‘CL– 

Amcot’’) at 2; CL–FWW supra note 81 at 13; CL– 

IATP supra note 113 at 5; and CL–NGFA supra note 

72 at 1–2. 

151CL–ABA supra note 150 at 3–4. 

152CL–Amcot supra note 150 at 3. 

153CL–AIMA supra note 35 at 4; Bunge on March 

28, 2011 (‘‘CL–Bunge’’) at 1–2; Deutsche Bank AG 

(‘‘DB’’) on March 28, 2011 (‘‘CL–DB’’) at 6; Gresham 

Investment Management LLC (‘‘Gresham’’) on 

February 15, 2011 (‘‘CL–Gresham’’) at 4–5; CL–FIA 

I supra note 21 at 12; CL–MGEX supra note 74 at 

2; CL–MFA supra note 21 at 18–19; and United 

States Commodity Funds LLC (‘‘USCF’’) on March 

25, 2011 (‘‘CL–USCF’’) at 10–11. 

154CL–USCF supra note 153 at 10–11. 

155CL–Bunge supra note 153 at 1–2; CL–FIA I 

supra note 21 at 12; and CL–Gresham supra note 

153 at 5. See CME Petition for Amendment of 

Commodity Futures Trading Commission 

Regulation 150.2 (April 6, 2010), available at 

http://www.cftc.gov/ucm/groups/public/@swaps/ 

documents/file/df26_cmepetition.pdf. 

156CL–CMC supra note 21 at 3; CL–DB supra note 

153 at 10; and CL–MFA supra note 21 at 19. 

157CL–CMC supra note 21 at 3; CL–KCBT I supra 

note 97 at 1–2; CL–MGEX supra note 74 at 2; and 

CL–NGFA supra note 72 at 4. 

158 58 FR 18057, April 7, 1993. 

159For a discussion of the historical approach, see 

64 FR 24038, 24039, May 5, 1999. 

160Within a contract class, the limits would be set 

at an amount equal to 10 percent of the first 25,000 

contracts of average all-months-combined aggregate 

open interest in the contract and 2.5 percent of the 

open interest for any amounts above 25,000 

contracts. The aggregate all-months-combined 

limits across contract classes would be set at 10 

percent of the first 25,000 contracts of average allmonths-combined aggregated open interests, and 

2.5 percent of the open interest thereafter. The 

average all-months-combined aggregate open 

interest, which is the basis of these calculations, is 

determined annually by adding the all-months 

futures open interest and the all-month-combined 

swaps open interest for each of the 12 months prior 

to the effective date and dividing that amount by 

12. Each trader’s positions would be netted for the 

purpose of determining compliance with position 

limits. 

161CL–AIMA supra note 35 at 3 (they add ‘‘an 

unnecessary level of complexity’’); CL–BlackRock 

limit each year, whereas under the final 

rule the limit for the first year would not 

decline and the limit for the second year 

would be based on the higher 24-month 

average open interest. The Commission 

also notes that under § 151.4(e) the 

public would have notice of updated 

position limit levels at least two months 

in advance of the effective date of such 

limits (i.e., such limits would be made 

effective on the first calendar day of the 

third calendar month immediately 

following the publication of new limit 

levels).149 Final § 151.5(e) requires the 

Commission to provide all relevant 

open interest data used to derive 

updated position limit levels. By 

making public this open interest data, 

the public can monitor and anticipate 

future position limit levels, consistent 

with the transparency suggestions made 

by several commenters. 

In addition, § 151.4(b)(2)(i)(C) 

provides that, upon the entry of an order 

under Commission regulation 20.9 of 

the Commission’s regulations 

determining that operating swap data 

repositories (‘‘SDRs’’) are processing 

positional data that will enable the 

Commission to conduct surveillance in 

the relevant swaps markets, the 

Commission shall rely on such data in 

order to determine all-months-combined 

swaps open interest. 

4. ‘‘Legacy Limits’’ for Certain 

Agricultural Commodities 

The Proposed Rule would set nonspot-month limits for Reference 

Contracts in legacy agricultural 

commodities at the Federal levels 

currently in place (referred to herein as 

‘‘legacy limits’’). Several commenters 

recommended that the Commission 

should keep the legacy limits.150 The 

American Bakers Association argued 

that raising these legacy limits would 

increase hedging margins and increase 

volatility which would ultimately 

undermine commodity producers’ 

ability to sell their product to 

consumers.151 Amcot opined that the 

Commission need not proceed with 

phased implementation for the legacy 

agricultural markets because it could set 

their limits based on existing legacy 

limits.152

Several other commenters 

recommended that the Commission 

abandon the legacy limits.153 U.S. 

Commodity Funds argued that the 

Commission offered no justification for 

treating legacy agricultural contracts 

differently than other Referenced 

Contract commodities.154 Some of these 

commenters endorsed the limits 

proposed by CME.155 Other commenters 

recommended the use of the open 

interest formula proposed by the 

Commission in determining the position 

limits applicable to the legacy 

agricultural Referenced Contract 

markets.156 Finally, four commenters 

expressed their preference that non-spot 

position limits be kept consistent for the 

three wheat Core Referenced Futures 

Contracts.157

The Commission has determined to 

adopt the position limit levels proposed 

by the CME for the legacy Core 

Referenced Futures Contracts. Such 

levels would be effective 60 days after 

the publication date of this rulemaking 

and those levels would be subject to the 

existing provisions of current part 150 

until the compliance date of these rules, 

which is 60 days after the Commission 

further defines the term ‘‘swap’’ under 

the Dodd-Frank Act. At that point, the 

relevant provisions of this part 151, 

including those relating to bona-fide 

hedging and account aggregation, would 

also apply. In the Commission’s 

judgment, the CME proposal represents 

a measured approach to increasing 

legacy limits, similar to that previously 

implemented.158 The Commission will 

use the CME’s all-months-combined 

petition levels as the basis to increase 

the levels of the non-spot-month limits 

for legacy Referenced Contracts. The 

petition levels were based on 2009 

average month-end open interest. 

Adoption of the petition levels results in 

increases in limit levels that range from 

23 to 85 percent higher than the levels 

in existing § 150.2. 

The Commission has determined to 

maintain the current approach to setting 

and resetting legacy limits because it is 

consistent with the Commission’s 

historical approach to setting such 

limits. To ensure the continuation of 

maintaining a parity of limit levels for 

the major wheat contracts at DCMs and 

in response to comments supporting 

this approach, the Commission will also 

increase the levels of the limits on 

wheat at the MGEX and the KCBT to the 

level for the wheat contract at the 

CBOT.159

5. Non-Spot Month Class Limits 

The Commission proposed to create 

two classes of contracts for non-spotmonth limits: (1) Futures and options on 

futures contracts and (2) swaps. The 

Proposed Rule would apply singlemonth and all-months-combined 

position limits to each class 

separately.160 The aggregate position 

limits across contract classes are in 

addition to the position limits within 

each contract class. Therefore, a trader 

could hold positions up to the allowed 

limit in each class (futures and options 

and swaps), provided that their overall 

position remains within the applicable 

position limits. Under the proposal, a 

trader could net positions within a 

class, such as a long swap position with 

a short swap position, but could not net 

positions in different classes, such as a 

long futures position with a short swap 

position. The class limits were designed 

to diminish the possibility that a trader 

could have market power as a result of 

a concentration in any one submarket 

and to prevent a trader that had a flat 

net aggregate position in futures and 

swaps combined from establishing 

extraordinarily large offsetting 

positions. 

Several commenters stated that the 

class limits proposal was flawed and 

therefore should not be adopted.161 For 


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supra note 21 at 17; CL–Cargill supra note 76 at 10; 

CL–CME I supra note 8 at 13; CL–DB supra note 

153 at 8–9; CL–Goldman supra note 89 at 6; CL– 

ICE I supra note 69 at 9; CL–ISDA/SIFMA supra 

note 21 at 23; CL–MFA supra note 21 at 18; CL– 

Prof. Pirrong supra note 124 at paras. 24–30; and 

CL–Shell supra note 35 at 6. 

162CL–Shell supra note 35 at 6; CL–BlackRock 

supra note 21 at 17 (arguing that the Commission 

failed to demonstrate that large positions in a 

submarket implies market power). See also CL– 

Cargill supra note 76 at 10; CL–AIMA supra note 

35 (commenting that the proposed class limits add 

‘‘an unnecessary level of complexity’’); CL–ISDA/ 

SIFMA supra note 21 at 23; CL–ICE I supra note 

69 at 9; CL–CME I supra note 8 at 13; CL–DB supra 

note 153 at 8–9; CL–Goldman supra note 89 at 6; 

CL–MFA supra note 21 at 18; and CL–Prof. Pirrong 

supra note 124 at paras. 24–30. 

163CL–ICE I supra note 69 at pg. 9. 

164CL–Shell supra note 35 at 6–7; CL–API supra 

note 21 at 14 (Commission should engage in a 

rigorous analysis of the regulatory burdens of 

intraday limits and ultimately clarify that position 

limits will only apply at the end of each trading 

day); Barclays Capital (‘‘Barclays I’’) on March 28, 

2011 (‘‘CL–Barclays I’’) at 4–5 (Commission should 

reconsider requiring intraday compliance for nonspot-month position limits). 

165Commodity Futures Trading Commission 

Division of Market Oversight, Advisory Regarding 

Compliance with Speculative Position Limits (May 

7, 2010), available at http://www.cftc.gov/ucm/ 

groups/public/@industryoversight/documents/file/ 

specpositionlimitsadvisory0510.pdf. 

166See e.g., CME Rulebook, Rule 443, available at 

http://www.cmegroup.com/rulebook/files/ 

CME_Group_RA0909-5.pdf’’) (amended Sept. 14, 

2009); ICE OTC Advisory, Updated Notice 

Regarding Position Limit Exemption Request Form 

for Significant Price Discovery Contracts, available 

at https://www.theice.com/publicdocs/otc/ 

advisory_notices/ICE_OTC_Advisory_0110001.pdf 

(Jan. 4, 2010). 

167 In 1977, the Commission proposed a general 

or conceptual definition of bona fide hedging that 

did not include the modifying adverb ‘‘normally’’ 

to the verb ‘‘represent.’’ 42 FR 14832, Mar. 17, 1977. 

The Commission introduced the adverb normally in 

the subsequent final rulemaking in order to 

accommodate balance sheet hedging that would 

otherwise not have met the general definition of 

bona fide hedging. 42 FR 42748, Aug. 24, 1977. The 

Commission noted that, for example, hedges of 

asset value volatility associated with depreciable 

capital assets might not represent a substitute for 

subsequent transactions in a physical marketing 

channel. Id. at 42749. 

168By its terms, the definition of bona fide 

hedging applies only to futures (and options). 

Pursuant to section 4a(c), the Commission proposed 

to extend the definition of bona fide hedging 

transactions and positions to all Referenced 

Contracts, including swaps. The Commission is 

adopting the definition of bona fide hedging 

substantially as proposed. The Commission believes 

that applying the statutory definition of bona fide 

hedging to swaps is consistent with congressional 

intent as embodied in the expansion of the 

Commission’s authority to swaps (i.e., those that are 

economically-equivalent and SPDFs). In granting 

the Commission authority over such swaps, 

Congress recognized that such swaps warrant 

similar treatment to their economically equivalent 

futures for purposes of position limits and 

therefore, intended that the statutory definition of 

bona fide hedging also be extended to swaps. 

example, the CME argued that because 

the class limits would not permit 

netting across contract classes (that is, 

across futures and swaps), the class 

limits would not appropriately limit a 

trader’s actual (net) speculative 

positions. CME further objected to this 

proposal by stating that the Commission 

provided no rationale as to why the 

positions in two futures contracts could 

be netted but positions in swaps and 

futures could not be netted.162 Another 

commenter similarly argued that 

economically equivalent contracts 

(futures or swaps) are simply two 

components of a broader derivatives 

market for a particular commodity and, 

therefore, the concept of establishing 

limits on a class of economically 

equivalent derivatives was logically 

flawed.163

In response to the comments, the 

Commission has determined to 

eliminate class limits from the final 

rules. The Commission believes that 

comments regarding the ability of 

market participants to net swaps and 

future positions that are economically 

equivalent have merit. The Commission 

believes that concerns regarding the 

potential for market abuses through the 

use of futures and swaps positions can 

be addressed adequately, for the time 

being, by the Commission’s large trader 

surveillance program. The Commission 

will closely monitor speculative 

positions in Referenced Contracts and 

may revisit this issue as appropriate. 

F. Intraday Compliance With Position 

Limits 

The Commission proposed to apply 

position limits on an intraday basis, and 

some commenters urged the 

Commission to reconsider such a 

requirement.164 Barclays commented 

that the Commission should recognize 

intraday violations of aggregate limits as 

a form of excusable overage because of 

the challenge of sharing and collating 

position information on a real-time 

basis. 

In the Commission’s judgment, 

intraday compliance would constitute a 

marginal compliance cost and not be 

overly-burdensome. The Commission 

notes that firms may impose risk limits 

(i.e., position limits determined by the 

internal risk management department or 

equivalent unit) on individual traders 

and among related entities required to 

aggregate positions under § 151.7 to 

mitigate the need to create systems to 

ensure intraday compliance. Moreover, 

the expected levels of limits outside of 

the spot-month are not expected to 

affect many firms and those affected 

firms should have the capability to 

establish internal risk limits or real-time 

position reporting to ensure intraday 

compliance with position limits. 

Finally, the Commission notes that 

intraday compliance with position 

limits is consistent with existing 

Commission 165 and DCM 166 policy. 

The Commission’s policy on intraday 

compliance reflects its concerns with 

very large speculative positions, 

whether or not they persist through the 

end of a trading day. 

G. Bona Fide Hedging and Other 

Exemptions 

The new statutory definition of bona 

fide hedging transactions or positions in 

section 4a(c)(2) of the CEA generally 

follows the definition of bona fide 

hedging in current Commission 

regulation 1.3(z)(1), with two significant 

differences. First, the new statutory 

definition recognizes a position in a 

futures contract established to reduce 

the risks of a swap position as a bona 

fide hedge, provided that either: (1) The 

counterparty to such swap transaction 

would have qualified for a bona fide 

hedging transaction exemption, i.e., the 

‘‘pass-through’’ of the bona fides of one 

swap counterparty to another (such 

swaps may be termed ‘‘pass-through 

swaps’’); or (2) the swap meets the 

requirements of a bona fide hedging 

transaction. Second, a bona fide hedging 

transaction or position must represent a 

substitute for a physical market 

transaction.167

Section 4a(c)(1) of the CEA authorizes 

the Commission to define bona fide 

hedging transactions or positions 

‘‘consistent with the purposes of this 

Act.’’ Congress directed the 

Commission, in amended CEA section 

4a(c)(2), to adopt a definition of bona 

fide hedging transactions or positions 

for futures contracts (and options) for 

purposes of setting the position limits 

mandated by CEA section 4a(a)(2)(A). 

Pursuant to this authority, the 

Commission proposed a new regulatory 

definition of bona fide hedging 

transactions or positions in proposed 

§ 151.5(a).168 The Commission also 

proposed § 151.5 to establish five 

enumerated exemptions from position 

limits for bona fide hedging transactions 

or positions for exempt and agricultural 

commodities. 

Under the proposal, a trader must 

meet the general requirements for a 

bona fide hedging transaction or 

position in proposed § 151.5(a)(1) and 

also meet the requirements for an 

enumerated hedging transaction in 

proposed § 151.5(a)(2). The general 

requirements call for the bona fide 

hedging transaction or position to 

represent a substitute for transactions in 

a physical marketing channel (that is, 

the cash market for a physical 

commodity), to be economically 

appropriate to the reduction of risks in 


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169Thus, for example, an anticipatory 

merchandising transaction could only serve as a 

basis of an enumerated hedge if it, inter alia, 

reduces the risks attendant to transactions 

anticipated to be made in the physical marketing 

channel. 

170See e.g., CL–FIA I supra note 21 at 14–15; CL– 

Morgan Stanley supra note 21 at 4, 5; and CL– 

ISDA/SIFMA supra note 21 at 9. 

171CL–Morgan Stanley supra note 21 at 5. 

According to Morgan Stanley, the proposed 

definition may preclude market participants from 

(i) netting exposure across different categories of 

related futures and swaps; (ii) hedging long-term 

risks in illiquid markets, common in the 

development of large infrastructure projects; and 

(iii) assuming the positions of a less stable market 

participant during times of market distress. 

172See e.g., CL–Commercial Alliance I supra note 

42 at 2–3; CL–FIA I supra note 21 at 13; and 

Economists Inc. on March 28, 2011 (‘‘CL– 

Economists Inc.’’) at 2. 

173See e.g., CL–FIA I supra note 21 at 13; CL– 

ISDA/SIFMA supra note 21 at 8; CL–BlackRock 

supra note 21 at 16; CL–Barclays I supra note 164 

at 3; and CL–ICI supra note 21 at 9. 

174See e.g., CL–CME I supra note 8 at 18. 

175See id. at 18 citing New CEA section 1a(33), 

7 U.S.C. 1a(33). 

176See id. at 18 citing 75 FR 80747 (Dec. 23, 

2010). 

177See e.g., CL–FIA I supra note 21 at 15l and 

CL–EEI/EPSA supra note 21 at 15. 

the conduct and management of a 

commercial enterprise, and to arise from 

the potential change in the value of 

certain assets, liabilities, or services. 

The five proposed enumerated hedging 

transactions are discussed below. The 

proposed section did not provide for 

non-enumerated hedging transactions or 

positions, which current Commission 

regulations 1.3(z)(3) and 1.47 permit. 

Under the proposal, Commission 

regulation 1.3(z) would be retained only 

for excluded commodities. 

Proposed § 151.5(b) established 

reporting requirements for a trader upon 

exceeding a position limit. The trader 

would be required to submit 

information not later than 9 a.m. on the 

business day following the day the limit 

was exceeded. Proposed § 151.5(c) 

specified application and approval 

requirements for traders seeking an 

anticipatory hedge exemption, 

incorporating the current requirements 

of Commission regulation 1.48. 

Proposed § 151.5(d) established 

additional reporting requirements for a 

trader who exceeded the position limits 

in order to reduce the risks of certain 

swap transactions, discussed above. 

Proposed § 151.5(e) specified 

recordkeeping requirements for traders 

that acquire positions in reliance on 

bona fide hedge exemptions, as well as 

for swap counterparties for which a 

counterparty represents that the 

transaction would qualify as a bona fide 

hedging transaction. Swap dealers 

availing themselves of a hedge 

exemption would be required to 

maintain a list of such counterparties 

and make that list available to the 

Commission upon request. Proposed 

§§ 151.5(g) and (h) provided procedural 

documentation requirements for such 

swap participants. 

Proposed § 151.5(f) required a crosscommodity hedger to provide 

conversion information, as well as an 

explanation of the methodology used to 

determine such conversion information, 

between the commodity exposure and 

the Referenced Contracts used in 

hedging. Proposed § 151.5(i) required 

reports by bona fide hedgers to be filed 

for each business day, up to and 

including the day the trader’s position 

level first falls below the position limit 

that was exceeded. 

The Commission has responded to the 

many comments received by making 

substantial changes to the Proposed 

Rules. A full discussion of the 

comments received and of the 

Commission’s responses is found below. 

In summary, in the final rules, the 

Commission: (1) Clarifies that a 

transaction qualifies as a bona fide 

hedging transaction without regard to 

whether the hedger’s position would 

otherwise exceed applicable position 

limits; (2) expands the list of 

enumerated hedging transactions to 

include hedging of anticipated 

merchandising activity, royalty 

payments, and service contracts; (3) 

clarifies the conditions under which 

swaps executed opposite a commercial 

counterparty would be recognized as the 

basis for bona fide hedging; (4) reduces 

the burden of claiming a pass-through 

swap exemption; (5) introduces new 

§ 151.5(b) to make the aggregation and 

bona fide hedging provisions of part 151 

consistent; (6) clarifies that cash market 

risk can be hedged on a one-to-one 

transactional basis or can be hedged as 

a portfolio of risk; (7) eliminates the 

restriction on holding hedges in cashsettled contracts up through the last 

trading day; (8) reduces the daily filing 

requirement for cash market information 

on the Form 404 and Form 404S to a 

monthly filing of daily reports; (9) 

allows for self-effectuating notice filings 

for those hedge exemptions that require 

such a filing; and (10) provides an 

exemption for situations involving 

‘‘financial distress.’’ 

1. Enumerated Hedges 

Under proposed § 151.5(a)(1), no 

transaction or position would be 

classified as a bona fide hedging 

transaction unless it also satisfies the 

requirements for one of five categories 

of enumerated hedging transactions.169

The Commission received many 

comment letters regarding the proposed 

definition of bona fide hedging, with a 

number of commenters expressing 

concern that the proposed definition 

was ambiguous and overly restrictive.170

Morgan Stanley, for example, opined 

that the ‘‘very narrow’’ definition of 

bona fide hedging in the Proposed Rule 

would unnecessarily limit the ability of 

many market participants to engage in 

‘‘many well-established risk reducing 

activities.’’ 171 Several commenters 

requested bona fide hedging recognition 

for transactions beyond those expressly 

enumerated.172 In this respect, some 

commenters, including the FIA and 

Morgan Stanley, urged the Commission 

to exercise its broad exemptive 

authority under CEA section 4a(a)(7) to 

accommodate a wider range of 

legitimate hedging activities, including 

the hedging of general swap position 

risk, otherwise known as a risk 

management exemption.173

Several commenters argued that not 

permitting a risk management 

exemption would be inconsistent with 

other parts of the Act and Commission 

rulemakings.174 For example, CME 

argued that the hedging standard under 

the major swap participant (‘‘MSP’’) 

definition includes swap positions 

‘‘maintained by [pension plans] for the 

primary purpose of hedging or 

mitigating any risk directly associated 

with the operation of the plan.’’ 175 CME 

also pointed to the commercial end-user 

exception to mandatory clearing 

requirements, where the Commission’s 

proposed definition of hedging ‘‘covers 

swaps used to hedge or mitigate any of 

a person’s business risks.’’ 176

As discussed above, the Commission 

is authorized to define bona fide 

hedging for swaps. The Commission, 

however, does not believe that 

including a risk management provision 

is necessary or appropriate given that 

the elimination of the class limits 

outside of the spot-month will allow 

entities, including swap dealers, to net 

Referenced Contracts whether futures or 

economically equivalent swaps. As 

such, under the final rules, positions in 

Referenced Contracts entered to reduce 

the general risk of a swap portfolio will 

be netted with the positions in the 

portfolio. 

Some commenters also objected to the 

Commission’s failure to recognize as 

bona fide hedging swap transactions 

that qualify for the end-user clearing 

exception. Such omission, these 

commenters added, will lead to 

unnecessary disruption to commercial 

hedgers’ legitimate business 

practices.177 The end-user clearing 

exception is available for swap 

transactions used to hedge or mitigate 


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178The Commission notes that Congress also 

referred to positions held ‘‘for hedging or mitigating 

commercial risk’’ in the definition of major swap 

participant. CEA section 1a(33), 7 U.S.C. 1a(33). 

Due to the nearly identical wording, the 

Commission has proposed to interpret this phrase 

in the implementation of the end-user exception in 

a near-identical manner in the further definition of 

major swap participant. CFTC, Notice of Proposed 

Rulemaking, End-User Exception to Mandatory 

Clearing of Swaps, 75 FR 80747, 80752–3, Dec. 23, 

2010. In light of Congress’s nearly identical use of 

this language in two separate provisions of the 

Dodd-Frank Act, but not within the definition of 

bona fide hedging, the Commission does not believe 

that Congress intended that the different wording in 

section 4a(c)(2) should be interpreted in an 

identical manner to these differently worded 

provisions. 

179Under the new statutory definition of a bona 

fide hedge, positions must meet the following 

requirements: (1) They must represent a substitute 

for transactions made or to be made or positions 

taken or to be taken at a later time in the physical 

marketing channel; (2) they must be economically 

appropriate to the reduction of risk in the conduct 

and management of a commercial enterprise; and 

(3) the hedge must manage price risks associated 

with specific types of activities in the physical 

marketing channel (e.g., the production of 

commodity assets). CEA section 4a(c)(2), 7 U.S.C. 

6a(c)(2). The conditions for the end-user exception 

may overlap with the general statutory definition of 

bona fide hedging on one of the latter’s three 

prongs. Similarly, the statutory direction to define 

bona fide hedging does address whether at least one 

counterparty is not a financial entity and does not 

address how one meets its financial obligations, 

which are conditions for claiming the end-user 

exception. 

180See e.g., CL–CME I supra note 8 at 18; CL– 

Commercial Alliance I supra note 42 at 3, 7, 9, CL– 

ISDA/SIFMA supra note 21 at 11; and CL–MFA 

supra note 21 at 18. 181CL–ISDA/SIFMA supra note 21 at 17. 

182CL–Amcot supra note 150 at 2. 

183CL–FWW supra note 81 at 2. 

184CL–CME I supra note 8 at 8. 

185The Commission also notes that the bona fide 

hedge definition in new CEA section 4a(c)(2), 7 

U.S.C. 6a(c)(2), deals with an entity’s transaction 

and not the entity itself. As such, the Commission 

declines to provide bona fide hedge status to an 

entity without reference to the underlying 

transaction. 

commercial risk. When Congress 

inserted a general definition of bona fide 

hedging in CEA section 4a(c)(2), 

Congress did not include language that 

paralleled the end-user clearing 

exception; rather, Congress included 

different criteria for bona fide hedging 

transactions or positions.178

Accordingly, the Commission believes 

that the end-user exception’s broader 

sweep, that the swap be used for 

‘‘hedg[ing] or mitigat[ing] commercial 

risk,’’ is not appropriate for a definition 

of a bona fide hedging transaction.179

Several commenters expressed 

concern that exemptions were not 

provided for arbitrage or spread 

positions in the list of enumerated bona 

fide hedges.180 Some commenters, such 

as ISDA/SIFMA, argued that the 

Commission should use its exemptive 

authority under CEA section 4a(a)(7) to 

include an exemption for intercommodity spread and arbitrage 

transactions, ‘‘which reflect a 

relationship between two commodities 

rather than an outright directional 

position in the spread components 

* * *. Arbitrage and inter-commodity 

spreads do not raise the same price 

volatility concerns as outright positions. 

On the contrary, they constitute a 

standard investment practice that 

minimizes exposure while capturing 

inefficiencies in an established 

relationship and aiding price discovery 

in each contract.’’ 181

With regard to spread exemptions, 

under current § 150.3(a)(3), a trader may 

use this exemption to exceed the singlemonth limit outside the spot month in 

a single futures contract or options 

thereon, but not to exceed the allmonths limit in any single month. As 

explained in the proposal, the 

Commission proposed to set the singlemonth limit at the level of the allmonths limit, making the ‘‘spread’’ 

exemption no longer necessary. Since 

the final rule retains the individualmonth limit at the same level as the allmonths-combined limit, it remains 

unnecessary to extend an exemption to 

spread positions. 

With respect to the existing DCM 

arbitrage exemptions, under existing 

DCM rules a trader may receive an 

arbitrage exemption to the extent that 

the trader has offsetting positions at a 

separate trading venue. The 

Commission does not believe that it is 

necessary to provide for such an 

exemption from aggregate position 

limits because the Commission has 

eliminated class limits in these final 

rules for non-spot-month position 

limits. As such, a trader’s offsetting 

positions among Referenced Contracts 

outside of the spot month, whether 

futures or economically-equivalent 

swaps, would be netted for purposes of 

applying the position limits and, 

therefore, there is no need for arbitrage 

exemptions. As discussed in further 

detail under II.N.3. below, however, the 

Commission has provided for an 

arbitrage exemption from DCM or SEF 

position limits under certain 

circumstances. 

With regard to inter-commodity 

spreads, traders would not be able to net 

such positions unless the positions fall 

within the same category of Referenced 

Contracts. However, a trader offsetting 

multiple risks in the physical marketing 

channel may be eligible for a bona fide 

hedging exemption. For example, a 

processor seeking to hedge the price risk 

associated with anticipated processing 

activity may receive bona fide hedging 

treatment for an inter-commodity spread 

economically appropriate to the 

reduction of its anticipated price risks 

under final § 151.5(a)(ii)(C). 

As discussed above, the final rules 

retain the class limits within the spotmonth. Otherwise, if a trader were 

permitted to claim an arbitrage 

exemption in the spot-month across 

physically-delivered and cash-settled 

spot-month class limits, then that trader 

would be able to amass an 

extraordinarily large long position in the 

physically-delivered Referenced 

Contract with an offsetting short 

position in a cash-settled Referenced 

Contract, effectively cornering the 

market at the entry prices to the 

contracts. In the proposal, the 

Commission asked whether it should 

grant a bona fide hedge exemption to an 

agent that is not responsible for the 

merchandising of the cash positions, but 

is linked to the production of the 

physical commodity, e.g., if the agent is 

the provider of crop insurance. Amcot 

recommended that the Commission 

deny exemptions to crop insurance 

providers.182 Similarly, Food and Water 

Watch questioned whether agents 

merely linked to production should be 

allowed to claim bona fide hedges.183

CME, in contrast, argued that extending 

the bona fide hedge exemption to these 

entities would be appropriate.184 The 

Commission notes that crop insurance 

providers and other agents that provide 

services in the physical marketing 

channel could qualify for a bona fide 

hedge of their contracts for services 

arising out of the production of the 

commodity underlying a Referenced 

Contract under § 151.5(a)(2)(vii). 

In response to comments, the 

Commission clarifies in the final rule 

that whether a transaction qualifies as a 

bona fide hedging transaction or 

position is determined without regard to 

whether the hedger’s position would 

otherwise exceed applicable position 

limits.185 Accordingly, a person who 

uses a swap to reduce risks attendant to 

a position that qualifies for a bona fide 

hedging transaction may pass-through 

those bona fides to the counterparty, 

even if the person’s swap position is not 

in excess of a position limit. 

Proposed § 151.5(a)(2)(ii) stated that 

purchases of Referenced Contracts may 

qualify as bona fide hedges. However, 

the language in proposed § 151.5(a)(2)(i) 

provided that sales of any commodity 

underlying Referenced Contracts may 

qualify as bona fide hedges. Existing 

Commission regulation 1.3(z) treats 

equally purchases and sales of futures 

contracts (and does not explicitly cover 

sales or purchases of any commodity 


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186CL–BGA supra note 35 at 15. See also CL–FIA 

I supra note 21 at 15; and CL–Morgan Stanley supra 

note 21 at 5. 187Many of these transactions were described in 

comment letters. See e.g., CL–Economists Inc. supra 

note 172 at 10–17; CL–Commercial Alliance I supra 

note 42 at 5–10; and CL–FIA I supra note 21 at 14– 

15. 188See e.g., CL–FIA I supra note 21 at 15; CL– 

BGA supra note 35 at 14; CL–ISDA/SIFMA supra 

note 21 at 11; and CL–EEI/EPSA supra note 21 at 

15. 

189See CL–Commercial Alliance I supra note 42 

at 3. See also CL–Bunge supra note 153 at 3–4 

(describing ‘‘enterprise hedging’’ needs arising 

from, inter alia, investments in operating assets and 

forward contract relationships with farmers and 

consumers that create timing mismatches between 

the cash flow associated with the physical 

commodity commitment and the hedge’s cash 

flow). 

190See e.g., CL–FIA I supra note 21 at 15. 

191See e.g., CL–FIA I supra note 21 at 14; CL– 

Commercial Alliance I supra note 42 at 3; CL–BGA 

supra note 35 at 14; CL–ISDA/SIFMA supra note 21 

at 11; and CL–EEI/EPSA supra note 21 at 14. 

192See e.g., CL–FIA I supra note 21 at 15; CL– 

BGA supra note 35 at 14; CL–ISDA/SIFMA supra 

note 21 at 11; and CL–EEI/EPSA supra note 21 at 

15. 

193The Commission historically has recognized a 

merchandising transaction as a bona fide hedge in 

the narrow circumstances of an agent responsible 

for merchandising a cash market position which is 

being offset. 17 CFR 1.3(z)(3). 

194The ‘‘appropriateness’’ test was contained in 

Commission regulation 1.3(z)(1). Congress 

incorporated that provision in the new statutory 

definition in 4a(c)(2)(A)(ii), 7 U.S.C. 6a(c)(2)(A)(ii). 

195A specific example of this type of anticipated 

merchandising is described in Appendix B to the 

final rule. 

underlying). BGA requested that the 

Commission harmonize the perceived 

difference between the current and 

Proposed Rule texts.186 The 

Commission has deleted the phrase 

‘‘any commodity underlying’’ from 

‘‘sales of any commodity underlying 

Referenced Contracts’’ in § 151.5(a)(2)(i) 

in order to clarify that it does not intend 

to treat hedges involving the sales of 

Referenced Contracts any differently 

than hedges involving the purchases of 

Referenced Contracts. 

The Commission received many 

comments describing transactions that 

the commenters believed would not be 

covered by the Commission’s proposed 

bona fide hedging provisions. Appendix 

B to part 151 has been added to list 

some of the transactions or positions 

that the Commission deems to qualify 

for the bona fide hedging exemption.187

The appendix includes an analysis of 

each fact pattern to assist market 

participants in understanding the 

enumerated hedging transactions in 

final § 151.5(a)(2). As discussed in 

section II.G.4. and provided for in 

§ 151.5(a)(5), if any person is engaging 

in other risk-reducing practices 

commonly used in the market which the 

person believes may not be specifically 

enumerated above, such person may ask 

for relief regarding the applicability of 

the bona fide hedging exemption from 

the staff under § 140.99 or the 

Commission under section 4a(a)(7) of 

the CEA. 

Further, to provide transparency to 

the public, the Commission is 

considering publishing periodically 

general statistical information gathered 

from the bona fide hedging exemptions 

to inform the public of the extent of 

commercial firms’ use of exemptions. 

This summary data may include the 

number of persons and extent to which 

such persons have availed themselves of 

cash-market, anticipatory, and passthrough-swaps bona fide hedge 

exemptions. 

2. Anticipatory Hedging 

As discussed in II.G.1. above, some 

commenters objected that proposed 

§ 151.5(a)(1) included the anticipated 

ownership or merchandising of an 

exempt or agricultural commodity, but 

such transactions were not included in 

the list of enumerated hedges.188

Commenters pointed out that, while the 

statutory definition of bona fide hedging 

appears to contemplate hedges of asset 

price risk,189 including royalty or 

volumetric production payments,190

hedges of liabilities or services,191 and 

anticipatory ownership and 

merchandising,192 these types of hedge 

transactions are not recognized among 

enumerated hedge transactions in the 

proposal. 

In response to commenters, the 

Commission is expanding the list of 

enumerated hedging transactions to 

recognize, in final §§ 151.5(a)(2)(v)–(vii), 

the hedging of anticipated 

merchandising activity, royalty 

payments (a type of asset), and service 

contracts, respectively, under certain 

circumstances as discussed below in 

detail. The Commission has determined 

that the transactions fall within the 

statutory definition of bona fide hedging 

transactions and are otherwise 

consistent with the purposes of section 

4a of the Act. 

The Commission had never 

recognized anticipated ownership and 

merchandising transactions as bona fide 

hedging transactions,193 due to its 

historical view that anticipatory 

ownership and merchandising 

transactions generally fail to meet the 

second ‘‘appropriateness’’ prong of the 

Commission’s definition of a bona fide 

hedging transaction, 194 which requires 

that a hedge be economically 

appropriate and that it reduce risks in 

the conduct and management of a 

commercial enterprise. For example, a 

merchant may anticipate that it will 

purchase and sell a certain amount of a 

commodity, but has not acquired any 

inventory or entered into fixed-price 

purchase or sales contracts. Although 

the merchant may anticipate such 

activity, the price risk from 

merchandising activity is yet to be 

assumed and therefore a transaction in 

Referenced Contracts could not reduce 

this yet-to-be-assumed risk. Such a 

merchant would not meet the second 

prong of the bona fide hedging 

definition. To the extent that a merchant 

acquires inventory or enters into fixedprice purchase or sales contracts, the 

merchant would have established a 

position of risk and may meet the 

requirements of the second prong and 

the long-standing enumerated 

provisions to hedge those risks. 

In response to comments, the 

Commission recognizes that in some 

circumstances, such as when a market 

participant owns or leases an asset in 

the form of storage capacity, the market 

participant could establish market 

positions to reduce the risk associated 

with returns anticipated from owning or 

leasing that capacity. In these narrow 

circumstances, the transactions in 

question may meet the statutory 

definition of a bona fide hedging 

transaction. However, to address 

Commission concerns about unintended 

consequences (e.g., creating a potential 

loophole that may result in granting 

hedge exemptions for types of 

speculative activity), the Commission 

will recognize anticipatory 

merchandising transactions as a bona 

fide hedge, provided the following 

conditions are met: (1) The hedger owns 

or leases storage capacity; (2) the hedge 

is no larger than the amount of unfilled 

storage capacity currently, or the 

amount of reasonably anticipated 

unfilled storage capacity during the 

hedging period; (3) the hedge is in the 

form of a calendar spread (and utilizing 

a calendar spread is economically 

appropriate to the reduction of risk 

associated with the anticipated 

merchandising activity) with 

component contract months that settle 

in not more than twelve months; and (4) 

no such position is maintained in any 

physical-delivery Referenced Contract 

during the last five days of trading of the 

Core Referenced Futures Contract for 

agricultural or metal contracts or during 

the spot month for other 

commodities.195 In addition, the 

anticipatory merchandiser must meet 

specific new filing requirements under 

§ 151.5(d)(1). As is the case with other 

anticipated hedges, the Commission 

clarifies in the final rule that such a 

hedge can only be maintained so long as 


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196CL–Cargill supra note 76 at 5; CL–FIA I supra 

note 21 at 16; CL–AGA supra note 124 at 7–8; and 

CL–EEI/EPSA supra note 21 at 5. 

197See CL–EEI/EPSA supra note 21 at 18. 

198See CL–FIA supra note 21 at 6; and CL– 

Morgan Stanley supra note 21 at 6. 

199See e.g., CL–Cargill supra note 76 at 6; and 

CL–FIA I supra note 21 at 17. 

200See CL–Cargill supra note 76 at 6; and CL– 

EEI/EPSA supra note 21 at 17. 

201See e.g., CL–Cargill supra note 76 at 6. 

the trader is reasonably certain that he 

or she will engage in the anticipated 

merchandising activity. 

New §§ 151.5(a)(2)(vi)–(vii) provide 

for royalty and services hedges that are 

available only if: (1) The royalty or 

services contract arises out of the 

production, manufacturing, processing, 

use, or transportation of the commodity 

underlying the Referenced Contract; and 

(2) the hedge’s value is ‘‘substantially 

related’’ to anticipated receipts or 

payments from a royalty or services 

contract. Specific examples of what 

types of royalties or service contracts 

would comply with § 151.5(a)(1) and 

would therefore be eligible as a basis for 

a bona fide hedge transaction are 

described in Appendix B to the final 

rule. 

Under proposed § 151.5(c), the 

Commission also limited the availability 

of an anticipatory hedge to a period of 

one year after the request date, in 

contrast to proposed § 151.5(a)(2), 

which only imposed this requirement 

for Referenced Contracts in agricultural 

commodities. Several commenters 

requested that the Commission expand 

the scope of anticipatory hedging to 

include hedging periods beyond one 

year.196 These commenters opined that 

limiting anticipatory hedging to one 

year may make sense in the agricultural 

context because the risks are typically 

associated with an annual crop cycle; 

however, this same analysis does not 

apply to other commodities, particularly 

for electricity generators, utilities, and 

other energy companies.197 For 

example, this restriction would be 

commercially unworkable for 

infrastructure projects that require 

multi-year hedges in order to secure 

financing.198

The Commission has amended the 

appropriate exemptions for anticipatory 

activities under § 151.5(a)(2) to clarify 

that the one-year limitation for 

production, requirements, royalty rights, 

and service contracts applies only to 

Referenced Contracts in an agricultural 

commodity, except that a one-year 

limitation for anticipatory 

merchandising, applies to all 

Referenced Contracts. 

The Commission proposed in 

§ 151.5(a)(2)(i) to recognize the hedging 

of unsold anticipated production as an 

enumerated hedge. The Commission 

clarifies in the final rule that anticipated 

production includes anticipated 

agricultural production, e.g., the 

anticipated production of corn in 

advance of a harvest. 

3. Pass-Through Swaps 

In the proposal, the Commission 

explained that under CEA section 

4a(c)(2)(B), pass-through swaps are 

recognized as the basis for bona fide 

hedges if the swap was executed 

opposite a counterparty for whom the 

transaction would qualify as a bona fide 

hedging transaction pursuant to CEA 

section 4a(c)(2)(A). Further, a swap in a 

Referenced Contract may be used as a 

bona fide hedging transaction if that 

swap itself meets the requirements of 

CEA section 4a(c)(2)(A). CEA section 

4a(c)(2)(A) provides the general 

definition of a bona fide hedge 

transaction. 

Several commenters requested 

clarification concerning the so-called 

pass-through provision.199 For example, 

Cargill maintained that the rule is not 

clear on whether the non-hedging 

counterparty may claim a hedge 

exemption for the swap, and without 

such an exemption there would be less 

liquidity available to hedgers using 

swaps because potential counterparties 

would be subject to position limits for 

the swap itself.200

The Commission clarifies through 

new § 151.5(a)(3) (entitled ‘‘Passthrough swaps’’) that positions in 

futures or swaps Referenced Contracts 

that reduce the risk of pass-through 

swaps qualify as a bona fide hedging 

transaction. In response to comments 

regarding the bona fide hedging status of 

the pass-through swap itself, 201 the 

Commission also clarifies that the nonbona-fide counterparty (e.g., a swapdealer) may classify this swap as a bona 

fide hedging transaction only if that 

non-bona-fide counterparty enters risk 

reducing positions, including in futures 

or other swap contracts, which offset the 

risk of the pass-through swap. For 

example, if a person entered a passthrough swap opposite a bona fide 

hedger, either within or outside of the 

spot-month, that resulted in a 

directional exposure of 100 long 

positions in a Referenced Contract, that 

person could treat those 100 long 

positions as a bona fide hedging 

transaction only if that person also 

entered into 100 short positions to 

reduce the risk of the pass-through 

swap. Absent this restriction, a nonbona-fide counterparty could create a 

large speculative directional position in 

excess of limits simply by entering into 

pass-through swaps. 

The Commission notes that regardless 

of the bona fide status of the passthrough swap, outside of the spot-month 

the risk-reducing positions in a 

Referenced Contract will net with the 

positions from the pass-through swap. 

Similarly, within the spot-month, if the 

non-bona-fide counterparty to a passthrough swap reduces the risk of that 

swap with cash-settled Referenced 

Contracts, the risk reducing positions in 

cash-settled contracts would net with 

the pass-through swap for purposes of 

the spot-month position limit. 

Because the spot-month limits 

include class limits for physicaldelivery futures contracts and cashsettled contracts, the bona fide hedging 

status of the pass-through swap would 

impact spot-month compliance if the 

non-bona-fide counterparty reduced the 

risk of the pass-through swap with 

physical-delivery futures contracts in 

the spot-month. However, as discussed 

above, so long as the risk of the passthrough swap is offset, these final rules 

would treat both the pass-through swap 

and the risk reducing positions as bona 

fide hedges. In this connection, the 

Commission notes that the non-bonafide counterparty would still be subject 

to 151.5(a)(1)(v), and must exit the 

physical delivery futures contract in an 

orderly manner as the person ‘‘lifts’’ the 

hedge of the pass-through swap. 

Similarly, as with all transactions in 

Referenced Contracts, the person would 

be subject to the intra-day application of 

position limits. Therefore, as the person 

‘‘lifts’’ the hedge of the pass-through 

swap, if the pass-through swap is no 

longer offset, only the extent of the passthrough swap that is offset would 

qualify as a bona fide hedge. 

The Commission clarifies through 

new § 151.5(a)(4) (entitled ‘‘Passthrough swap offsets’’) that a passthrough swap position will be classified 

as a bona fide hedging transaction for 

the counterparty for whom the swap 

would not otherwise qualify as a bona 

fide hedging transaction pursuant to 

paragraph (a)(2) of this section (the 

‘‘non-hedging counterparty’’), provided 

that the non-hedging counterparty 

purchases or sells Referenced Contracts 

that reduce the risks attendant to such 

pass-through swaps. 

Commenters also requested further 

clarity concerning proposed § 151.5(g), 

which set forth certain procedural 

requirements for pass-through swap 

counterparties. FIA and ISDA, for 

example, stated that it was unclear 

whether the pass-through provision is 

limited to transactions where the swap 

counterparty is relying on an exemption 


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71648 Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / Rules and Regulations 

202See e.g., CL–FIA I supra note 21 at 19; and 

CL–ISDA/SIFMA supra note 21 at 10. 

203See CL–FIA I supra note 21 at 18. 

204See CL–EEI/EPSA supra note 21 at 17. 

205See CL–FIA I supra note 21 at 19. 

206See e.g., CL–BGA supra note 35 at 16. 

207See e.g., CL–EEI/EPSA supra note 21 at 17; 

CL–ISDA/SIFMA supra note 21 at 12; and CL–FIA 

I supra note 21 at 19. 

208See CL–ISDA/SIFMA supra note 21 at 13. 

209See id. 

210See e.g., CL–BGA supra note 35 at 17; and 

ISDA/SIFMA supra note 21 at 12. 

211See CL–DB supra note 153 at 8. 

212See id. Barclays similarly noted that it should 

not matter whether the original holder of a passthrough swap risk manages the risk itself or asks 

another to manage it for them and that overall 

systemic risk would increase if risk transfer is made 

more difficult. CL–Barclays I supra note 164 at 4. 

213See CEA section 4a(c)(2)(B)(i), 7 U.S.C. 

6a(c)(2)(B)(i). The Commission notes that the same 

restrictions on holding a position in the spot month 

or the last five days of trading of physical-delivery 

Core Referenced Futures Contracts that would 

apply to the swap counterparty with the underlying 

bona fide risk also apply to the holder of the passthrough swap. For example, if a swap dealer enters 

into a crude oil swap with an anticipatory 

production hedger, then it would be subject to the 

same restrictions on holding the hedge of that passthrough swap into the spot month of the 

appropriate physical-delivery Referenced Contract. 

214For example, Company A owns cash market 

inventory in a non-Referenced Contract commodity 

and enters into a Swap N with Bank B. Swap N 

would be an enumerated bona fide hedging 

transaction for Company A under the rules of a 

DCM or SEF. Because Swap N is not a Referenced 

Contract, Bank B does include Swap H in 

measuring compliance with position limits. 

However, Bank B, as is economically appropriate, 

may enter into a cross-commodity hedge to reduce 

the risk associated with Swap N. That risk reducing 

transaction is a bona fide hedging transaction for 

Bank B. 

215CL–COPE supra note 21 at 13; CL–API supra 

note 21 at 11; CL–Shell supra note 35 at 4–5; and 

CL–WGCEF supra note 35 at 23. 

216CL–API supra note 21 at 11. 

217 Id. 

to exceed the limits, and not simply 

entering a swap with a counterparty that 

is a bona fide hedger.202 Other 

commenters requested clarification as to 

whether the hedger must wait until all 

written communications have been 

exchanged before it can enter into a 

hedging transaction.203 According to 

these commenters, such a requirement 

could delay entering a swap for hours if 

not days,204 forcing the hedger to 

assume the risk of price changes during 

the period between when it enters the 

swap and when the parties complete the 

written documentation process.205

Finally, commenters believed the rule 

was unclear on the type of 

representation that must be provided by 

an end-user and may be relied upon by 

dealers.206

Some commenters recommended a 

less-costly verification regime that 

would allow parties to rely upon a onetime representation concerning 

eligibility for the bona fide hedging 

exemption.207 ISDA/SIFMA also argued 

that the Commission should confirm the 

bona fide hedger status of a party in 

order to prevent, among other things, 

unwarranted disclosure of confidential 

information from an end-user to a 

dealer.208 Further, ISDA/SIFMA argued 

that the determination should be on an 

entity-by-entity basis, and not on a 

transaction-by-transaction basis, in 

order to promote certainty for bona fide 

hedgers and their swap 

counterparties.209 BGA argued that the 

proposal to require a dealer to 

continuously monitor whether the 

underlying swap continues to offset the 

cash commodity risk of the hedging 

counterparty would result in significant 

and costly burdens on end-users and 

other hedgers.210

In response to these comments, the 

Commission has determined to reduce 

the burden of claiming a pass-through 

swap exemption. Under new § 151.5(i), 

in order to rely on a pass-through 

exemption, a counterparty would be 

required to obtain from its counterparty 

a representation that the swap, in its 

good-faith belief, would qualify as an 

enumerated hedge under § 151.5(a)(2). 

Such representation must be provided at 

the inception (i.e., execution) of the 

swap transaction and the parties to the 

swap must keep records of the 

representation. This representation, 

which may be made in a trade 

confirmation, must be kept for a period 

of at least two years following the 

expiration of the swap and furnished to 

the Commission upon request. 

Deutsche Bank also requested 

clarification as to whether the 

immediate counterparty to the swap 

must be a bona fide hedger or whether 

the Commission will look to a series of 

transactions to determine if it was 

connected to a bona fide hedger.211

Deutsche Bank argued that given the 

complexity of the swaps marketplace, 

market participants often hedge their 

risk through multiple combinations of 

intermediaries; hence, the Commission 

should not require that the immediate 

counterparty be a bona fide hedger, but 

rather part of a network of transactions 

connected to a bona fide hedger.212

The Commission rejects extending the 

pass-through exemption to a series of 

swap transactions. Rather, consistent 

with this Congressional direction, a 

pass-through swap will be recognized as 

a bona fide hedge only to the extent it 

is executed opposite a counterparty 

eligible to claim an enumerated hedge 

exemption.213

The Commission clarifies that the 

pass-through swap exemption will 

allow non-hedging counterparties to 

such swaps to offset non-Referenced 

Contract swap risk in Referenced 

Contracts.214

Some commenters recommended that 

the Commission exclude inter-affiliate 

swaps from any calculation of a trader’s 

position for position limit compliance 

purposes.215 API, for example, argued 

that swaps among affiliates would have 

no net effect on the positions of 

affiliated entities and the final rule 

should therefore make it clear that the 

Commission will not consider such 

swaps for purposes of position limits.216

API commented further that this 

approach would be consistent with the 

Commission’s treatment of inter-affiliate 

swaps in other proposed rulemakings, 

for example, the proposed rulemaking 

further defining, inter alia, swap 

dealer.217

In light of the structure of the 

aggregation rules regarding the 

treatment of a single person or a group 

of entities under common ownership or 

control, as provided for under § 151.7, 

the Commission has introduced 

§ 151.5(b). This subsection clarifies that 

entities required to aggregate accounts 

or positions under § 151.7 shall be 

considered the same person for the 

purpose of determining whether a 

person or persons are eligible for a bona 

fide hedge exemption under § 151.5(a) 

to the extent that such positions are 

attributed among these entities. The 

Commission’s intention in introducing 

new § 151.5(b) is to make the 

aggregation and bona fide hedging 

provisions of part 151 consistent. For 

example, a holding company that owns 

a sufficient amount of equity in an 

operating company would need to 

aggregate the operating company’s 

positions with those of the holding 

company in order to determine 

compliance with position limits. 

Commission regulation 151.5(b) would 

clarify that the holding company could 

enter into bona fide hedge transactions 

related to the operating company’s cash 

market activities, provided that the 

operating company has itself not 

entered into such hedge transactions 

with another person with whom it is not 

aggregated (i.e., the holding company’s 

hedge activity must comply with the 

appropriateness requirement of 

§ 151.5(a)(1)). Appendix B to the final 

regulations provides an illustrative 

example as to how this provision would 

operate. 

4. Non-Enumerated Hedges 

Many of the commenters objecting to 

the proposed definition of bona fide 


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218See e.g., CL–FIA I supra note 21 at 15; CL– 

EEI/EPSA supra note 21 at 15; CL–CME I supra note 

8 at 19; CL–Morgan Stanley supra note 21 at 6; and 

CL–WGCEF supra note 35 at 5. It should be noted, 

however, that at least 184 comment letters opined 

that the Commission should define the bona fide 

hedge exemption ‘‘in the strictest sense possible’’ 

and that ‘‘[b]anks, hedge funds, private equity and 

all passive investors in commodities should not be 

deemed as bona fide hedgers.’’ 

219CL–WGCEF supra note 35 at 5. 

220CL–FIA I supra note 21 at 15. 

221See e.g., CL–Cargill supra note 76 at 2–3; CL– 

BGA supra note 35 at 15; and CL–ISDA/SIFMA 

supra note 21 at 10–11. 

222See e.g., CL–BGA supra note 35 at 15. 

223Similarly, and in light of comments, the 

Commission has elected not to adopt proposed 

§ 151.5(j) in recognition of the confusion this 

provision could have caused to market participants 

who hedge on a portfolio basis and to reduce the 

burden of requiring a continuing representation of 

bona fides by the swap counterparty. The proposed 

§ 151.5(j) provided that a party to a swap opposite 

a bona fide hedging counterparty could establish a 

position in excess of the position limits, offset that 

position, and then re-establish a position in excess 

of the position limits, so long as the swap continued 

to offset the cash market commodity risk of a bona 

fide hedging counterparty. 

224See § 1.3(z)(2)(iv). In the proposal, anticipatory 

hedge transactions could not be held during the five 

last trading days of any Referenced Contract. This 

restriction has been clarified to be aligned with the 

trading calendar of the Core Referenced Futures 

Contract and applies to all anticipatory transaction 

hedges. 

225See e.g., CL–FIA I supra note 21 at 16l and 

CL–ISDA/SIFMA supra note 21 at 11. 

226See CL–FIA I supra note 21 at 16. 

227See CL–ISDA/SIFMA supra note 21 at 11. 

228See e.g., CL–Commercial Alliance I supra note 

42 at 9; and National Milk Producers Federation 

(‘‘NMPF’’) on July 25, 2011 (‘‘CL–NMPF’’) at 3–4. 

229CL–NMPF, supra note 228 at 3–4. 

hedging requested that the Commission 

reintroduce a process for claiming nonenumerated hedging exemptions.218 The 

Working Group of Commercial Energy 

Firms (‘‘Working Group’’), for example, 

argued that the Commission should 

maintain its current flexibility and 

preserve its ability to allow 

exemptions.219 FIA commented further 

that such a provision is expressly 

authorized under CEA section 

4a(a)(7).220 The Commission has 

considered the comments and has 

expanded the list of enumerated hedge 

transactions, consistent with the 

statutory definition of bona fide 

hedging. 

In response to questions raised by 

commenters, the Commission notes that 

market participants may request 

interpretive guidance (under 

§ 140.99(a)(3)) regarding the 

applicability of any of the provisions of 

this part, including whether a 

transaction or class of transactions 

qualify as enumerated hedges under 

§ 151.5(a)(2). Market participants may 

also petition the Commission to amend 

the current list of enumerated hedges or 

the conditions therein. Such a petition 

should set forth the general facts 

surrounding such class of transactions, 

the reasons why such transactions 

conform to the requirements of the 

general definition of bona fide hedging 

in § 151.5(a)(1), and the policy purposes 

furthered by the recognition of this class 

of transactions as the basis for 

enumerated bona fide hedges. 

5. Portfolio Hedging 

Some commenters requested 

clarification as to whether the new bona 

fide hedging exemption would require 

one-to-one tracking, and argued that 

portfolio hedging should be allowed 

because the combination of hedging 

instruments, such as futures, swaps and 

options, generally cannot be 

individually identified to particular 

physical transactions.221 Some of these 

commenters argued that if the 

Commission does not permit portfolio 

hedging, the requirement to one-to-one 

track physical commodity transactions 

with corresponding hedge transactions 

will increase risk by preventing endusers from effectively hedging their 

commercial exposure.222

The Commission notes that the final 

§ 151.5(a)(2) provides for bona fide 

hedging transactions and positions. The 

Commission intends to allow market 

participants either to hedge their cash 

market risk on a one-to-one 

transactional basis or to combine the 

risk associated with a number of 

enumerated cash market transactions in 

establishing a bona fide hedge, provided 

that the hedge is economically 

appropriate to the reduction of risk in 

the conduct and management of a 

commercial enterprise, as required 

under § 151.5(a)(1)(ii). The Commission 

has clarified this intention by adding 

after ‘‘potential change in the value of’’ 

in § 151.5(a)(1)(iii) the phrase ‘‘one or 

several.’’ 223

6. Restrictions on Hedge Exemptions 

Proposed § 151.5(a)(2)(v) generally 

followed the Commission’s existing 

agricultural commodity position limits 

regime, which restricts cross-commodity 

hedge transactions from being classified 

as a bona fide hedge during the last five 

days of trading on a DCM.224 Some 

commenters recommended that the 

Commission eliminate this prohibition, 

otherwise market participants will have 

to assume risks during that time period 

instead of shifting risks to those willing 

to assume them.225 According to the 

FIA, unhedged risk, such as a 

commercial company unable to hedge 

jet fuel price exposure with heating oil 

futures or swap contracts in the last five 

days of trading, would reduce market 

liquidity and increase the risk of 

operating a commercial business.226

Further, ISDA opined that the 

Commission did not adequately justify 

the purpose of applying a prohibition 

from the Commission’s agricultural 

commodity position limits to other 

commodities.227

The Commission recognizes the 

restriction on holding cross-commodity 

hedges in the last five days of trading 

may increase tracking risk if the trader 

were forced out of the Referenced 

Contract into a lesser correlated 

contract, or into a deferred contract 

month that was less correlated with the 

relevant cash market risk than the spot 

month. However, the Commission also 

continues to believe that such crosscommodity hedges are not appropriately 

recognized as bona fide in the physicaldelivery contracts in the last five days 

of trading for agricultural and metal 

Referenced Contracts or the spot month 

for energy Referenced Contracts since 

the trader does not hold the underlying 

commodity for delivery against, or have 

a need to take delivery on, the 

underlying commodity The Commission 

agrees with the comments regarding the 

elimination of the restriction on holding 

a cross-commodity hedge in cash-settled 

contracts during the last five days of 

trading for agricultural and metal 

contracts and the spot month for other 

contracts and has relaxed this restriction 

for hedge positions established in cashsettled contracts. Under the final rules, 

traders may maintain their crosscommodity hedge positions in a cashsettled Referenced Contract through the 

final day of trading. 

The Commission received a number 

of comments on similar restrictions 

proposed to apply to other enumerated 

hedge transactions.228 The National 

Milk Producers Federation, for example, 

argued that the restriction on holding a 

hedge position through the last days of 

trading for cash-settled contracts should 

be eliminated because if a trader carried 

positions through the last days of 

trading in a cash-settled contract then it 

could not impact the orderly liquidation 

of the market.229

In response to these comments, the 

Commission has eliminated all 

restrictions on holding a bona fide 

hedge position for cash-settled contracts 

and narrowed the restriction on holding 

a bona fide hedge position in physicaldelivery contracts. Specifically, a bona 

fide hedge position for anticipatory 

hedges for production, requirements, 

merchandising, royalty rights, and 

service contract, and unfixed-price 

calendar spread risk hedges 


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230CL–Morgan Stanley supra note 21 at 16. 

231CL–Barclays I supra note 164 at 5. 

232New CEA section 4a(a)(7) provides that the 

Commission may ‘‘by rule, regulation, or order 

* * * exempt * * * any person or class of 

persons’’ from any requirement it may establish 

under section 4a. 7 U.S.C. 6a(a)(7). This provision 

requires that any exemption, general or bona fide, 

to position limits granted by the Commission, be 

done by Commission action. 

233See §§ 151.5(b) and (d). 

234See e.g., CL–Cargill supra note 76 at 3; CL–FIA 

I supra note 21 at 20; CL–Commercial Alliance I 

supra note 42 at 3–4; CL–BGA supra note 35 at 17; 

CL–EEI/EPSA supra note 21 at 15–16; and CL– 

Utility Group supra note 21 at 14. See also CL– 

ISDA/SIFMA supra note 21 at 12 (opposing daily 

reporting). 

235See CL–FIA I supra note 21 at 21; and CL– 

ISDA/SIFMA supra note 21 at 12. 

236See e.g., CL–Cargill supra note 76 at 4. 

237Commercial Alliance (‘‘Commercial Alliance 

II’’) on July 20, 2011 (‘‘CL–Commercial Alliance II ’’) 

at 1. 

238 Id. 

239See e.g., CL–ICE I supra note 69 at 12; and 

CL–WGCEF supra note 35 at 2–3. 

(§ 151.5(a)(2)(iii), and, as discussed 

above, cross-commodity hedges in all 

bona fide hedge circumstances will not 

retain bona fide hedge status if held, for 

physical-delivery agricultural and metal 

contracts, in the last five trading days 

and in the spot month for all other 

physical-delivery contracts. The 

Commission has modified the Proposed 

Rule in recognition of potential 

circumstances where inefficient hedging 

would be required if the restriction were 

maintained as proposed, the reduced 

concerns with a negative impact on the 

market of maintaining such a hedge if 

held in a cash-settled contract (as 

opposed to a physical-delivery 

contract), and a generally cautious 

approach to imposing new restrictions 

on the ability of traders active in the 

physical marketing channel to enter into 

cash-settled transactions to meet their 

hedging needs. 

7. Financial Distress Exemption 

Some commenters requested that the 

Commission introduce an exemption for 

market participants in financial distress 

scenarios. Morgan Stanley, for example, 

commented that during periods of 

financial distress, it may be beneficial 

for a financially sound entity to assume 

the positions (and corresponding risk) of 

a less stable market participant.230

Morgan Stanley argued that not 

providing for an exemption in these 

types of situations could reduce 

liquidity and increase systemic risk. 

Similarly, Barclays argued that the 

Commission should preserve the 

flexibility to accommodate situations 

involving, for example, the exit of a line 

of business by an entity, a customer 

default at a futures commission 

merchant (‘‘FCM’’), or in the context of 

potential bankruptcy.231

In recognition of the public policy 

benefits of including such an 

exemption, the Commission has 

provided, in § 151.5(j), for an exemption 

for situations involving financial 

distress. The Commission’s authority to 

provide for this exemption is derived 

from CEA section 4a(a)(7).232 In this 

regard, the Commission clarifies that 

this exemption for financial distress 

situations does not establish or 

otherwise represent a form of hedging 

exemption. 

8. Filing Requirements 

Under the proposal, once an entity’s 

total position exceeds a position limit, 

the entity must file daily reports on 

Form 404 for cash commodity 

transactions and corresponding hedge 

transactions and on Form 404S for 

information on swaps used for 

hedging.233 Several commenters argued 

that bona fide hedgers should only be 

required to file monthly reports to the 

Commission because daily reporting is 

onerous and unnecessary.234 In 

addition, the commenters pointed out 

that daily reporting will also be costly 

for the Commission,235 and argued that 

the Commission should instead utilize 

its special call authority on top of 

monthly reporting to ensure that it has 

sufficient information.236

The Commission has determined to 

address these concerns by requiring that 

a trader file a Form 404 three business 

days following the day that a position 

limit is exceeded and thereafter file 

daily data on a monthly basis. These 

monthly reports would, under 

§ 151.5(c)(1), provide cash market 

positions for each day that the trader 

exceeded the position limits during the 

monthly reporting period. This 

amendment would reduce the filing 

burden on market participants. The 

Commission believes the monthly 

reports, though less timely, would 

generally provide information sufficient 

to determine a trader’s daily compliance 

with position limits, without requiring a 

trader to file additional information 

under a special call or, as discussed 

below, follow-up information on his or 

her notice filings. The Commission has 

also reduced the filing burden by 

allowing all such reports of cash market 

positions to be filed by the third 

business day following the day that a 

position limit is exceeded, rather than 

on the next business day. 

Final § 151.5(d) asks for information 

relevant to the three new anticipatory 

hedging exemptions—for 

merchandising, royalties, and services 

contracts—that would be helpful for the 

Commission in evaluating the validity 

of such claims. For anticipated 

merchandising hedge exemptions, the 

Commission is most interested in 

understanding the storage capacity 

relating to the anticipated and historical 

merchandising activity. For anticipated 

royalty hedge exemptions, the 

Commission is interested in 

understanding the basis for the 

projected royalties. For anticipated 

services, the Commission is interested 

in understanding what types of service 

contracts have given rise to the trader’s 

anticipated hedging exemption request. 

The Commercial Alliance 

recommended that Form 404A filings 

for anticipatory hedgers be modified to 

require descriptions of activity, as 

opposed to calling for the submission of 

data reflecting a one-for-one correlation 

between an anticipated market risk and 

a hedge position.237 The Commercial 

Alliance stated that companies are not 

managed in this manner and the data 

could not be collated and provided to 

the Commission in this way.238 The 

Commercial Alliance provided 

recommended amendments to the 

requirements for Form 404A filers to 

reflect that information concerning 

anticipated activities would be 

appropriate to justify a hedge position, 

in accordance with regulations 

151.5(a)(1) and (a)(2). 

The Commission agrees with many of 

the Commercial Alliance’s suggestions. 

For example, § 151.5(c)(2) closely tracks 

the Commercial Alliance’s suggested 

language revisions. The information 

required by this section should allow 

the Commission to understand whether 

the trader’s bona fide hedging activity 

complies with the requirements of 

§ 151.5(a)(1). Final § 151.5(c)(2) clarifies 

that the 404 filing is a notice filing made 

effective upon submission. 

Many commenters opined that the 

application and approval process for 

receiving an anticipatory hedge 

exemption set forth in proposed 

§ 151.5(c) would impose an unnecessary 

compliance burden on hedgers.239 In 

response to such comments, the 

Commission has amended the process 

for claiming an anticipatory hedge in 

§ 151.5(d)(2) to allow market 

participants to claim an exemption by 

notice filing. The notice must be filed at 

least ten days in advance of the date the 

person expects to exceed the position 

limits and is effective after that ten-day 

period unless so notified by the 

Commission. 

In response to commenters seeking 

greater procedural certainty for 

obtaining bona fide hedge 


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240See e.g., CL–WGCEF supra note 35 at 2–3. 

241The Commission did not propose any 

substantive changes to existing § 150.4(d), which 

allows an FCM to disaggregate positions in 

discretionary accounts participating in its customer 

trading programs provided that the FCM does not, 

among other things, control trading of such 

accounts and the trading decisions are made 

independently of the trading for the FCM’s other 

accounts. As further described below, however, the 

FCM disaggregation exemption would no longer be 

self-executing; rather, such relief would be 

contingent upon the FCM applying to the 

Commission for relief. 

242See e.g., CL–PMAA/NEFI supra note 6 at 16– 

17; CL–Prof. Greenberger supra note 6 at 18; CL– 

AFR supra note 17 at 8; and CL–FWW supra note 

81 at 16. 

243See e.g., CL–FIA I supra note 21; CL– 

Commercial Alliance II supra note 237 at 1; CL–DB 

supra note 153 at 6; CL–CME I supra note 8 at 15– 

16; ICI supra note 21 at 8; CL–BlackRock supra note 

21 at 9; New York City Bar Association—Committee 

on Futures and Derivatives (‘‘NYCBA’’) on April 11, 

2011 (‘‘CL–NYCBA’’) at 2; and CL–SIFMA AMG 

supra note 21 at 10. One commenter did ask that 

the Commission allow for a significant amount of 

time for an orderly transition from the IAC to the 

more limited account aggregation exemptions in the 

proposed rules. See CL–Cargill supra note 76 at 7. 

244 In this regard, the Commission interprets the 

‘‘hold’’ or ‘‘control’’ criterion as applying separately 

to ownership of positions and to control of trading 

decisions. 

245Barclays requested that, in light of the 

fundamental changes to the aggregation policy, the 

Commission should reconsider the 10 percent 

ownership standard. Specifically, Barclays stated 

that the ownership test should be tied to a 

‘‘meaningful actual economic interest in the result 

of the trading of the positions in question,’’ and that 

10 percent ownership, in absence of control, is no 

longer a ‘‘viable’’ standard. See CL–Barclays I supra 

note 164 at 3. In view of the fact that the 

Commission is finalizing the aggregation provisions 

with modifications to the proposal that will 

substantially address the concerns of the comments, 

the Commission has determined to retain the longstanding 10 percent ownership standard that has 

worked effectively to date. In response to a point 

raised by Commissioner O’Malia in his dissent, the 

Commission clarifies that it will continue to use the 

10 percent ownership standard and apply a 100 

percent position aggregation standard, and therefore 

will not adopt Barclays’ recommendation that ‘‘only 

an entity’s pro rata share of the position that are 

actually controlled by it or in which it has 

ownership interest’’ be aggregated. Id. at 3. In the 

future, the Commission may reconsider whether to 

adopt Barclays’ recommendation. 

246See e.g., CL–FIA I supra note 21 at 22–23; CL– 

CME I supra note 8 at 15; and CL–CMC supra note 

21 at 4; CL–ISDA/SIFMA supra note 21 at 14–16; 

CL–Katten supra note 21 at 3; CL–MFA supra note 

21 at 13; CL–Morgan Stanley supra note 21 at 7; 

CL–NYCBA supra note 243 at 2; Barclays Capital 

(‘‘Barclays II’’) on June 14, 2011 (‘‘CL–Barclays II’’) 

at 1; and U.S. Chamber of Commerce (‘‘USCOC’’) on 

March 28, 2011 (‘‘CL–USCOC’’) at 6. 

247See e.g., CL–CME I supra note 8 at 15; CL–ICI 

supra note 21 at 9; CL–BlackRock supra note 21 at 

4, 9; CL–Katten supra note 21 at 3; CL–ISDA/ 

SIFMA supra note 21 at 14; CL–AIMA supra note 

35 at 5–6; DB Commodity Services LLC (‘‘DBCS’’) 

on March 28, 2011 (‘‘CL–DBCS’’) at 7; and CL– 

Barclays I supra note 164 at 2. 

248CL–Morgan Stanley supra note 21 at 7. 

Morgan Stanley added that the resulting inability to 

disaggregate separately controlled accounts of its 

various affiliates will have ‘‘[a] significantly adverse 

effect on Morgan Stanley’s ability to provide risk 

Continued 

exemptions,240 § 151.5(e) clarifies the 

conditions of the Commission’s review 

of 404 and 404A notice filings 

submitted under §§ 151.5(c) and 

151.5(d), respectively. Traders 

submitting these filings may be notified 

to submit additional information to the 

Commission in order to support a 

determination that the statement filed 

complies with the requirements for bona 

fide hedging exemptions under 

paragraph (a) of § 151.5. 

H. Aggregation of Accounts 

The proposed part 151 regulations 

would significantly alter the existing 

position aggregation rules and 

exemptions currently available in part 

150. Specifically, the aggregation 

standards under proposed § 151.7 

would eliminate the independent 

account controller (‘‘IAC’’) exemption 

under § 150.3(a)(4), restrict many of the 

disaggregation provisions currently 

available under § 150.4, and create a 

new owned-financial entity exemption. 

The proposal would also require a 

trader to aggregate positions in multiple 

accounts or pools, including passivelymanaged index funds, if those accounts 

or pools have identical trading 

strategies. Lastly, disaggregation 

exemptions would no longer be 

available on a self-executing basis; 

rather, an entity seeking an exemption 

from aggregation would need to apply to 

the Commission, with the relief being 

effective only upon Commission 

approval.241

Some commenters supported the 

proposed aggregation standards, 

contending that the revised standards 

would enhance the Commission’s 

ability to monitor and enforce position 

limits by preventing institutional 

investors, including hedge funds, from 

evading application of position limits by 

creating multiple smaller investment 

funds.242 However, many of the 

commenters on the account aggregation 

rules objected to the change in the 

aggregation policy and, in particular, the 

proposed elimination of the IAC 

exemption.243 Generally, these 

commenters expressed concern that the 

proposed aggregation standards would 

result in an inappropriate aggregation of 

independently controlled accounts, 

potentially cause harmful consequences 

to investors and investment managers, 

and potentially reduce liquidity in the 

commodities markets. 

In response to comments, the 

Commission is adopting the proposed 

aggregation standard, with 

modifications as discussed below. In 

brief, the final rules largely retain the 

provisions of the existing IAC 

exemption and pool aggregation 

standards under current part 150. The 

final rules reaffirm the Commission’s 

current requirements to aggregate 

positions that a trader owns in more 

than one account, including accounts 

held by entities in which that trader 

owns a 10 percent or greater equity 

interest. Thus, for example, a financial 

holding company is required to 

aggregate house accounts (that is, 

proprietary trading positions of the 

company) across all wholly-owned 

subsidiaries. 

1. Ownership or Control Standard 

Under proposed § 151.7, a trader 

would be required to aggregate all 

positions in accounts in which the 

trader, directly or indirectly, holds an 

ownership or equity interest of 10 

percent or greater, as well as accounts 

over which the trader controls 

trading.244 The Proposed Rule also 

treats positions held by two or more 

traders acting pursuant to an express or 

implied agreement or understanding the 

same as if the positions were held by a 

single trader. 

As proposed, a trader also would be 

required to aggregate interests in funds 

or accounts with identical trading 

strategies. Proposed § 151.7 would 

require a trader to aggregate any 

positions in multiple accounts or pools, 

including passively-managed index 

funds, if those accounts or pools had 

identical trading strategies. The 

Commission is finalizing this provision 

as proposed.245

2. Independent Account Controller 

Exemption 

The Commission proposed to 

eliminate the IAC exemption in part 

150. Numerous commenters asserted 

that the Commission failed to provide a 

reasoned explanation for the departure 

from its long-standing exception from 

aggregation for independently 

controlled accounts.246 These 

commenters also asserted that the 

elimination of the IAC exemption would 

force aggregation of accounts that are 

under the control of independent 

managers subject to meaningful 

information barriers and, hence, do not 

entail risk of coordinated excessive 

speculation or market manipulation.247

Morgan Stanley asserted that the 

rationale for permitting disaggregation 

for separately controlled accounts is that 

‘‘the correct application of speculative 

position limits hinges on attributing 

speculative positions to those actually 

making trading decisions for a particular 

account.’’ 248 In absence of the IAC 


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management services to its clients and will reduce 

market liquidity.’’ 

249See e.g., CL–MFA supra note 21 at 13. 

250See e.g., 56 FR 14308, 14312 (Apr. 9, 1991) 

(clarifying, among other things, that the IAC 

exemption is limited to those who trade 

professionally for others, and who have a fiduciary 

relationship to those for whom they trade). 

251 If the IAC is affiliated with the eligible entity 

or another IAC trading on behalf of the eligible 

entity, each of the affiliated entities must, among 

other things, maintain written procedures to 

preclude them from having knowledge of, or 

gaining access to data about trades of the other, and 

each must trade such accounts pursuant to 

separately developed and independent trading 

systems. See § 150.3(a)(4)(i). 

252 64 FR 33839, Jun. 13, 1979 (‘‘1979 Aggregation 

Policy Statement’’). In that release, the Commission 

provided certain indicia of independence, which 

included appropriate screening procedures, 

separate registration and marketing, and a separate 

trading system. 

253See e.g., CL–FIA I supra note 21 at 23–24; CL– 

EEI/ESPA supra note 21 at 20; CL–ISDA/SIFMA 

supra note 21 at 16; and CL–AGA supra note 124 

at 9. 

254See e.g., CL–FIA I supra note 21 at 24; CL– 

API supra note 21 at 11; CL–DBCS supra note 247 

at 3; CL–CME I supra note 8 at 17; CL–ISDA/SIFMA 

supra note 21 at 16; CL–MFA supra note 21 at 13; 

CL–Morgan Stanley supra note 21 at 8; CL–SIFMA 

AMG I supra note 21 at 11; and CL–Barclays I supra 

note 164 at 2. See e.g., CL–Morgan Stanley supra 

note 21 at 8 (For example, advisors to private 

investment funds may not be able to permit certain 

investors to view position information unless the 

information is made available to all of the fund’s 

investors on an equal basis). 

255See e.g., CL–CME I supra note 8 at 17; CL– 

Barclays II supra note 2468 at 2; CL–MFA supra 

note 21 at 13; CL–Morgan Stanley supra note 21 at 

9; and CL–SIFMA AMG I supra note 21 at 11. See 

also CL–NYCBA supra note 243 at 4. 

256CL–FIA I supra note 21 at 24. 

exemption, commenters further noted 

that otherwise independent trading 

operations would be required to 

communicate with each other as to their 

trading positions so as to avoid violating 

position limits, raising the risk for 

concerted trading.249

The Commission has carefully 

considered the views expressed by 

commenters and has determined to 

retain the IAC exemption largely as 

currently in effect, with clarifications to 

make explicit the Commission’s longstanding position that the IAC 

exemption is limited to client positions, 

that is, only to the extent one trades 

professionally for others can one avail 

him or herself of this IAC exemption. 

Such a person has a fiduciary 

relationship to those clients for whom 

he or she trades.250 Accordingly, eligible 

entities may continue to rely upon the 

IAC exemption to disaggregate client 

positions held by an IAC. This means 

that the IAC exemption does not extend 

to proprietary positions in accounts 

which a trader owns. 

After reviewing the comments in 

connection with the terms of the 

proposal, the Commission believes that 

retaining the IAC exemption for 

independently managed client accounts 

is in accord with the purposes of the 

aggregation policy. The fundamental 

rationale for the aggregation of positions 

or accounts is the concern that a single 

trader, through common ownership or 

control of multiple accounts, may 

establish positions in excess of the 

position limits and thereby increase the 

risk of market manipulation or 

disruption. Such concern is mitigated in 

circumstances involving client accounts 

managed under the discretion and 

control of an independent trader and 

subject to effective information barriers. 

The Commission also recognizes the 

wide variety of commodity trading 

programs available for market 

participants. To the extent that such 

accounts and programs are traded 

independently and for different 

purposes, such trading may enhance 

market liquidity for bona fide hedgers 

and promote efficient price discovery. 

Under the current IAC exemption 

provision, an eligible entity, which 

includes banks, CPOs, commodity 

trading advisors (‘‘CTAs’’), and 

insurance companies, may disaggregate 

customer positions or accounts managed 

by an IAC from its proprietary positions 

(outside of the spot months), subject to 

the conditions specified therein. 

Specifically, an IAC must trade 

independently of the eligible entity and 

of any other IAC trading for the eligible 

entity and have no knowledge of trading 

decisions by any other IAC.251

A central feature of the IAC 

exemption is the requirement that the 

IAC trades independently of the eligible 

entity and of any other IAC trading for 

the eligible entity. The determination of 

whether a trader exercises independent 

control over the trading decisions of the 

customer discretionary accounts or 

trading programs within the meaning of 

the IAC exemption must be decided 

case-by-case based on the particular 

underlying facts and circumstances. In 

this respect, the Commission will look 

to certain factors or indicia of control in 

determining whether a trader has 

control over certain positions or 

accounts for aggregation purposes.252

A non-exclusive list of such indicia of 

control includes existence of a proper 

firewall separating the trading functions 

of the IAC and the eligible entity. That 

is, the Commission will consider, in 

determining whether the IAC trades 

independently, the degree to which 

there is a functional separation between 

the proprietary trading desk of the 

eligible entity and the desk responsible 

for trading on behalf of the managed 

client accounts. Similarly, the 

Commission will consider the degree of 

separation between the research 

functions supporting a firm’s 

proprietary trading desk and the client 

trading desk. For example, a firm’s 

research information concerning 

fundamental demand and supply factors 

and other data may be available to an 

IAC who directs trading for a client 

account of the firm. However, specific 

trading recommendations of the firm 

contained in such information may not 

be substituted for independently 

derived trading decisions. If the person 

who directs trading in an account 

regularly follows the trading suggestions 

disseminated by the firm, such trading 

activity will be evidence that the 

account is controlled by the firm. In the 

absence of a proper firewall separating 

the trading or research functions, among 

other things, an eligible entity may not 

avail itself of the IAC exemption. 

3. Exemptions From Aggregation 

Several commenters expressed 

concern that forced aggregation of 

independently controlled and managed 

accounts would effectively require 

independent trading operations of 

commonly-owned entities to coordinate 

trading activities and commercial 

hedging opportunities, in potential 

violation of contractual and legal 

obligations, such as FERC affiliate 

rules,253 bank regulatory restrictions, 

and antitrust provisions.254 Some 

commenters also asserted that asset 

managers and advisers may be required 

to violate their fiduciary duty to clients 

by sharing confidential information 

with third parties, and which could also 

lead to anti-competitive activity if two 

unrelated entities, such as competitors 

in a joint-venture, are required to share 

such confidential information.255 FIA 

also added that a company with an 

affiliate underwriter may not be aware 

that its affiliate has acquired a 

temporary, passive interest in another 

company trading commodities. Under 

the aggregation proposal, the first 

company would be required to share 

trading information with a temporary 

affiliate. In such instance, FIA 

concludes, the cost of aggregation 

‘‘greatly outweighs the unarticulated 

regulatory benefits.’’ 256

According to commenters, this 

problem is exacerbated if aggregate 

limits are applied intraday as it requires 

real-time sharing of information, and, 

when added to the attendant 

dismantling of information barriers and 

restructuring of information systems, 

would impose significant operational 


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257See e.g., CL–DBCS supra note 247 at 3; CL– 

CME I supra note 8 at 17; CL–FIA I supra note 21 

at 24; CL–ICI supra note 21 at 8–9; CL–ISDA/ 

SIFMA supra note 21 at 17; CL–Barclays II supra 

note 246 at 2; and CL–Morgan Stanley supra note 

21 at 8. 

258See e.g., CL–FIA I supra note 21 at 24. 

259Assume, for example, that Company A owns 

10 percent of Company B. Company B may not 

share with Company A information regarding its 

positions unless it makes such data public. In this 

instance, Company A would file a notice with the 

Commission, along with opinion of counsel, that 

requiring the aggregation of such positions will 

require Company A to obtain information from 

Company B that would violate federal law. 

260See e.g., CL–MFA supra note 21 at 14–15; and 

CL–BlackRock supra note 21 at 6–7. 

261CL–Morgan Stanley supra note 21 at 8. 

262 Id. 

263CL–MFA supra note 21 at 14. 

264The proposed regulations included a nonexclusive list of indicia of independence for 

purposes of this exemption, including that the two 

entities have no knowledge of each other’s trading 

decisions, that the owned non-financial entity have 

written policies and procedures in place to 

preclude such knowledge, and that the entities have 

separate employees and risk management systems. 

265 76 FR 4752, at 4762. 

266See e.g., CL–FIA I supra note 21 at 23–24; CL– 

DBCS supra note 238 at 6; CL–PIMCO supra note 

21 at 3; National Rural Electric Cooperative 

(‘‘NREC’’), Association American Public Power 

(‘‘AAPP’’), and Association Large Public Power 

Council (‘‘ALLPC’’) on March 28, 2011 (‘‘CL–NREC/ 

AAPP/ALLPC’’) at 20; CL–MFA supra note 21 at 14; 

CL–CME I supra note 8 at 16; CL–ISDA/SIFMA 

supra note 21 at 15; CL–BlackRock supra note 21 

at 9; CL–Morgan Stanley supra note 21 at 9; and 

CL–NYCBA supra note 243 at 4. 

267See e.g., CL–FIA I supra note 21 at 22–23; CL– 

CME I supra note 8 at 16–17; CL–ISDA/SIFMA 

supra note 21 at 15; CL–Morgan Stanley supra note 

21 at 9; CL–USCOC supra note 246 at 6; CL–DBCS 

supra note 247 at 6; CL–PIMCO supra note 21 at 

5 (position limits are not high enough to offset 

elimination of IAC as explained in the proposed § ); 

CL–MFA supra note 21 at 14; Akin Gump Strauss 

Hauer & Field LLP (‘‘Akin Gump’’) on March 25, 

2011 (‘‘CL–Akin Gump’’) at 4; and CL–CMC supra 

note 21 at 4. 

challenges and massive costly 

infrastructure changes.257

In view of these considerations, and 

as discussed above, the Commission is 

reinstating the IAC exemption. The 

majority of the contentions from the 

commenters stemmed from the removal 

of the IAC exemption, and therefore, 

incorporating this exemption into the 

final rules should address these 

concerns. In response to comments,258

and to further mitigate the impact of the 

aggregation requirements that apply to 

commonly-owned entities or accounts, 

the Commission is adopting new 

§ 151.7(g), which will allow a person to 

disaggregate when ownership above the 

10 percent threshold also is associated 

with the underwriting of securities. In 

addition to a limited exemption for the 

underwriting of securities, new 

§ 151.7(i) will provide for disaggregation 

relief, subject to notice filing and 

opinion of counsel, in instances where 

aggregation across commonly-owned 

affiliates (i.e., above the 10 percent 

ownership threshold) would require 

position information sharing that, in 

turn, would result in the violation of 

Federal law.259 The Commission notes, 

however, when a trader has actual 

knowledge of the positions of an 

affiliate, that trader is required to 

aggregate all such positions. 

4. Ownership in Commodity Pools 

Exemption 

Under current § 150.4(b), a trader who 

is a limited partner or shareholder in a 

commodity pool (other than the pool’s 

commodity pool operator (‘‘CPO’’)) 

generally need not aggregate so long as 

the trader does not control the pool’s 

trading decisions. Under § 150.4(c)(2), if 

the trader is also a principal or affiliate 

of the pool’s CPO, the trader need not 

aggregate provided that the trader does 

not control or supervise the pool’s 

trading and the pool operator has proper 

informational barriers. In addition, 

mandatory aggregation based on a 25 

percent ownership interest is only 

triggered with respect to a pool exempt 

from CPO registration under existing 

§ 4.13. 

The Commission’s proposal would 

eliminate the disaggregation exemption 

for passive pool participants (i.e., 

participants who are not principals or 

affiliates of the pool’s CPO). Under the 

Commission’s proposal, all passive pool 

participants (with a 10 percent or 

greater ownership or equity interest and 

regardless of whether they are a 

principal or affiliate) would be subject 

to the aggregation requirement unless 

they meet certain exemption criteria. 

These criteria include: (i) An inability to 

acquire knowledge of the pool’s 

positions or trading due to 

informational barriers maintained by the 

CPO, and (ii) a lack of control over the 

pool’s trading decisions. The proposal 

would also require aggregation for an 

investor with a 25 percent or greater 

ownership interest in any pool, without 

regard to whether the operator operates 

a small pool exempt from CPO 

registration. 

Commenters objected to the changes 

to the disaggregation provision 

applicable to interests in commodity 

pools, arguing that forcing aggregation 

of independent traders would increase 

concentration, limit investment 

opportunities, and thus potentially 

reduce liquidity in the U.S. futures 

markets.260 Morgan Stanley stated that 

the current disaggregation exemption for 

interests in commodity pools ‘‘reflect 

the current reality of investing in 

commodity pools structured as private 

investment funds.’’ 261 It would be, 

Morgan Stanley explained, 

‘‘extraordinarily difficult to monitor and 

limit ownership thresholds given that 

an investor’s stake in a fund may rise 

due to actions of third parties, e.g., 

redemptions.’’ 262 MFA likewise noted 

that ‘‘monitoring of ownership 

percentages of investors in a commodity 

pool is burdensome, difficult to manage, 

and creates a potential trap for investors 

who may unintentionally violate 

limits.’’ 263

Upon further consideration, and in 

response to the comments, the 

Commission has determined to retain 

the current disaggregation exemption for 

interests in commodity pools. The 

exemption was originally intended in 

part to respond to the growth of 

professionally managed futures trading 

accounts and pooled futures investment. 

The Commission finds that 

disaggregation for ownership in 

commodity pools, subject to appropriate 

safeguards, may continue to provide the 

necessary flexibility to the markets, 

while at the same time protecting the 

markets from the undue accumulation 

of large speculative positions owned by 

a single person or entity. 

5. Owned Non-Financial Entity 

Exemption 

The Commission proposed a limited 

disaggregation exemption for an entity 

that owns 10 percent or more of a nonfinancial entity (generally, a nonfinancial, operating company) if the 

entity can demonstrate that the owned 

non-financial entity is independently 

controlled and managed.264 The 

Commission explained that this limited 

exemption was intended to allow 

disaggregation primarily in the case of a 

conglomerate or holding company that 

‘‘merely has a passive ownership 

interest in one or more non-financial 

operating companies. In such cases, the 

operating companies may have 

complete trading and management 

independence and operate at such a 

distance from the holding company that 

it would not be appropriate to aggregate 

positions.’’ 265 Several commenters 

argued that the non-financial entity 

provision was too narrow to provide 

meaningful disaggregation relief and 

supported its extension to financial 

entities.266 These commenters also 

asserted that the failure to extend the 

exemption was discriminatory against 

financial entities without a proper 

basis.267 Other commenters asked for 

guidance from the Commission on 

whether business units of a company 

could qualify as owned non-financial 


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268See e.g., CL–BGA supra note 35 at 21; and CL– 

Cargill supra note 76 at 7. 

269See e.g., CL–Cargill supra note 76 at 7. 

270See e.g., CL–CME I supra note 8 at 18; and CL– 

BlackRock supra note 21 at 14. 

271See e.g., CL–Better Markets supra note 37 at 

69–70. 

272CL–PMAA/NEFI supra note 6 at 14. 

273See e.g., CL–FIA I supra note 21 at 25; CL– 

CMC supra note 21 at 5; and CL–EEI/EPSA supra 

note 21 at 19–20. 

274See e.g., CL–Morgan Stanley supra note 21 at 

7. See also Futures Industry Association (‘‘FIA II’’) 

on May 25, 2011 (‘‘CL–FIA II’’) at 6. 

275See CL–MFA supra note 21 at 16. 

276See e.g., CL–FIA I supra note 21 at 25; Willkie 

Farr & Gallagher LLP (‘‘Willkie’’) on March 28, 2011 

(‘‘CL–Willkie’’) at 7; CL–API supra note 21 at 12; 

Gavilon Group, LLC (‘‘Gavilon’’) on March 28, 

2011(‘‘CL–Gavilon’’) at 8; and CL–CMC supra note 

21 at 4. See also CL–BGA supra note 35 at 22. 

277See e.g., CL–Cargill supra note 76 at 9. 

278See e.g., CL–FIA I supra note 21 at 26–27; and 

CL–BGA supra note 35 at 22. 

279See e.g., CL–FIA I supra note 21 at 27. 

entities for aggregation purposes.268

These commenters argued that 

functionally these business units 

operate the same as separately organized 

entities, and should not be forced to 

undergo the costs and inefficiencies of 

becoming separately organized for 

position limit purposes.269

In view of the Commission’s 

determination to retain the IAC 

exemption and the aggregation policy in 

general (which the Commission believes 

has worked effectively to date), provide 

an exemption for Federal law 

information sharing restrictions in final 

§ 151.7(i) and provide an exemption for 

underwriting in final § 151.7(g), the 

Commission believes that it would not 

be appropriate, at this time, to expand 

further the scope of disaggregation 

exemptions to owned non-financial or 

financial entities. As described above, 

the final rules include express 

disaggregation exemptions to mitigate 

the impact of the aggregation 

requirements that apply to commonlyowned entities or accounts. These 

disaggregation exemptions are 

appropriately limited to situations that 

do not present the same concerns as 

those underlying the aggregation policy, 

namely, the sharing of transaction or 

position information that may facilitate 

coordinated trading; as such, the 

Commission does not believe further 

expansion of the disaggregation 

exemptions is warranted at this time. 

6. Funds With Identical Trading 

Strategies 

The proposal would require 

aggregation for positions in accounts or 

pools with identical trading strategies 

(e.g., long-only position in a given 

commodity), including passivelymanaged index funds. Under this 

provision, the general ownership 

threshold of 10 percent would not 

apply; rather, positions of any size in 

accounts or pools would require 

aggregation. 

Several commenters objected to 

forcing aggregation on the basis of 

identical trading strategies because it 

did not, in their view, further the 

purpose of preventing unreasonable or 

unwarranted price fluctuations. 270

These commenters argued that the 

proposal would lead to a decrease in 

index fund participation, which will 

reduce market liquidity, especially in 

deferred months, as well as impact 

commodity price discovery. One 

commenter indicated support for 

extending the aggregation requirement 

to commodity index funds, and the 

swaps which are indexed to each 

individual index.271 PMAA/NEFI 

opined that positions of passive long 

speculators should be aggregated to the 

extent that they follow the same trading 

strategies regardless of whether their 

positions are held or controlled by the 

same trader in order to shield the 

markets from the cumulative impact of 

multiple passive long speculators who 

follow the same trading strategies.272

The Commission is adopting this 

aggregation provision as proposed, with 

the clarification that a trader must 

aggregate positions controlled or held in 

one account with positions controlled or 

held in one pool with identical trading 

strategies. As the Commission stated in 

the NPRM, this aggregation provision is 

intended to prevent circumvention of 

the aggregation requirements. In absence 

of such aggregation requirement, a 

trader can, for example, acquire a large 

long-only position in a given 

commodity through positions in 

multiple pools, without exceeding the 

applicable position limits. 

7. Process for Obtaining Disaggregation 

Exemption 

In contrast to the existing practice, the 

proposed aggregation exemptions were 

not self-effectuating. A trader seeking to 

rely on any aggregation exemption 

would be required to file an application 

for relief with the Commission, and the 

trader could not rely on the exemption 

until the Commission approved the 

application.273 Further, the trader 

would be subject to an annual renewal 

application and approval. 

Several commenters objected to the 

proposed change from self-executing 

disaggregation exemptions to an 

application-based exemption on the 

basis that it would create an additional 

burden on traders without any benefits. 

Some of these commenters argued that 

the disaggregation exemptions for FCMs 

should continue to be self-effectuating 

because FCMs are subject to direct 

oversight by the Commission, and the 

Proposed Rule does not provide a 

sufficient explanation for the change in 

policy.274 MFA recommended that 

instead of requiring an application for 

exemptive relief and annual renewals, 

IACs should be required to file a notice 

informing the Commission that they 

intend to rely on the exemption and a 

representation that they meet the 

relevant conditions.275

Some of the commenters, objecting to 

the application-based exemption, 

requested that the Commission make the 

necessary applications for an exemption 

conditionally effective, rather than 

effective after a Commission 

determination.276 Other commenters 

argued that the Commission should only 

require that exemption applications be 

initially filed with material updates as 

opposed to an annual reapplication 

process.277

With regard to the specific conditions 

for applying for an aggregation 

exemption, several commenters 

requested that the Commission remove 

or clarify the condition that entities 

submit an independent assessment 

report.278 Similarly, commenters opined 

that the Commission should not require 

applicants to designate an office and 

employees responsible for coordinating 

compliance with aggregation rules and 

position limits.279

The Commission is adopting the 

proposal with modifications to address 

the concerns expressed in the 

comments. Specifically, the 

Commission is eliminating the 

requirement that a trader seeking to rely 

on a disaggregation exemption file an 

application for exemptive relief and 

annual renewals. Instead, the trader 

must file a notice, effective upon filing, 

setting forth the circumstances that 

warrant disaggregation and a 

certification that they meet the relevant 

conditions. 

The Commission believes that the 

new notice process (with its attendant 

certification requirement) for 

disaggregation relief represents a less 

burdensome, yet effective, alternative to 

the proposed application and preapproval process. The notice procedure 

will allow market participants to rely on 

aggregation exemptions without the 

potential delay of Commission approval, 

thus lessening the burden on both 

market participants and the Commission 

to respond to such applications. In 

addition, the notice filings will give the 

Commission insight into the application 


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280See § 151.7(h)(2). 

281 76 FR at 4752, 4763. 

282See CL–BGA supra note 35 at 20; and CL– 

WGCEF supra note 35 at 20. 

283CL–CME I supra note 8 at 19–20; CL– 

BlackRock supra note 21 at 17; and CL–SIFMA 

AMG I supra note 21 at 16. 

284See e.g., CL–CME I supra note 8 at 19–20; CL– 

SIFMA AMG I supra note 21 at 16; CL–BlackRock 

supra note 21 at 17; CL–MFA supra note 21 at 19. 

These commenters generally explained that these 

funds ‘‘typically replace or ‘roll over’ their contracts 

in a staggered manner, before they reach their spot 

months, in order to maintain position allocations in 

as stable a manner as possible and without causing 

price impact.’’ 

285CL–SIFMA AMG I supra note 21 at 16. 

286CL–CME I supra note 8 at 19–20; and CL– 

BlackRock supra note 21 at 17. 

287CL–CME I supra note 8 at 19. 

288Notwithstanding the pre-existing exemption in 

non-spot months, a person must comply with spotmonth limits. Any spot-month limit that is initially 

set or reset under Final § 151.4(a) will apply to all 

spot month periods. The Commission notes it will 

provide at least two months advance notice of 

changes to levels of such spot-month limits under 

Final § 151.4(e). 

289For example, if the position limit in a 

particular reference contract is 1,000 and a trader’s 

pre-existing position amounted to 1,005 long 

positions in a Referenced Contract, the trader would 

not be in violation of the position limit. However, 

the trader could not increase its long position with 

additional new long positions until its position 

decreased to below the position limit of 1,000. Once 

below the position limit of 1,000, this hypothetical 

trader would be subject to the position limit of 

1,000. 

290 76 FR at 4763. 

of the various exemptions, which the 

Commission could not do under a selfcertification regime. 

Under the notice provisions, upon 

call by the Commission, any person 

claiming a disaggregation exemption 

must provide relevant information 

concerning the claim for exemption.280

Thus, for example, if the Commission 

identifies potential concerns regarding 

the integrity of the information barrier 

supporting a trader’s reliance on the IAC 

exemption, it can audit the subject 

trader for adequacy of such information 

barrier and related practices. To the 

extent the Commission finds that a 

trader is not appropriately following the 

conditions of the exemption, upon 

notice and opportunity for the affected 

person to respond, the Commission may 

amend, suspend, terminate, or 

otherwise modify a person’s aggregation 

exemption. 

In response to the concerns of 

commenters, the Commission has 

determined to remove the conditions 

that a person submit an independent 

assessment report and designate an 

office and employees responsible for 

coordinating compliance with 

aggregation rules and position limits as 

part of the notice filing for an 

exemption. 

I. Preexisting Positions 

The Commission proposed to apply 

the good-faith exemption under CEA 

section 4a(b) for pre-existing positions 

in both futures and swaps. This 

provided a limited exemption for preexisting positions that are in excess of 

the proposed position limits, provided 

that they were established in good-faith 

prior to the effective date of a position 

limit set by rule, regulation, or order. 

However, ‘‘[s]uch person would not be 

allowed to enter into new, additional 

contracts in the same direction but 

could take up offsetting positions and 

thus reduce their total combined net 

positions.’’ 281 Thus, the Commission 

would calculate a person’s pre-existing 

position for purposes of position limit 

compliance, but a person could not 

violate position limits based upon preexisting positions alone. 

The Commission also proposed a 

broader scope of the good-faith 

exemption for swaps entered before the 

effective date of the Dodd-Frank Act. 

Such swaps would not be subject to 

position limits, and the Commission 

would allow pre-effective date swaps to 

be netted with post-effective date swaps 

for the purpose of complying with 

position limits. 

Finally, the Commission proposed to 

permit persons with risk-management 

exemptions under current Commission 

regulation 1.47 to continue to manage 

the risk of their swap portfolio that 

exists at the time of implementation of 

the legacy limits, and no new swaps 

would be covered. 

The Working Group and BGA 

requested that the Commission 

grandfather any positions put on in 

good faith prior to the effective date of 

any final rule implementing position 

limits for Referenced Contracts.282 CME 

and Blackrock urged that the 

Commission instead phase in position 

limits to minimize market disruption.283

Commenters addressing the preexisting positions exemption in the 

context of index funds recommended 

that these funds be grandfathered in 

order that they may ‘‘roll’’ their futures 

positions after the effective date of any 

position limits rule.284 Absent such 

grandfather treatment, commenters such 

as SIFMA opined that funds and 

accounts could be prevented from 

implementing rollovers in the most 

advantageous manner, and could 

conceivably be put in the anomalous 

positions of having to liquidate 

positions to return funds to investors if 

pre-existing positions cannot be 

replaced as necessary to meet stated 

investment goals.’’ 285 CME also put 

forth that ‘‘[i]ndex fund managers who 

do not or cannot roll-over positions 

would also be deviating from disclosedto-investors trading strategies.286

With regard to the proposal to permit 

swap dealers to continue to manage the 

risk of a swap portfolio that exists at the 

time of implementation of the proposed 

regulations, CME requested that such 

relief be extended to swap dealers with 

swap portfolios in contracts that were 

not previously subject to position limits 

and therefore did not require 

exemptions.287

The Commission is finalizing the 

scope of the pre-existing position and 

grandfather exemption as proposed, 

subject to modifications below, in final 

§ 151.9. The exemption for pre-existing 

positions implements the provisions of 

section 4a(b)(2) of the CEA, and is 

designed to phase in position limits 

without significant market disruption. 

In response to concerns over the scope 

of the pre-existing position exemption, 

the Commission clarifies that a person 

can rely on this exemption for futures, 

options and swaps entered in good faith 

prior to the effective date of the rules 

finalized herein for non-spot monthposition limits.288 Such pre-existing 

futures, options and swaps transactions 

that are in excess of the proposed 

position limits would not cause the 

trader to be in violation based solely on 

those positions. To the extent a trader’s 

pre-existing futures, options or swaps 

positions would cause the trader to 

exceed the non-spot-month limit, the 

trader could not increase the directional 

position that caused the positions to 

exceed the limit until the trader reduces 

the positions to below the position 

limit.289 As such, persons who 

established a net position below the 

speculative limit prior to the enactment 

of a regulation would be permitted to 

acquire new positions, but the 

Commission would calculate the 

combined position of a person based on 

pre-existing positions with any new 

position.290

Notwithstanding the combined 

calculation of pre-existing positions 

with new positions, the Commission is 

also retaining the broader exemption for 

swaps entered prior to the effective date 

of the Dodd-Frank Act and prior to the 

initial implementation of position limits 

under final § 151.4. The pre-effective 

date swaps would not be subject to the 

position limits adopted herein, and 

persons may, but need not, net swaps 

entered before the effective date of 

Dodd-Frank with swaps entered after 

the effective date. 

With regard to comments addressing 

index funds that ‘‘roll’’ their preexisting positions, the Commission 


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291The Commission also notes that absent this 

limitation on pre-existing positions, any entity that 

rolls futures positions would in effect not be subject 

to position limits because the subsequent positions 

would be subject to exemption. 

292CL–BlackRock supra note 21 at 15; CL–DB 

supra note 153 at 2–4; CL–PIMCO supra note 21 at 

9; ETF Securities on March 28, 2011 (‘‘CL–ETF 

Securities’’) at 3–4; and CL–SIFMA AMG I supra 

note 21 at 13. 

293CL–DBCS supra note 247 at 3. 

294CL–Gresham supra note 153 at 2, 6–7. 

295CL–BlackRock supra note 21 at 15; CL–PIMCO 

supra note 21 at 10 (citing Sen. Lincoln’s remarks 

on index funds); and CL–DBCS supra note 247 at 

3–4. 

296CL–BlackRock supra note 21 at 15. 

297See Senator Lincoln (‘‘Sen. Lincoln’’) on Dec. 

16, 2010 (‘‘CL–Sen. Lincoln’’) at 1–2 (‘‘I urge the 

CFTC not to unnecessarily disadvantage market 

participants that invest in diversified and 

unleveraged commodity indices.’’) 

298 Id. 

299 Irwin, Scott and Dwight Sanders ‘‘The Impact 

of Index and Swap Funds on Commodity Futures 

Markets’’, OECD Food, Agriculture, and Fisheries 

Working Papers, (2010); Sanders, Dwight and Scott 

Irwin ‘‘A Speculative Bubble in Commodity Futures 

Prices? Cross-Sectional Evidence’’, Agricultural 

Economics, (2010); Sanders, Dwight, Scott Irwin, 

and Robert Merrin ‘‘The Adequacy of Speculation 

in Agricultural Futures Markets: Too Much of a 

Good Thing?’’ University of Illinois at UrbanaChampaign, (2008). 

300U.S. Commodity Futures Trading Commission 

‘‘Staff Report on Commodity Swap Dealers and 

Index Traders with Commission 

Recommendations’’ (2008). While the majority of 

the report is broad in scope and serves as a guide 

to the special calls issued to swap dealers and index 

traders by the Commission, there is a discussion of 

the impact of these types of participants (generally 

considered to be speculators in most markets). 

Specifically, the report looks at the vast increase in 

notional value of NYMEX crude oil futures 

contracts in relationship to the vast increase in 

commodity index investment from December 2007 

to June 2008. Staff concluded that the increase in 

notional value is due to the appreciation of existing 

positions, and not the influx of new money into the 

market, citing the observation that the actual 

number of futures-equivalent contracts declined 

over the same period. 

301CL–ABA supra note 150 at 4; CL–ATAA supra 

note 94 at 15; CL–ATA supra note 81 at 4,5; CL– 

PMAA/NEFI supra note 6 at 12–14; CL–ICPO supra 

note 20 at 1; CL–Better Markets supra note 37 at 71 

(‘‘limiting commodity index funds to 10 percent of 

total market open interest would likely have 

significant beneficial effects [on excessive 

speculation]’’); and International Pizza Hut 

Franchise Holders Association (IPHFHA’’) on 

March 24, 2011 (‘‘CL–IPHFHA’’) at 1. There were 

6,074 form comment letters that urged the 

Commission to adopt ‘‘lower speculative position 

limits for passive, long-only traders.’’ 

302CL–PMAA/NEFI supra note 6 at 12–13; CL– 

Delta supra note 20 at 7–8; CL–Better Markets supra 

note 37 at 35–36; and Industrial Energy Consumer 

of America (‘‘IECA’’) on March 28, 2011 (‘‘CL– 

IECA’’) at 2. 

303CL–ATAA supra note 94 at 15. 

304Tang, Ke and Wei Xiong ‘‘Index Investing and 

the Financialization of Commodities’’, Working 

Paper, Department of Economics, Princeton 

notes that CEA section 4a(b)(2) only 

extends the exemption for pre-existing 

positions that were entered ‘‘prior to the 

effective date of such rule, regulation, or 

order [establishing position limits].’’ 

Given this statutory stricture, index 

funds that ‘‘roll’’ their pre-existing 

positions after the effective date of a 

position limit rule do not fall within the 

scope of the pre-existing position 

exemption.291

With regard to persons with existing 

exemptions under Commission 

regulation 1.47 to manage the risk of 

their existing swap portfolio, the 

Commission is adopting this provision 

as proposed. Specifically, the 

Commission is adopting a limited 

exemption to provide for transition into 

these position limit rules for persons 

with existing § 1.47 exemptions under 

final § 151.9(d). This limited exemption 

is also designed to limit market 

disruptions as market participants 

transition to these position limit rules. 

However, the Commission will only 

apply this relief to market participants 

with existing § 1.47 exemptions because 

the transitional nature of providing such 

relief dictates that the Commission 

should not extend a general exemption 

for persons to manage their existing 

swap book outside of § 1.47 exemptions. 

Further, since the proposed non-spot 

month class limits are not being 

adopted, such a person may net 

positions across futures and swaps in a 

Referenced Contract. This largely 

mitigates the need for a risk 

management exemption. 

J. Commodity Index or CommodityBased Funds 

The definition of ‘‘Referenced 

Contract’’ in § 151.1 expressly excludes 

commodity index contracts. A 

commodity index contract is defined as 

a contract, agreement, or transaction 

‘‘that is not a basis or any type of spread 

contract, [and] based on an index 

comprised of prices of commodities that 

are not the same nor substantially the 

same.’’ Thus, by the terms of this 

provision, contracts with diversified 

commodity reference prices are 

excluded from the proposed position 

limit regime. As a result, single 

commodity index contracts fall within 

the scope of the proposal. Further, 

under amended section 4a(a)(1) of the 

CEA, the Commission is empowered to 

establish position limits by ‘‘group or 

class of traders,’’ and new section 

4a(a)(7) gives the Commission authority 

to provide exemptions from those 

position limits to any ‘‘person or class 

of persons.’’ 

A number of commenters argued that 

commodity index funds (‘‘CIFs’’) should 

be exempted from the final rulemaking 

for position limits.292 DB Commodity 

Services argued that passive CIFs apply 

‘‘zero net buying pressure across the 

commodity term structure.’’ 293 Gresham 

Investments argued that ‘‘unleveraged, 

solely exchange-traded, fully 

transparent, clearinghouse guaranteed’’ 

CIFs that pose ‘‘no systemic risk’’ 

should be treated differently than highly 

leveraged futures traders, who pose a 

continuing systemic risk to the 

commodity markets.294 Three 

commenters argued that CIFs increase 

market liquidity for bona fide 

hedgers.295 Finally, BlackRock also 

argued that there is no empirical 

evidence supporting a causal 

connection between CIFs and 

commodity price volatility.296 Senator 

Blanche Lincoln argued that position 

limits should not apply to diversified, 

unleveraged index funds because they 

provide ‘‘necessary liquidity to assist in 

price discovery and hedging for 

commercial users * * * [and] are an 

effective way [for] investors to diversify 

their portfolios and hedge against 

inflation.’’ 297 Further, Senator Lincoln 

opined that that the Commission should 

distinguish between ‘‘trading activity 

that is unleveraged or fully 

collateralized, solely exchange-traded, 

fully transparent, clearinghouse 

guaranteed, and poses no systemic risk 

and highly leveraged swaps trading in 

its implementation of position 

limits.’’ 298

Commenters also submitted studies 

regarding index traders. In particular, 

several studies conducted by two 

agricultural economists were 

highlighted by commenters. The authors 

of the studies contended that there is no 

evidence that the influx of index fund 

trading unduly influences prices.299

Commenters also cited the 

Commission’s 2008 Staff Report on 

Commodity Index Traders and Swap 

Dealers, in which Commission staff 

provided an overview for the public 

regarding the participation of these 

types of traders in commodity 

derivatives markets.300

Other commenters, however, asserted 

that CIFs should be subject to special, 

more restrictive position limits.301 Some 

of these commenters argued that the 

presence of CIFs upsets the price 

discovery function of the market 

because investors buy interests in CIFs 

without regard to the market 

fundamentals price.302 The Air 

Transport Association of America 

recommended that the Commission 

undertake a study to analyze and 

determine the effect of such passive, 

long-only traders on the price discovery 

function of the markets.303

Some studies opined that the recent 

influx of CIF trading has caused an 

increase in prices that is not explained 

by market fundamentals alone.304 For 


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University, (2010).; Mou, EthanY. ‘‘Limits to 

Arbitrage and Commodity Index Investment: FrontRunning the Goldman Roll’’, Working Paper, 

Columbia University, (2010).; Gilbert, Christopher 

L. ‘‘Speculative Influences on Commodity Futures 

Prices, 2006–2008’’, Working Paper, Department of 

Economics, University of Trento, Italy, (2009).; 

Gilbert, Christopher L. ‘‘How to Understand High 

Food Prices’’, Journal of Agricultural Economics, 

61(2): 398–425. (2010). 

305Masters, Michael and Adam White ‘‘The 

Accidental Hunt Brothers: How Institutional 

Investors are Driving up Food and Energy Prices’’, 

White Paper, (2008). ‘‘As hundreds of billions of 

dollars have poured into the relatively small 

commodities futures markets, prices have risen 

dramatically. Index Speculators working through 

swaps dealers have been the single biggest source 

of new speculative money. This has driven prices 

far beyond the levels that supply and demand 

would indicate, and has done tremendous damage 

to our economy as a result.’’ 

306 In addition, the Commission has reviewed all 

other studies submitted by commenters; a detailed 

description can be found in Section III of this 

release. 

307 In this regard, the lack of consensus in the 

studies submitted demonstrates the need for 

additional analysis. 

308CL–CME I supra note 8 at 20. 309See Proposed Rule 151.6. The position 

visibility levels did not apply to agricultural 

commodity contracts. 310While the proposed position visibility regime 

would only trigger reporting requirements, the 

preamble did note that trading at or near such levels 

was ‘‘in no way intended to imply that positions at 

or near such levels cannot constitute excessive 

speculation or be used to manipulate prices or for 

other wrongful purposes.’’ See Proposed Rule at 

4759. 

311 75 FR 4752, 4761–62, Jan. 26, 2011. 

312See e.g., CL–Prof. Greenberger supra note 6 at 

18; CL–AFR supra note 17 at 8; and CL–AIMA 

supra note 35 at 4. 

313See e.g., CL–FWW supra note 81 at 15. 

314See e.g., Vandenberg & Feliu LLP 

(‘‘Vandenberg’’) on March 28, 2011 (‘‘CL– 

Vandenberg’’) at 2–3. 315See e.g., CL–BGA supra note 35 at 20–21; CL– 

FIA I supra note 21 at 13; CL–EEI/EPSA supra note 

21 at 6 (EEI alternatively argued that the 

Commission should raise the threshold levels for 

certain contracts if the Commission retained the 

visibility regime); CL–MFA supra note 21 at 3; CL– 

Utility Group supra note 21 at 13–14; CL–NREC/ 

AAPP/ALLPC supra note 266 at 12; CL–USCF supra 

note 153 at 11; and CL–WGCEF supra note 35 at 

23. Some commenters expressed concern that the 

Commission would not have sufficient resources to 

review the data, and therefore the cost of 

compliance would not produce a benefit. See e.g., 

CL–MFA supra note 21 at 3. 

316See e.g., CL–EEI/EPSA supra note 21 at 6; and 

CL–WGCEF supra note 35 at 23. 

317See e.g., CL–BGA supra note 35 at 20–21. 

318See e.g., CL–USCF supra note 153 at 11. 

319See e.g., CL–NGFA supra note 72 at 5. 

320See e.g., CL–AGA supra note 124 at 12. 

example, one study argued that index 

speculators have been at least partially 

responsible for the tripling of 

commodity futures prices over the last 

five years.305

Regardless of whether a CIF is nondiversified or diversified, the 

Commission did not propose to impose 

different position limits on CIFs or to 

exempt CIFs from position limits. In 

addition to considering comments 

regarding the role of CIFs in commodity 

derivatives markets, the Commission 

has reviewed and evaluated studies 

cited by commenters presenting 

conflicting views on the effect of certain 

groups of index traders.306 Historically, 

the Commission has applied position 

limits to individual traders rather than 

a group or class of traders, and does not 

have a similar level of experience with 

respect to group or class limits as it has 

with position limits for individual 

traders. Therefore, the Commission 

believes more analysis is required before 

the Commission would impose a 

separate position limit regime, or 

establish an exemption, for a group or 

class of traders, including CIFs.307 The 

Commission welcomes further 

submissions of studies to assist in 

subsequent rulemakings on the 

treatment of various groups or classes of 

speculative traders. 

K. Exchange Traded Funds 

CME commented that the Commission 

should coordinate its position limit 

policy with the Securities and Exchange 

Commission (‘‘SEC’’) in order to avoid 

encouraging market participants to 

replace their commodity derivatives 

exposures with physical commodity 

exchange-traded fund (‘‘ETF’’) 

exposures.308 As previously stated, the 

Commission believes that the final rules 

will ensure sufficient market liquidity 

for bona fide hedgers in accordance 

with CEA section 4a(a)(3)(B)(iii). With 

respect to the potential increase in ETF 

exposures, the Commission notes that 

such products are not within the scope 

of this rulemaking. 

L. Position Visibility 

The Proposed Rule established an 

enhanced reporting regime for traders 

who hold or control positions in certain 

energy and metal Referenced Contracts 

above a specified number of net long or 

net short positions.309 These ‘‘position 

visibility levels’’ are set below the 

proposed non-spot-month position limit 

levels. A trader’s positions in allmonths-combined for listed Referenced 

Contracts would be aggregated under 

the Proposed Rule, including bona fide 

hedge positions. Once a trader crosses a 

proposed position visibility level, the 

trader would have to file monthly 

reports with the Commission that 

generally capture the trader’s physical 

and derivatives portfolio in the same 

commodity and substantially same 

commodity as that underlying the 

Referenced Contract.310

The general purpose behind the 

position visibility levels was to enhance 

the Commission’s surveillance functions 

to better understand the largest traders 

for energy and metal Referenced 

Contracts, and to better enable the 

Commission to set and adjust 

subsequent position limits, as 

appropriate.311

Commenters were divided on the 

utility of position visibility levels. A 

number of commenters supported the 

proposed visibility levels, with some 

urging the Commission to expand their 

application to agricultural contracts.312

Many of the supportive commenters 

stated that the Commission should 

extend the position visibility regime to 

agricultural Referenced Contracts.313 At 

least one commenter specifically 

requested that the Commission expand 

the position visibility levels to metalbased ETFs as well as contracts traded 

on the London Metals Exchange as a 

method to deter excessive speculation 

and manipulation.314

Several commenters stated that the 

enhanced reporting requirements would 

be onerous to implement along with 

other Dodd-Frank Act requirements 

with little benefit to combating 

excessive speculation.315 Certain 

commenters also asserted that the 

reporting requirements would 

disproportionately impact bona fide 

hedgers because such entities would 

have to produce reports surrounding 

their hedging activity whereas a 

speculative trader would not have to 

produce similar reports.316 One 

commenter pointed out that the 

Commission could instead utilize its 

special call authority under § 18.05 to 

receive data similar to the data to be 

reported in the position visibility 

regime.317 One commenter argued that 

the reporting frequency should be semiannual as opposed to monthly because 

the Commission would not need to 

analyze this additional data on a 

monthly basis.318 Another commenter 

assumed that the reporting requirements 

would be daily and therefore requested 

the Commission alter the requirement to 

monthly.319 Some commenters opined 

that the scope of the position visibility 

reports was vague because it required 

reporting of uncleared swap positions in 

substantially the same commodity.320

Commenters also argued that the 

Commission should alter the position 

visibility levels to a position 

accountability regime similar to the 

rules on DCMs. However, among the 

commenters who supported converting 

position visibility levels to position 

accountability levels, there were two 

distinct approaches. Some commenters 

wanted the Commission to implement 

position accountability levels as an 

interim measure until the Commission 


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321See e.g., CL–PMAA/NEFI supra note 6 at 15; 

CL–ATAA supra note 94 at 5, 16; CL–APGA supra 

note 17 at 8–9; and CL–Delta supra note 20 at 11. 

322See e.g., CL–BlackRock supra note 21 at 18– 

19; and CL–CME I supra note 8 at 6. See also, CL– 

FIA I supra note 21 at 13; and CL–EEI/EPSA supra 

note 21 at 10. 

323Proposed § 151.6(c) required reporting of 

uncleared swaps in substantially the same 

commodity. 

324The Commission has also amended 

§ 151.6(b)(1) to require the reporting of the dates, 

instead of the total number of days, that a trader 

held a position exceeding visibility levels. 

325See e.g., CL–BlackRock supra note 21 at 18 

(‘‘The variability of position limits from year to year 

also will create uncertainty for market participants 

as to what limits will apply to their long-term 

trading strategies, causing some participants to shift 

their commodity-risk positions to markets with no 

limits at all or possibly even fixed limits.’’); and 

CL–ISDA/SIFMA supra note 21 at 24–25 (‘‘* * * 

we believe that the Proposed Rules will likely result 

in market participants, especially those that operate 

outside the U.S., shifting their trading activity to 

non- U.S. markets.’’). 

326CL–USCOC supra note 246 at 4. 

327CL–ISDA/SIFMA supra note 21 at 24–25 

(‘‘* * * we believe that the Proposed Rules will 

likely result in market participants, especially those 

that operate outside the U.S., shifting their trading 

activity to non-U.S. markets.’’) 

328 Id. 

329CL–Prof. Greenberger supra note 6 at 20. 

could fully implement hard position 

limits outside of the spot-month.321 The 

second group requested that the 

Commission eliminate visibility levels 

and position limits, and in their place 

implement position accountability 

levels.322

The Commission is adopting the 

position visibility proposal with certain 

modifications in response to comments. 

The Commission continues to believe 

that position visibility levels represent 

an important surveillance tool in the 

metal and energy Referenced Contracts 

because the Commission does not 

anticipate that the number of traders 

with positions in excess of the limits for 

metal and energy Referenced Contracts 

will constitute a significant segment of 

the market. As such, the Commission 

would not receive a large number of 

bona fide hedging reports and other data 

for many traders in excess of the 

position limit, and the position 

visibility levels would improve the 

Commission’s ability to monitor the 

positions of the largest traders in the 

markets. In this regard, the Commission 

anticipates that more traders in the 

agricultural Referenced Contracts will 

be above the anticipated position limits, 

and therefore, the Commission does not 

currently anticipate a similar need to 

apply the position visibility levels to 

agricultural Referenced Contracts. 

To accommodate compliance cost 

concerns raised by some commenters 

the position visibility level will be 

raised to approximately 50 percent of 

the projected aggregate position limit 

(based on current futures and swaps 

open interest data), with the exception 

of NYMEX Light Sweet Crude Oil (CL) 

and NYMEX Henry Hub Natural Gas 

(NG) Referenced Contracts where the 

levels have been set lower to 

approximate the point where ten 

traders, on an annual basis, would be 

subject to position visibility reporting 

requirements. The Commission believes 

that this increase is appropriate in order 

to reduce the number of traders 

burdened by the associated reporting 

obligations. In addition, under 

§ 151.6(b)(2)(ii), the Commission will 

require position visibility reports to 

include uncleared swaps in Referenced 

Contracts, but will not require reporting 

of swaps in substantially the same 

commodity.323 The position visibility 

rule will become effective on the date 

that new Federal spot month limits 

become effective. Additionally, the 

Commission has eliminated the 

requirement to submit 404A filings 

under § 151.6 in order to further reduce 

the compliance burden for firms 

reporting under that provision. The 

Commission believes it will receive 

sufficient information on the cash 

market activity for general surveillance 

purposes through 404 filings under 

§ 151.6(c).324

The Commission has eliminated the 

separate 402S filing and will gather 

information on uncleared swaps 

through the revised 401 filing. The 

revised 401 filing will provide 

information for general surveillance 

purposes in light of the data 

management issues discussed in II.C. of 

this release. 

The Commission has also reduced the 

required frequency of reporting on the 

401 and 404 filings. The Commission 

may request more specific data, either in 

terms of data granularity (e.g., a breakout of data based on expirations) or with 

respect to a trader’s position on a 

specific date or dates under its existing 

authority under Commission regulations 

18.05 and 20.6. The Commission 

clarifies that 401 and 404 filings 

required under § 151.6 are to reflect the 

reporting person’s relevant positions as 

of the first business Tuesday of a 

calendar quarter and on the date on 

which the person held the largest net 

position in excess of the level in all 

months. The Commission would require 

such a filing to be made within ten 

business days of the last day of the 

quarter in which the trader held a 

position exceeding position visibility 

levels. 

M. International Regulatory Arbitrage 

Section 4a(a)(2)(C) of the CEA, as 

amended by section 737 of the DoddFrank Act, requires the Commission to 

‘‘strive to ensure that trading on foreign 

boards of trade in the same commodity 

will be subject to comparable limits and 

that any limits to be imposed by the 

Commission will not cause price 

discovery in the commodity to shift to 

trading on the foreign boards of trade.’’ 

The Commission received several 

comments expressing concerns 

regarding the regulatory arbitrage 

opportunities that might arise as a result 

of the imposition of position limits.325

The U.S. Chamber of Commerce 

stated that ‘‘hasty and ill-conceived 

limits on the U.S. derivatives markets 

will undoubtedly lead to a significant 

migration of market participants to lessregulated overseas markets.’’ 326

Similarly, ISDA/SIFMA stated that a 

permanent position limit regime should 

be postponed until the Commission has 

fully consulted with its counterparts 

around the globe about harmonizing 

limits and phasing them in 

simultaneously, so as to ensure that 

position limits imposed on U.S. markets 

do not shift business offshore.327

Accordingly, ISDA/SIFMA strongly 

urged ‘‘the CFTC to work with foreign 

regulators to ensure that foreign 

commodity market participants are 

subject to position limits that are 

comparable to those imposed on U.S. 

market participants.’’ 328 Michael 

Greenberger, on the other hand, opined 

that the proposed position limits would 

result in minimal international 

regulatory arbitrage because (i) The 

Commission has extraterritorial 

jurisdiction reach under Dodd-Frank 

Act section 722, (ii) many swap dealers 

would be required to register under the 

Dodd-Frank Act thereby ensuring that 

the Commission would have 

jurisdiction over them, (iii) other 

authorities are working to harmonize 

their rules and have expressed a 

hostility to the financialization of 

commodity markets, and (iv) many 

other authorities have shown a 

willingness to impose additional 

requirements on expatriate U.S. 

banks.329

The Commission agrees that it should 

seek to avoid regulatory arbitrage and 

participate in efforts to raise regulatory 

standards internationally. The 

Commission has worked to achieve that 

general goal through its participation in 

the International Organization of 

Securities Commissions (‘‘IOSCO’’). 


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330See Principles for the Regulation and 

Supervision of Commodity Derivatives Markets, 

IOSCO Technical Committee (2011). 

331The Futures Trading Practices Act of 1992 

(‘‘FTPA’’) required the CFTC to study the 

competitiveness of boards of trade over which it has 

jurisdiction compared with the boards of trade over 

which ‘‘foreign futures authorities’’ have 

jurisdiction. The Commission submitted its report 

on this issue, ‘‘A Study of the Global 

Competitiveness of U. S. Futures Markets’’ (‘‘1994 

Study’’), to the Senate and House agriculture 

committees in April 1994. 

332The Global Competitiveness of U.S. Futures 

Markets Revisited, CFTC Division of Economic 

Analysis (November 1999) http://www.cftc.gov/dea/ 

compete/deaglobal_competitiveness.htm. 

333CFTC press release #4333–99F (November 4, 

1999) http://www.cftc.gov/opa/press99/opa4333– 

99.htm Among other things, the 1999 report 

concluded that the U.S. share of total worldwide 

futures and option trading activity appears to be 

stabilizing as the larger foreign markets have 

matured. As in 1994, the most actively traded 

foreign products tend to fill local or regional risk 

management needs and few products offered by 

foreign exchanges directly duplicate products 

offered by U.S. markets; and the increased 

competition among mature segments of the global 

futures industry, particularly in Europe, may reflect 

industry restructuring and the introduction of new 

technologies, particularly electronic trading. 

334As discussed above in II.E., section 719(a) of 

the Dodd-Frank Act directs the Commission to 

study the ‘‘effects (if any) of the positions limits 

imposed pursuant to [section 4a] on excessive 

speculation and on the movement of transactions’’ 

from DCMs to foreign venues and to submit a report 

on these effects to Congress within 12 months after 

the imposition of position limits. This study will be 

conducted in consultation with DCMs. See DoddFrank Act, supra note 1, section 719(a). 

335All references to ‘‘SEFs’’ below are to SEFs 

that are trading facilities. 

336CL–Shell supra note 35 at 5–6. 

337See e.g., CL–ICE I supra note 69 at 6–8 (Cashsettled contract limits should apply to each 

exchange-traded contract separately and there 

should not be an aggregate spot-month limit.); CL– 

DB supra note 153 at 9–10; and CL–Centaurus 

supra note 21 at 4. 

338As discussed below in II.M.3, the Commission 

has recognized an arbitrage exemption for registered 

entity limits for all but physical-delivery contracts 

in the spot month. This is consistent with the 

Commission’s approach on non-spot month class 

limits as it ensures that registered entity limits do 

not create a marginal incentive to establish a 

position in a class of otherwise economically 

equivalent contracts outside of the spot month. 

339The Commission notes that under Core 

Principle 1 for DCMs and SEFs, the Commission 

may ‘‘by rule or regulation’’ prescribe standards for 

compliance with Core Principles. Sections 

5(d)(1)(B) and 5h(f)(1)(B) of the CEA, 7 U.S.C. 

7(d)(1)(B), 7b–3(f)(1)(B). 

340See section 4a(e) of the CEA, 7 U.S.C. 6a(e). 

Most recently, the Commission assisted 

in the development of an international 

consensus on principles for the 

regulation and supervision of 

commodity derivatives markets, which 

included a requirement that market 

authorities should have the authority, 

among other things, to establish ex-ante 

position limits, at least in the delivery 

month.330 The Commission intends, 

through its activities within IOSCO, to 

seek further elaboration on the degree to 

which commodity derivatives market 

authorities implement those principles, 

including the extent to which position 

limits are been imposed. 

The Commission rejects the view, 

however, that section 4a(a)(2)(C) of the 

CEA prohibits Commission rulemaking 

unless and until there is uniformity in 

position limit policies in the United 

States and other major market 

jurisdictions. Such a view would 

subordinate the explicit statutory 

directive to impose position limits as a 

means to address excessive speculation 

in U.S. derivatives markets to a 

potentially lengthy period of policy 

negotiations with foreign regulators. 

The Commission also rejects the view 

suggested in some of the comment 

letters that it is a foregone conclusion 

that the mere existence of differences in 

position limit policies will inevitably 

drive trading abroad. The Commission’s 

prior experience in determining the 

competitive effects of regulatory policies 

reveals that it is difficult to attribute 

changes in the competitive position of 

U.S. exchanges to any one factor. For 

example, prior concerns with regard to 

the competitive effect on U.S. contract 

markets of alleged lighter regulation 

abroad led the CFTC to study those 

concerns both in 1994, pursuant to a 

congressional directive,331 and again in 

1999.332 In both cases, the 

Commission’s staff reports concluded 

that differences in regulatory regimes 

between various countries did not 

appear to have been a significant factor 

in the competitive position of the 

world’s leading exchanges.333

Nonetheless, the Commission takes 

seriously the need to avoid 

disadvantaging U.S. futures exchanges 

and will monitor for any indication that 

trading is migrating away from the 

United States following the 

establishment of the position limit 

structure set forth in this rulemaking.334

N. Designated Contract Market and 

Swap Execution Facility Position Limits 

and Accountability Levels 

For contracts subject to Federal 

position limits imposed under section 

4a(a) of the CEA, sections 5(d)(5)(B) and 

5h(f)(6)(B) require DCMs and SEFs that 

are trading facilities,335 respectively, to 

set and enforce speculative position 

limits at a level no higher than those 

established by the Commission. Section 

4a(a)(2) of the CEA, in turn, directs the 

Commission to set position limits on 

‘‘physical commodities other than 

excluded commodities.’’ Section 

5(d)(5)(A) of the CEA requires that 

DCMs set, ‘‘as is necessary and 

appropriate, position limitations or 

position accountability for speculators’’ 

for each contract executed pursuant to 

their rules. A similar duty is imposed on 

SEFs that are trading facilities under 

section 5h(f)(6)(A) of the CEA. 

1. Required DCM and SEF Position 

Limits for Referenced Contracts 

Proposed § 151.11(a) would have 

required DCMs and SEFs to set spot 

month, single month, and all-months 

position limits for all commodities, with 

exceptions for securities futures and 

some excluded commodities. Under 

proposed § 151.11(a)(1), DCMs and SEFs 

would be required to set additional, 

DCM or SEF spot-month and non-spotmonth position limits for Referenced 

Contracts at a level no higher than the 

Federal position limits established 

pursuant to proposed § 151.4. For other 

contracts (including other physical 

commodity contracts), under proposed 

§ 151.11(a)(2), DCMs and SEFs would be 

required to set position limits utilizing 

the Commission’s historic approach to 

position limits. 

Shell requested that if the 

Commission adopts Federal spot month 

limits, exchange-based position limits 

should be eliminated because these 

limits will be redundant, at best, and 

may cause unintended apportionment of 

trading across exchanges, at worst.336

Several other commenters opined that 

the Commission should require 

exchanges to set spot month limits and 

to refrain from setting Federal position 

limits.337

The Commission has determined, 

consistent with the statute and the 

proposal, to require the establishment of 

position limits by DCMs and SEFs for 

Referenced Contracts.338 As discussed 

above under II.A, the Commission has 

been directed under section 4a(a)(2) of 

the CEA to establish position limits on 

physical commodity DCM futures and 

options contracts and has been granted 

discretion to determine the specific 

levels. The Commission has exercised 

this discretion by imposing federallyadministered position limits under 

§ 151.4 for 28 ‘‘Referenced Contract’’ 

physical commodity derivatives markets 

and under § 151.11 by directing DCMs 

and SEFs to establish methodologically 

similar position limits for Referenced 

Contracts.339 While DCM or SEF limits 

are not administered by the 

Commission, the Commission may 

nonetheless enforce trader compliance 

with such limits as violations of the 

Act.340 The Commission did not 

propose federally-administered position 

limits over other physical commodity 


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341See Core Principle 6 for SEFs, section 

5h(f)(6)(A) of the CEA, 7 U.S.C. 7b–3(f)(6)(A). 

342The Commission further notes that it did not 

receive any comments on this specific proposed 

requirement for SEFs. 

343As discussed above, the Commission has 

determined that SEF limits for physical commodity 

contracts are ‘‘necessary and appropriate’’ in order 

to effectuate the policy purposes underlying limits 

on DCM contracts. 

344 76 FR at 4752, 4763. 

345CL–AIMA supra note 35 at 6. 

346Proposed § 151.11(a)(2) and Final 

§ 151.11(b)(3). 

347See Section 1a(19) of the Act, 7 U.S.C. 1a(19). 

348See § 151.11(d)(1)(ii) of these proposed 

regulations. As explained in section G of this 

release, the definition of bona fide hedge 

transaction or position contained in § 4a(c)(2) of the 

Act, 7 U.S.C. 6a(c)(2), does not, by its terms, apply 

to excluded commodities. 

349See Clarification of Certain Aspects of Hedging 

Definition, 52 FR 27195, Jul. 20, 1987; and Risk 

Management Exemptions From Speculative 

Position Limits Approved under Commission 

regulation 1.61, 52 FR 34633, Sept. 14, 1987. 

contracts and intends to do so as 

practicable in the future. In the interim, 

the Commission will rigorously enforce 

DCM and SEF compliance with Core 

Principles 5 and 6. 

The Commission notes that section 

4a(a)(2) of the CEA requires the 

Commission to establish speculative 

position limits on physical commodity 

DCM contracts. This requirement does 

not extend to SEF contracts. The 

Commission has determined that SEF 

limits for physical commodity contracts 

are ‘‘necessary and appropriate’’ 

because the policy purposes effectuated 

by establishing such limits on DCM 

contracts are equally present in SEF 

markets.341 The Commission notes that 

the Proposed Rules would have required 

SEFs to establish limits for all physical 

commodity derivatives under proposed 

§ 151.11(a).342 Accordingly, the 

Commission has determined to establish 

essentially identical standards for 

establishing position limits (and 

accountability levels) for DCMs and 

SEFs. 

Under § 151.11(a), the Commission 

requires DCMs and SEFs to establish 

spot-month limits for Referenced 

Contracts at levels no greater than 25 

percent of estimated deliverable supply 

for the underlying commodity and no 

greater than the limits established under 

§ 151.4(a)(1). 

The requirement in proposed 

§ 151.11(a)(2) for position limits for 

contracts at designation has been 

modified in § 151.11(b)(3) in three 

important ways. First, consistent with 

the congressional mandate to establish 

position limits on all DCM physical 

commodity contracts, the Commission 

is requiring that DCMs (and SEFs by 

extension) 343 establish position limits 

for all physical commodity contracts. 

Second, the Commission has clarified 

this provision to apply to new contracts 

offered by DCMs and SEFs. The 

Commission has further clarified that it 

will be an acceptable practice that the 

notional quantity of the contract subject 

to such limits corresponds to a notional 

quantity per contract that is no larger 

than a typical cash market transaction in 

the underlying commodity. For 

example, if a DCM or SEF offers a new 

physical commodity contract and sets 

the notional quantity per contract at 

100,000 units while most transactions in 

the cash market for that commodity are 

for a quantity of between 1,000 and 

10,000 units and exactly zero percent of 

cash market transactions are for 100,000 

units or greater, then the notional 

quantity of the derivatives contract 

offered by the DCM or SEF would be 

atypical. This clarification is intended 

to deter DCMs and SEFs from setting 

non-spot-month position limits for new 

contracts at levels where they would 

constitute non-binding constraints on 

speculation through the use of an 

excessively large notional quantity per 

contract. This clarification is not 

expected to result in additional 

marginal cost because, among other 

things, it reflects current Commission 

custom in reviewing new contracts and 

is an acceptable practice for Core 

Principle compliance and not a 

requirement per se for DCMs or SEFs. 

Finally, the Commission in the 

preamble to the Proposed Rule 

indicated that a DCM or SEF could elect 

to establish position accountability 

levels in lieu of position limits if the 

open interest in a contract was less than 

5,000 contracts.344 The Commission did 

not, however, provide for this in the 

Proposed Rule’s text. One commenter 

specifically supported the position 

taken by the Commission in the 

Proposed Rule’s preamble because it 

recognized that position accountability 

may be more appropriate for certain 

contracts with lower levels of open 

interest.345

The Commission clarifies that it is not 

adopting the preamble discussion for 

low open interest contracts. Rather, final 

§ 151.11(b)(3) provides that it shall be 

an acceptable practice to provide for 

speculative limits for an individual 

single-month or in all-months-combined 

at no greater than 1,000 contracts for 

non-energy physical commodities and at 

no greater than 5,000 contracts for other 

commodities.346

2. DCM and SEF Accountability Levels 

for Non-Referenced and Excluded 

Commodities 

Under proposed § 151.11(c), 

consistent with current DCM practice, 

DCMs and SEFs have the discretion to 

establish position accountability levels 

in lieu of position limits for excluded 

commodities.347 DCMs and SEFs could 

impose position accountability rules in 

lieu of position limits only if the 

contract involves either a major 

currency or certain excluded 

commodities (such as measures of 

inflation) or an excluded commodity 

that: (1) Has an average daily open 

interest of 50,000 or more contracts, (2) 

has an average daily trading volume of 

100,000 or more contracts, and (3) has 

a highly liquid cash market. 

Under final § 151.11(c)(1), the 

Commission provides that the 

establishment of position accountability 

rules are an acceptable alternative to 

position limits outside of the spot 

month for physical commodity contracts 

when a contract has an average monthend open interest of 50,000 contracts 

and an average daily volume of 5,000 

contracts and a liquid cash market, 

consistent with current acceptable 

practices for tangible commodity 

contracts. With respect to excluded 

commodities, consistent with the 

current DCM practice, DCMs and SEFs 

may provide for exemptions from their 

position limits for ‘‘bona fide hedging.’’ 

The term ‘‘bona fide hedging,’’ as used 

with respect to excluded commodities, 

would be defined in accordance with 

amended § 1.3(z).348 Additionally, 

consistent with the current DCM 

practice, DCMs and SEFs could 

continue to provide exemptions for 

‘‘risk-reducing’’ and ‘‘risk-management’’ 

transactions or positions consistent with 

existing Commission guidelines.349

Finally, though the Commission is 

removing the procedure to apply to the 

Commission for bona fide hedge 

exemptions for non-enumerated 

transactions or positions under 

§ 1.3(z)(3), the Commission will 

continue to recognize prior Commission 

determinations under that section, and 

DCMs and SEFs could recognize nonenumerated hedge transactions subject 

to Commission review. 

3. DCM and SEF Hedge Exemptions and 

Aggregation Rules 

Final §§ 151.11(e) and 151.11(f)(1)(i) 

require DCMs and SEFs to follow the 

same account aggregation and bona fide 

exemption standards set forth by 

§§ 151.5 and 151.7 with respect to 

exempt and agricultural commodities 

(collectively ‘‘physical’’ commodities). 

Section 151.11(f)(2) requires traders 

seeking a hedge exemption to ‘‘comply 

with the procedures of the designated 


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350CL–MFA supra note 21 at 18. 

351See the discussion of non-spot month class 

limits under II.D.5 and II.F.1 supra discussing 

comments expressing concern that arbitrage 

exemptions were not recognized in the proposal. 

See e.g., CL–ISDA/SIFMA supra note 21 at 11; and 

CL–MFA supra note 21 at 18. See also, CL–Shell 

supra note 35 at 5–6. 

352See section 4a(a)(1) of the CEA, 7 U.S.C. 

6a(a)(1). 

353See e.g., CL–WGCEF supra note 35 at 19–20 

(proposing a specific schedule for the setting of 

spot-month position limits by notice and comment); 

CL–BGA supra note 35 at 20. See also, CL–ISDA/ 

SIFMA supra note 21 at 22. 

354See e.g., CL–BlackRock supra note 21 at 18; 

CL–CME I supra note 8 at 12; CL–NGFA supra note 

72 at 3; CL–EEI/EPSA supra note 21 at 11; CL– 

KCBT I supra note 97 at 3; and CL–WGC supra note 

21 at 5. 

355CL–CME I supra note 8 at 12. 

356CL–BlackRock supra note 21 at 18. 

contract market or swap execution 

facility for granting exemptions from its 

speculative position limit rules.’’ 

MGEX commented on the role of 

DCMs and SEFs in administering bona 

fide hedge exemptions. MGEX noted 

that while § 151.5 contemplated a 

Commission-administered bona fide 

hedging regime, proposed § 151.11(e)(2) 

would require persons seeking to 

establish eligibility for an exemption to 

comply with the DCM’s or SEF’s 

procedures for granting exemptions. 

MGEX recommended that the 

Commission be the primary entity for 

administering bona fide hedge 

exemptions and that when necessary 

that information be shared with the 

necessary DCMs and SEFs. 

With respect to a DCM’s or SEF’s duty 

to administer hedge exemptions, the 

Commission intended that DCMs and 

SEFs administer their own position 

limits under § 151.11. Accordingly, 

under its rulemaking, the Commission is 

requiring that DCMs and SEFs create 

rules and procedures to allow traders to 

claim a bona fide hedge exemption, 

consistent with § 151.5 for physical 

commodity derivatives and § 1.3(z) for 

excluded commodities. Section 151.11 

contemplates that DCMs and SEFs 

would administer their own bona fide 

hedge exemption regime in parallel to 

the Commission’s regime. Traders with 

a hedge position in a Referenced 

Contract subject to DCM or SEF limits 

will not be precluded from filing the 

same bona fide hedging documentation, 

provided that the hedge position would 

meet the criteria of Commission 

regulation 151.5 for both the purposes of 

Federal and DCM or SEF position limits. 

Section 4a(a) of the CEA provides the 

Commission with authority to exempt 

from the position limits or to impose 

different limits on spread, straddle, or 

arbitrage trades. Current § 150.4(a)(3) 

recognizes these exemptions in the 

context of the single contract position 

limits set forth under § 150.2. MFA 

opined that the Commission should 

restore the arbitrage exemptions because 

they are central to managing risk and 

maintaining balanced portfolios.350

The Commission has determined to 

re-introduce a version of this exemption 

in the final rulemaking in response to 

commenters that opined directly on this 

issue 351 as well as those that argued 

against the imposition of the proposed 

class limits, as discussed above in II.D.5. 

The Commission has therefore 

introduced an arbitrage exemption for 

DCM or SEF limits under § 151.11(g)(2) 

that allows traders to claim as an offset 

to their positions on a DCM or SEF 

positions in the same Referenced 

Contracts or in an economically 

equivalent futures or swap position.352

This arbitrage exemption does not, 

however, apply to physical-delivery 

contracts in the spot month. The 

Commission has reintroduced this 

exemption, available to those traders 

that demonstrate compliance with a 

DCM or SEF speculative limit through 

offsetting trades on different venues or 

through OTC swaps in economically 

equivalent contracts. 

4. DCM and SEF Position Limits and 

Accountability Rules Effective Date 

Section 151.11(i) provides that 

generally the effective date for the 

position limits or accountability levels 

described in § 151.11 shall be made 

effective sixty days after the term 

‘‘swap’’ is further defined. The 

Commission has set this effective date to 

coincide with the effective date of the 

spot-month limits established under 

§ 151.4. The one exception to this 

general rule is with respect to the 

acceptable guidance for DCMs and SEFs 

in establishing position limits or 

accountability rules for non-legacy 

Referenced Contracts executed pursuant 

to their rules prior to the 

implementation of Federal non-spotmonth limits on such Referenced 

Contracts. Under § 151.11(j), the 

acceptable practice for these contracts 

during this transition phase will be 

either to retain existing non-spot-month 

position limits or accountability rules or 

to establish non-spot-month position 

limits pursuant to the acceptable 

practice described in § 151.11(b)(2) (i.e., 

to impose limits based on ten percent of 

the average combined futures and deltaadjusted option month-end open 

interest for the most recent two calendar 

years up to 25,000 contracts with a 

marginal increase of 2.5 percent 

thereafter) based on open interest in the 

contract and economically equivalent 

contracts traded on the same DCM or 

SEF. 

O. Delegation 

Proposed § 151.12 would have 

delegated certain of the Commission’s 

proposed part 151 authority to the 

Director of the Division of Market 

Oversight and to other employee or 

employees as designated by the 

Director. The delegated authority would 

extend to: (1) Determining open interest 

levels for the purpose of setting nonspot-month position limits; (2) granting 

an exemption relating to bona fide 

hedging transactions; and (3) providing 

instructions, determining the format, 

coding structure, and electronic data 

transmission procedures for submitting 

data records and any other information 

required under proposed part 151. The 

purpose of this delegation provision was 

to facilitate the ability of the 

Commission to respond to changing 

market and technological conditions 

and thus ensure timely and accurate 

data reporting. 

The Commission requested comments 

on whether determinations of open 

interest or deliverable supply should be 

adopted through Commission orders. 

With respect to spot-month position 

limits, a few commenters contended 

that spot month limits should be set by 

rulemaking.353 With respect to nonspot-month position limits, several 

commenters submitted that such limits 

should be calculated by rulemaking not 

by annual recalculation so that market 

participants can have sufficient advance 

notice and opportunity to comment on 

changes in position limit levels.354

CME, for example, commented that the 

Commission should set initial limits 

through this rulemaking and make 

subsequent limit changes subject to 

notice and comment, unless the 

formula’s automatic annual application 

would result in higher limits.355

BlackRock commented that the 

Commission could mitigate the adverse 

effects of volatile limit levels by setting 

limits subject to notice and comment.356

The Commission has determined to 

adopt proposed § 151.12 substantially 

unchanged with some additional 

delegations provided for in the final rule 

text. Under § 151.4(b)(2)(i)(A), the 

Commission has addressed concerns 

about the volatility of non-spot-month 

position limit levels for non-legacy 

Referenced Contracts by providing for 

automatic adjustments based on the 

higher of 12 or 24 months of aggregate 

open interest data. As discussed earlier 

in this release, the Commission believes 

that adjustments to Referenced Contract 

spot month and non-legacy Referenced 


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357 7 U.S.C. 19(a). 

358See 76 FR at 4764. 

359 Id. 

360 Id. 

361Accordingly, to assist the Commission and the 

public to assess and understand the economic costs 

and benefits of the final rule, the Commission is 

supplementing its consideration of costs and 

benefits with wage rate estimates based on salary 

information for the securities industry compiled by 

the Securities Industry and Financial Markets 

Association (‘‘SIFMA’’). The wage estimates the 

Commission uses are derived from an industrywide survey of participants and thus reflect an 

average across entities; the Commission notes that 

the actual costs for any individual company or 

sector may vary from the average. In response to 

comments, the Commission has also addressed its 

PRA estimates in this Considerations of Costs and 

Benefits section. 

362See e.g., CL–CME I supra note 8 at 2; and CL– 

COPE supra note 21 at 2–5. 

363CL–CME I supra note 8 at 2. See also CL– 

Blackrock supra note 21 at 3. 

364See e.g., CL–Utility Group supra note 21 at 2 

(submitting that the compliance burden of the 

Commission’s position limits proposal is not 

justified by any demonstrable benefits); and CL– 

COPE supra note 21 (stating that there is no 

predicate for finding federal position limits to be 

appropriate at this time; and the Position Limits 

NOPR is overly complex and creates significant and 

burdensome requirements on end-users). 

365See e.g., CL–Morgan Stanley supra note 21 at 

4. 

366See e.g., CL–CME I supra note 8 at 2. 

367See e.g., CL–USCOC supra note 246 at 3; CL– 

PIMCO, supra note 21 at 8; and CL–ISDA/SIFMA, 

supra note 21 at 24. 

368See e.g., CL–WGC supra note 21 at 3. 

369See CL–WGCEF supra note 34 at 25–26. 

370Section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1). 

Contracts non-spot-month position limit 

levels on a scheduled basis by 

Commission order provide for a process 

that is responsive to the changing size 

of the underlying physical and financial 

market for the relevant Referenced 

Contracts respectively. 

III. Related Matters 

A. Consideration of Costs and Benefits 

In this final rulemaking, the 

Commission is establishing position 

limits for 28 exempt and agricultural 

commodity derivatives, including 

futures and options contracts and the 

physical commodity swaps that are 

‘‘economically equivalent’’ to such 

contracts. The Commission imposes two 

types of position limits: Limits in the 

spot-month and limits outside of the 

spot-month. Generally, this rulemaking 

is comprised of three main categories: 

(1) The position limits; (2) exemptions 

from the limits; and (3) the aggregation 

of accounts. 

Section 15(a) of the CEA requires the 

Commission to ‘‘consider the costs and 

benefits’’ of its actions 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.357 The 

Commission may, in its discretion, give 

greater weight to any one of the five 

enumerated areas and may determine 

that, notwithstanding costs, a particular 

rule protects the public interest. 

In the Notice of Proposed 

Rulemaking, the Commission stated, 

‘‘[t[he proposed position limits and their 

concomitant limitation on trading 

activity could impose certain general 

but significant costs.’’ 358 In particular, 

the Commission noted that ‘‘[o]verly 

restrictive position limits could cause 

unintended consequences by decreasing 

speculative activity and therefore 

liquidity in the markets for Referenced 

Contracts, impairing the price discovery 

process in their markets, and 

encouraging the migration of 

speculative activity and perhaps price 

discovery to markets outside of the 

Commission’s jurisdiction.’’ 359 The 

Commission invited comments on its 

consideration of costs and benefits, 

including a specific invitation for 

commenters to ‘‘submit any data or 

other information that they may have 

quantifying or qualifying the costs and 

benefits of proposed part 151.’’ 360

In consideration of the costs and 

benefits of the final rules, the 

Commission has, wherever feasible, 

endeavored to estimate or quantify the 

costs and benefits of the final rules; 

where estimation or quantification is 

not feasible, the Commission provides a 

qualitative assessment of such costs and 

benefits.361 In this respect, the 

Commission notes that public comment 

letters provided little quantitative data 

regarding the costs and benefits 

associated with the Proposed Rules. 

In the following discussion, the 

Commission addresses the costs and 

benefits of the final rules, considers 

comments regarding the costs and 

benefits of position limits, and 

subsequently considers the five broad 

areas of market and public concern 

under section 15(a) of the CEA within 

the context of the three broad areas of 

this rule: Position limits; exemptions; 

and account aggregation. 

1. General Comments 

A number of commenters argued that 

the Commission did not make the 

requisite finding that position limits are 

necessary to combat excessive 

speculation.362 Specifically, one 

commenter argued that the Commission 

has ignored the wealth of empirical 

evidence supporting the view that the 

proposed position limits and related 

exemptions would actually be 

counterproductive by decreasing 

liquidity in the CFTC-regulated markets 

which, in turn, will increase both price 

volatility and the cost of hedging 

especially in deferred months.363

Similarly, some commenters opposing 

position limits questioned the benefits 

that would be derived from speculative 

limits in all markets or in particular 

markets.364 Several commenters denied 

or questioned that the Commission had 

demonstrated that excessive speculation 

exists or that the proposed speculative 

limits were necessary.365 Other 

commenters suggested that speculative 

limits would be inappropriate because 

the U.S. derivatives markets must 

compete against exchanges elsewhere in 

the world that do not impose position 

limits.366 Some commenters argued that 

even with the provisions concerning 

contracts on FBOTs, speculators could 

easily circumvent limits by migrating to 

FBOTs, and in fact the Proposed Rules 

could encourage such behavior.367

Other commenters opined that certain 

physical commodities, such as gold, 

should not be subject to position limits 

due to considerations unique to those 

particular commodities.368

One commenter stated that the 

Commission’s cost estimates did not 

accurately reflect the true cost to the 

market incurred as a result of the 

Proposed Rules because the wage 

estimates used were inaccurate; this 

commenter also stated that cost 

estimates in the PRA section were not 

addressed in the costs and benefits 

section of the Proposed Rule.369

As discussed above in sections II.A 

and II.C of this release, in section 

4a(a)(1) Congress has determined that 

excessive speculation causing ‘‘sudden 

or unreasonable fluctuations or 

unwarranted changes in the price of 

such commodity, is an undue and 

unnecessary burden on interstate 

commerce in such commodity.’’ 

Further, Congress directed that for the 

purpose of ‘‘diminishing, eliminating, or 

preventing such burden,’’ the 

Commission ‘‘shall * * * proclaim and 

fix such [position] limits * * * as the 

Commission finds are necessary to 

diminish, eliminate, or prevent such 

burden.’’ 370 New sections 4a(a)(2) and 

4a(a)(5) of the CEA contain an express 

congressional directive that the 

Commission ‘‘shall’’ establish position 

limits, as appropriate, within an 

expedited timeframe after the date of 

enactment of the Dodd-Frank Act. In 

requiring these position limits, Congress 

specified in section 4a(a)(3)(B) that in 


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371See Commodity Exchange Act of 1936, Pub L. 

74–675, 49 Stat. 1491 (1936). 

372Twenty commenters cited over 52 studies by 

institutional, academic, and industry professionals. 

373See e.g., Anderson, David, Joe L. Outlaw, 

Henry L. Bryant, James W. Richardson, David P. 

Ernstes, J. Marc Raulston, J. Mark Welch, George M. 

Knapek, Brian K. Herbst, and Marc S. Allison, The 

Agricultural and Food Policy Center Texas A&M 

University, Research Report 08–1, The Effects of 

Ethanol on Texas Food and Feed (2008); Antoshin, 

Sergei, Elie Canetti, and Ken Miyajima, IMF, Global 

Financial Stability Report, Financial Stress and 

Deleveraging, Macrofinancial Implications and 

Policy: Annex 1.2. Financial Investment in 

Commodities Markets, at 62–66 (2008); Baffes, John, 

and Tasos Haniotos, World Bank, Washington DC, 

Policy Research Working Paper 5371, Placing the 

2006/08 Commodity Boom into Perspective (2010); 

Brunetti, Celso, and Bahattin Buyuksahin, CFTC, 

Working Paper Series, Is Speculation Destabilizing? 

(2009); Buyuksahin, Bahattin, and Jeff Harris, The 

Energy Journal, The Role of Speculators in the 

Crude Oil Market (2011); Buyuksahin, Bahattin, and 

Michel Robe, CFTC, Working Paper, Speculators, 

Commodities, and Cross-Market Linkages (2010); 

Buyuksahin, Bahattin, Michael Haigh, Jeff Harris, 

James Overdahl, and Michel Robe, CFTC, Working 

Paper, Fundamentals, Trader Activity, and 

Derivative Pricing (2008); Eckaus, R.S., MIT Center 

for Energy and Environmental Policy Research, 

Working Paper 08–007WP, The Oil Price Really Is 

A Speculative Bubble (2008); Einloth, James T., 

Division of Insurance and Research, Federal Deposit 

Insurance Corporation, Washington, DC, Working 

Paper, Speculation and Recent Volatility in the 

Price of Oil (2009); Gilbert, Christopher L., 

Department of Economics, University of Trento, 

Italy, Working Paper, Speculative Influences on 

Commodity Futures Prices, 2006–2008 (2009); 

Gilbert, Christopher L., Journal of Agricultural 

Economics, How to Understand High Food Prices 

(2010); Government Accountability Office (GAO), 

Issues Involving the Use of the Futures Markets to 

Invest in Commodity Indexes (2009); Haigh, 

Michael, Jana Hranaiova, and James Overdahl, 

CFTC OCE, Staff Research Report, Price Dynamics, 

Price Discovery, and Large Futures Trader 

Interactions in the Energy Complex (2005); Haigh, 

Michael, Jeff Harris, James Overdahl, and Michel 

Robe, CFTC, Working Paper, Trader Participation 

and Pricing in Energy Futures Markets (2007); 

Hamilton, James, Brookings Paper on Economic 

Activity, The Causes and Consequences of the Oil 

Shock of 2007–2008 (2009); HM Treasury (UK), 

Global Commodities: A Long Term Vision for 

Stable, Secure, and Sustainable Global Markets 

(2008); Interagency Task Force on Commodity 

Markets, Interim Report on Crude Oil (2008); 

International Monetary Fund, World Economic 

Outlook, Is Inflation Back? Commodity Prices and 

Inflation, at 83–128 (2008); Irwin, Scott and Dwight 

Sanders, OECD Food, Agriculture, and Fisheries 

Working Papers, The Impact of Index and Swap 

Funds on Commodity Futures Markets (2010); 

Irwin, Scott, Dwight Sanders, and Robert Merrin, 

Journal of Agricultural and Applied Economics, 

Devil or Angel? The Role of Speculation in the 

Recent Commodity Price Boom (and Bust) (2009); 

Jacks, David, Explorations in Economic History, 

Populists vs Theorists: Futures Markets and the 

Volatility of Prices (2006); Kilian, Lutz, American 

Economic Review, Not All Oil Price Shocks Are 

Alike: Disentangling Demand and Supply Shocks in 

the Crude Oil Market (2009); Kilian, Lutz, and Dan 

Murphy, University of Michigan, Working Paper, 

The Role of Inventories and Speculative Trading in 

the Global Market for Crude Oil (2010); Korniotis, 

George, Federal Reserve Board of Governors, 

Finance and Economics Discussion Series, Does 

Speculation Affect Spot Price Levels? The Case of 

Metals With and Without Futures Markets (2009); 

Mou, Ethan Y., Columbia University, Working 

Paper, Limits to Arbitrage and Commodity Index 

Investment: Front-Running the Goldman Roll 

(2010); Nissanke, Machinko, University of London 

School of Oriental and African Studies, Commodity 

Markets and Excess Volatility: Sources and 

Strategies To Reduce Adverse Development Impacts 

(2010); Phillips, Peter C.B., and Jun Yu, Yale 

University, Cowles Foundation Discussion Paper 

No. 1770, Dating the Timeline of Financial Bubbles 

During the Subprime Crisis (2010); Plato, Gerald, 

and Linwood Hoffman, NCCC–134 Conference on 

Applied Commodity Price Analysis, Forecasting, 

and Market Risk Management, Measuring the 

Influence of Commodity Fund Trading on Soybean 

Price Discovery (2007); Robles, Miguel, Maximo 

Torero, and Joachim von Braun, International Food 

Policy Research Institute, IFPRI Issue Brief 57, 

When Speculation Matters (2009); Sanders, Dwight, 

and Scott Irwin, Agricultural Economics, A 

Speculative Bubble in Commodity Futures Prices? 

Cross-Sectional Evidence (2010); Sanders, Dwight, 

Scott Irwin, and Robert Merrin, University of 

Illinois at Urbana-Champaign, The Adequacy of 

Speculation in Agricultural Futures Markets: Too 

Much of a Good Thing? (2008); Smith, James, 

Journal of Economic Perspectives, World Oil: 

Market or Mayhem? (2009); Technical Committee of 

the International Organization of Securities 

Commission. IOSCO, Task Force on Commodity 

Futures Markets Final Report (2009); Stoll, Hans, 

and Robert Whaley, Vanderbilt University, Working 

Paper, Commodity Index Investing and Commodity 

Futures Prices (2009); Tang, Ke, and Wei Xiong, 

Department of Economics, Princeton University, 

Working Paper, Index Investing and the 

Financialization of Commodities (2010); Trostle, 

Ronald, ERS (USDA), Global Agricultural Supply 

and Demand: Factors Contributing to the Recent 

Increase in Food Commodity Prices (2008); U.S. 

Commodity Futures Trading Commission, Staff 

Report on Commodity Swap Dealers and Index 

Traders With Commission Recommendations 

(2008); Wright, Brian, World Bank, Policy Research 

Working Paper, International Grain Reserves and 

Other Instruments To Address Volatility in Grain 

Markets (2009). 

addition to establishing limits on the 

number of positions that may be held by 

any person to diminish, eliminate, or 

prevent excessive speculation, the 

Commission should also, to the 

maximum extent practicable, set such 

limits at a level to ‘‘deter and prevent 

market manipulation, squeezes and 

corners,’’ ‘‘ensure sufficient market 

liquidity for bona fide hedgers,’’ and ‘‘to 

ensure that the price discovery function 

of the underlying market is not 

disrupted.’’ 

In light of the congressional mandate 

to impose position limits, the 

Commission disagrees with comments 

asserting that the Commission must first 

determine that excessive speculation 

exists or prove that position limits are 

an effective regulatory tool. Section 

4a(a) expresses Congress’s 

determination that excessive 

speculation may create an undue and 

unnecessary burden on interstate 

commerce and directs the Commission 

to establish such limits as are necessary 

to ‘‘diminish, eliminate, or prevent such 

burden.’’ Congress intended the 

Commission to act to prevent such 

burdens before they arise. The 

Commission does not believe it must 

first demonstrate the existence of 

excessive speculation or the resulting 

burdens in order to take preventive 

action through the imposition of 

position limits. Similarly, the 

Commission need not prove that such 

limits will in fact prevent such burdens. 

In enacting the Dodd-Frank Act, 

Congress re-affirmed the findings 

regarding excessive speculation, first 

enacted in the Commodity Exchange 

Act of 1936, as well as the direction to 

the Commission to establish position 

limits.371 In the Dodd-Frank Act, 

Congress also expressly required that 

the Commission impose limits, as 

appropriate, to prevent excessive 

speculation and market manipulation 

while ensuring the sufficiency of 

liquidity for bona fide hedgers and the 

integrity of price discovery function of 

the underlying market. Comments to the 

Commission regarding the efficacy of 

position limits fail to account for the 

mandate that the Commission shall 

impose position limits. By its terms, 

CEA Section 15(a) requires the 

Commission to consider and evaluate 

the prospective costs and benefits of 

regulations and orders of the 

Commission prior to their issuance; it 

does not require the Commission to 

evaluate the costs and benefits of the 

actions or mandates of Congress. 

2. Studies 

A number of commenters submitted 

or cited studies to the Commission 

regarding excessive speculation.372

Generally, the comments and studies 

discussed whether or not excessive 

speculation exists, the definition of 

excessive speculation, and/or whether 

excessive speculation has a negative 

impact on derivatives markets. Some of 

these studies did not explicitly address 

or focus on the issue of position limits 

as a means to prevent excessive 

speculation or otherwise, while some 

studies did generally opine on the effect 

of position limits on derivatives 

markets. 

Thirty-eight of the studies were 

focused on the impact of speculative 

activity in futures markets, i.e., how the 

behavior of non-commercial traders 

affected price levels.373 These 38 studies 

did not provide a view on position 

limits in general or on the Commission’s 

implementation of position limits in 

particular. While the Commission 

reviewed these studies in connection 

with this rulemaking, the Commission 

again notes that it is not required to 

make a finding on the impact of 

speculation on commodity markets. 

Congress mandated the imposition of 

position limits, and the Commission 


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71664 Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / Rules and Regulations 

374 Greenberger, Michael, The Relationship of 

Unregulated Excessive Speculation to Oil Market 

Price Volatility, at 11 (2010) (On position limits: 

‘‘The damage price volatility causes the economy by 

needlessly inflating energy and food prices 

worldwide far outweighs the concerns about the 

precise application of what for over 70 years has 

been the historic regulatory technique for 

controlling excessive speculation in risk-shifting 

derivative markets.’’.); Khan, Mohsin S., Peterson 

Institute for International Economics, Washington, 

DC, Policy Brief PB09–19, The 2008 Oil Price 

‘Bubble’, at 8 (2009) (‘‘The policies being 

considered by the CFTC to put aggregate position 

limits on futures contracts and to increase the 

transparency of futures markets are moves in the 

right direction.’’); U.S. Senate, Permanent 

Subcommittee on Investigations, Excessive 

Speculation in the Wheat Market, at 12 (2009) 

(‘‘The activities of these index traders constitute the 

type of excessive speculation the CFTC should 

diminish or prevent through the imposition and 

enforcement of position limits as intended by the 

Commodity Exchange Act.’’); U.S. Senate, 

Permanent Subcommittee on Investigations, 

Excessive Speculation in the Natural Gas Market at 

8’’ (2007) (The Subcommittee recommended that 

Congress give the CFTC authority over ECMs, 

noting that ‘‘[to] ensure fair energy pricing, it is 

time to put the cop back on the beat in all U.S. 

energy commodity markets.’’); UNCTAD, The 

Global Economic Crisis: Systemic Failures and 

Multilateral Remedies: Report by the UNCTAD 

Secretariat Task Force on Systemic Issues and 

Economic Cooperation, at 14, (2009) (The UNCTAD 

recommends that ‘‘* * * regulators should be 

enabled to intervene when swap dealer positions 

exceed speculative position limits and may 

represent ‘excessive speculation.’); UNCTAD, 

United Nations, Trade and Development Report, 

2009: Chapter II: The Financialization of 

Commodity Markets, at 26 (2009) (The report 

recommends tighter restrictions, notably closing 

loopholes that allow potentially harmful 

speculative activity to surpass position limits.). 

375 De Schutter, O., United Nations Special Report 

on the Right to Food: Briefing Note 02, Food 

Commodities Speculation and Food Price Crises at 

8 (2010). 

376Masters, Michael, and Adam White, White 

Paper: The Accidental Hunt Brothers: How 

Institutional Investors Are Driving up Food and 

Energy Prices at 3 (2008). 

377Medlock, Kenneth, and Amy Myers Jaffe, Rice 

University: Who Is in the Oil Futures Market and 

How Has It Changed?’’ at 8 (2009). 

378Ebrahim, Muhammed: Working Paper, Can 

Position Limits Restrain Rogue Traders?’’ at 27 

(2011) (‘‘* * * binding constraints have an 

unintentional effect. That is, they lead to a 

degradation of the equilibria and augmenting 

market power of Speculator in addition to other 

agents. We therefore conclude that position limits 

are not helpful in curbing market manipulation. 

Instead of curtailing price swings, they could 

exacerbate them.’’ 

379 Irwin, Scott, Philip Garcia, and Darrel L. Good: 

Working Paper, The Performance of Chicago Board 

of Trade Corn, Soybean, and Wheat Futures 

Contracts After Recent Changes in Speculative 

Limits at 16 (2007) (‘‘The analysis of price volatility 

revealed no large change in measures of volatility 

after the change in speculative limits. A relatively 

small number of observations are available since the 

change was made, but there is little to suggest that 

the change in speculative limits has had a 

meaningful overall impact on price volatility to 

date.’’). 

380Parsons, John: Economia, Vol. 10, Black Gold 

and Fools Gold: Speculation in the Oil Futures 

Market at 30 (2010) (‘‘Restoring position limits on 

all nonhedgers, including swap dealers, is a useful 

reform that gives regulators the powers necessary to 

ensure the integrity of the market. Although this 

reform is useful, it will not prevent another 

speculative bubble in oil. The general purpose of 

speculative limits is to constrain manipulation . 

* * * Position limits, while useful, will not be 

useful against an asset bubble. That is really more 

of a macroeconomic problem, and it is not readily 

managed with microeconomic levers at the 

individual exchange level.’’). 

381Wray, Randall, The Levy Economics Institute 

of Bard College: The Commodities Market Bubble: 

Money Manager Capitalism and the 

Financialization of Commodities at 41, 43 (2008) 

‘‘(’’While the participation of traditional speculators 

offers clear benefits, position limits must be 

carefully administered to ensure that their activities 

do not ‘‘demoralize’’ markets. * * *The CFTC must 

re-establish and enforce position limits.’’). 

382CME Group, Inc.: CME Group White Paper, 

Excessive Speculation and Position Limits in 

Energy Derivatives Markets at 6 (‘‘Indeed, as the 

Commission has previously noted, the exchanges 

have the expertise and are in the best position to 

fix position limits for their contracts. In fact, this 

determination led the Commission to delegate to 

the exchanges authority to set position limits in 

non-enumerated commodities, in the first instances, 

almost 30 years ago.’’). 

383European Commission, Review of the Markets 

in Financial Instruments Directive (2010), note 282: 

European Parliament resolution of 15 June 2010 

on derivatives markets: future policy actions (A7– 

0187/2010) calls on the Commission to develop 

measures to ensure that regulators are able to set 

position limits to counter disproportionate price 

movements and speculative bubbles, as well as to 

investigate the use of position limits as a dynamic 

tool to combat market manipulation, most 

particularly at the point when a contract is 

approaching expiry. It also requests the 

Commission to consider rules relating to the 

banning of purely speculative trading in 

commodities and agricultural products, and the 

imposition of strict position limits especially with 

regard to their possible impact on the price of 

essential food commodities in developing countries 

and greenhouse gas emission allowances. 

Id. at 82. 

384See e.g., Wray, Randall, supra. 

385See e.g., Medlock, Kenneth and Amy Myers 

Jaffe, supra. 

does not have the discretion to alter an 

express mandate from Congress. As 

such, studies suggesting that there is 

insufficient evidence of excessive 

speculation in commodity markets fail 

to address that the Commission must 

impose position limits, and do not 

address issues that are material to this 

rulemaking. 

The remaining studies did generally 

addresses the concept of position limits 

as part of their discussion of speculative 

activity. The authors of some of these 

studies and papers expressed views that 

speculative position limits were an 

important regulatory tool and that the 

CFTC should implement limits to 

control excessive speculation.374 For 

example, one author opined that ‘‘* * * 

strict position limits should be placed 

on individual holdings, such that they 

are not manipulative.’’ 375 Another 

stated, ‘‘[S]peculative position limits 

worked well for over 50 years and carry 

no unintended consequences. If 

Congress takes these actions, then the 

speculative money that flowed into 

these markets will be forced to flow out, 

and with that the price of commodities 

futures will come down substantially. 

Until speculative position limits are 

restored, investor money will continue 

to flow unimpeded into the 

commodities futures markets and the 

upward pressure on prices will 

remain.’’ 376 The authors of one study 

claimed that ‘‘Rules for speculative 

position limits were historically much 

stricter than they are today. Moreover, 

despite rhetoric that imposing stricter 

limits would harm market liquidity, 

there is no evidence to support such 

claims, especially in light of the fact that 

the market was functioning very well 

prior to 2000, when speculative limits 

were tighter.’’ 377

One study claimed that position 

limits will not restrain manipulation,378

while another argued that position 

limits in the agricultural commodities 

have not significantly affected 

volatility.379 Another study noted that 

while position limits are effective as an 

anti-manipulation measure, they will 

not prevent asset bubbles from forming 

or stop them from bursting.380 One 

study cautioned that while limits may 

be effective in preventing manipulation, 

they should be set at an optimal level so 

as to not harm the affected markets.381

One study claimed that position limits 

should be administered by DCMs, as 

those entities are closest to and most 

familiar with the intricacies of markets 

and thus can implement the most 

efficient position limits policy.382

Finally, one commenter cited a study 

that notes the similar efforts under 

discussion in European markets.383

Although these studies generally 

discuss the impact of position limits, 

they do not address or provide analysis 

of how the Commission should 

specifically implement position limits 

under section 4a. As the Commission 

explained in the proposal, ‘‘overly 

restrictive’’ limits can negatively impact 

market liquidity and price discovery. 

These consequences are detailed in 

several of the studies criticizing the 

impact of position limits.384 Similarly, 

limits that are set too high fail to 

address issues surrounding market 

manipulation and excessive 

speculation. Market manipulation and 

excessive speculation are also detailed 

in several of the studies claiming the 

need for position limits.385 In section 

4a(a)(3)(B) Congress sought to ensure 

that the Commission would ‘‘to the 

maximum extent practicable’’ ensure 

that position limits would be set at a 


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386 In this respect, the costs of these limits may 

not in fact be additional expenditures or outlays but 

rather foregone benefits that would have accrued to 

the firm had it been permitted to hold positions in 

excess of the limits. For ease of reference, the term 

‘‘costs’’ as used in this context also refers to 

foregone benefits. 

387Further, the Commission also believes it 

would be impractical to require all potentially 

affected firms to provide the Commission with the 

information necessary for the Commission to make 

this determination or assessment for each firm. In 

this regard, the Commission notes that none of the 

commenters provided or offered to provide any 

such analysis to the Commission. 

388Further, as previously noted, market 

participants did not provide the Commission with 

specific information regarding how they may alter 

their trading strategies if the limits were adopted. 

389The Commission should be able to obtain an 

expanded set of swaps data through its swaps large 

trader reporting and SDR regulations. See Large 

Trader Reporting for Physical Commodity Swaps, 

76 FR 43851, Jul. 22, 2011; and Swap Data 

Repositories: Registration Standards, Duties and 

Core Principles, 76 FR 54538, Sept. 1, 2011. 

390Prior to the Dodd-Frank Act and at least until 

the Commission can begin regularly collecting 

swaps data under the Large Trader Reporting for 

Physical Commodity Swaps regulations (76 FR 

43851, Jul. 22, 2011), the Commission’s authority to 

collect data on the swaps market was generally 

limited to Commission regulation 18.05 regarding 

Special Calls, and Part 36 of the Commission’s 

regulations. 

391This is discussed in greater detail in II.B. of 

this release. These Core Referenced Futures 

Contracts are listed in regulation 151.2 of these final 

rules. 

392 76 FR at 4753. 

393The Commission further considers registered 

entity limits in section III.A.3.e. 

level that would ‘‘diminish, eliminate, 

or prevent excessive speculation’’ and 

deter or prevent market manipulation, 

while at the same time ensure there is 

sufficient market liquidity for bona fide 

hedgers and the price discovery 

function of the market would be 

preserved. The Commission historically 

has recognized the potential impact of 

both overly restrictive and unrestrictive 

limits, and through the consideration of 

the statutory objectives in section 

4a(a)(3)(B) as well as the costs and 

benefits, has determined to finalize 

these rules. 

3. General Costs and Benefits 

As stated in the Proposed Rule, the 

Commission anticipates that the final 

rules establishing position limits and 

related provisions will result in costs to 

market participants. Generally, market 

participants will incur costs associated 

with developing, implementing and 

maintaining a method to ensure 

compliance with the position limits and 

its attendant requirements (e.g., bona 

fide hedging exemptions and 

aggregation standards). Such costs will 

include those related to the monitoring 

of positions in the relevant Referenced 

Contracts, related filing, reporting, and 

recordkeeping requirements, and the 

costs (if any) of changes to information 

technology systems. It is expected that 

market participants whose positions are 

exclusively in swaps (and hence 

currently not subject to any position 

limits regime) will incur larger initial 

costs relative to those participants in the 

futures markets, as the latter should be 

accustomed to operating under DCM 

and/or Commission position limit 

regimes. 

The final rules are also expected to 

result in costs to market participants 

whose market participation and trading 

strategies will need to take into account 

and be limited by the new position 

limits rule. For example, a swap dealer 

that makes a market in a particular class 

of swaps may have to ensure that any 

further positions taken in that class of 

swaps are hedged or offset in order to 

avoid increasing that trader’s position. 

Similarly, a trader that is seeking to 

adopt a large speculative position in a 

particular commodity and that is 

constrained by the limits would have to 

either diversify or refrain from taking on 

additional positions.386

The Commission does not believe it is 

reasonably feasible to quantify or 

estimate the costs from such changes in 

trading strategies. Quantifying the 

consequences or costs of market 

participation or trading strategies would 

necessitate having access to and 

understanding of an entity’s business 

model, operating model, and hedging 

strategies, including an evaluation of the 

potential alternative hedging or business 

strategies that would be adopted if such 

limits were imposed. Because the 

economic consequences to any 

particular firm will vary depending on 

that firm’s business model and strategy, 

the Commission believes it is 

impractical to develop any type of 

generic or representative calculation of 

these economic consequences.387

The Commission believes that many 

of the costs that arise from the 

application of the final rules are a 

consequence of the congressional 

mandate that the Commission impose 

position limits. As described more fully 

below, the Commission has considered 

these costs in adopting these final rules, 

and has, where appropriate, attempted 

to mitigate costs while observing the 

express direction of Congress in section 

4a of the CEA. 

In the discussions below as well as in 

the Paperwork Reduction Act (‘‘PRA’’) 

section of this release, the Commission 

estimates or quantifies the 

implementing costs wherever 

reasonably feasible, and where 

infeasible provides a qualitative 

assessment of the costs and benefits of 

the final rule. In many instances, the 

Commission finds that it is not feasible 

to estimate or quantify the costs with 

reliable precision, primarily due to the 

fact that the final rules apply to a 

heretofore unregulated swaps markets 

and, as previously noted, the 

Commission does not have the resources 

or information to determine how market 

participants may adjust their trading 

strategies in response to the rules.388

At present, the Commission has 

limited data concerning swaps 

transactions in Referenced Contracts 

(and market participants engaged in 

such transactions).389 In light of these 

data limitations, to inform its 

consideration of costs and benefits the 

Commission has relied on: (1) Its 

experience in the futures markets and 

information gathered through public 

comment letters, its hearing, and 

meetings with the industry; and (2) 

relevant data from the Commission’s 

Large Trader Reporting System and 

other relevant data concerning cleared 

swaps and SPDCs traded on ECMs.390

4. Position Limits 

To implement the Congressional 

mandate under Dodd-Frank, the 

proposal identified 28 core physical 

delivery futures contracts in proposed 

Regulation 151.2 (‘‘Core Referenced 

Futures Contracts’’),391 and would apply 

aggregate limits on a futures equivalent 

basis across all derivatives that are (i) 

directly or indirectly linked to the price 

of a Core Referenced Futures Contracts, 

or (ii) based on the price of the same 

underlying commodity for delivery at 

the same delivery location as that of a 

Core Referenced Futures Contracts, or 

another delivery location having 

substantially the same supply and 

demand fundamentals (‘‘economically 

equivalent contracts’’) (collectively with 

Core Referenced Futures Contracts, 

‘‘Referenced Contracts’’).392

As explained in the proposal, the 28 

Core Referenced Futures Contracts were 

selected on the basis that (i) they have 

high levels of open interest and 

significant notional value or (ii) they 

serve as a reference price for a 

significant number of cash market 

transactions. The Commission believes 

that contracts that meet these criteria are 

of particular significance to interstate 

commerce, and therefore warrant the 

imposition of federally administered 

limits. The remaining physical 

commodity contracts traded on a DCM 

or SEF that is a trading facility will be 

subject to limits set by those 

facilities.393


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394The Commission notes economically 

equivalent contracts are a subset of ‘‘Referenced 

Contracts.’’ 

395See 75 FR 4755. 

396One commenter (CL–WGC supra note 21 at 3) 

opined that gold should not be subject to position 

limits because ‘‘gold is not consumed in a normal 

sense, as virtually all the gold that has ever been 

mined still exists’’ and given the ‘‘beneficial 

qualities of gold to the international monetary and 

financial systems.’’ Section 4a requires the 

Commission to impose limits on all physicaldelivery contracts and relevant ‘‘economically 

equivalent’’ contracts. The Commission notes that 

Congress directed the Commission to impose limits 

on physical commodities, including exempt and 

agricultural commodities. The scope of such 

commodities includes metal commodities. 

397The Commission staff’s estimates concerning 

the wage rates are based on salary information for 

the securities industry compiled by the Securities 

Industry and Financial Markets Association 

(‘‘SIFMA’’). The $78.61 per hour is derived from 

figures from a weighted average of salaries and 

bonuses across different professions from the 

SIFMA Report on Management & Professional 

Earnings in the Securities Industry 2010, modified 

to account for an 1800-hour work-year and 

multiplied by 1.3 to account for overhead and other 

benefits. The wage rate is a weighted national 

average of salary and bonuses for professionals with 

the following titles (and their relative weight): 

‘‘programmer (senior)’’ (30 percent); ‘‘programmer’’ 

(30 percent); ‘‘compliance advisor’’ (intermediate) 

(20 percent); ‘‘systems analyst’’ (10 percent); and 

‘‘assistant/associate general counsel’’ (10 percent). 

398Although one commenter provided a wage 

estimate of $120 per hour, the Commission believes 

that the SIFMA industry average properly accounts 

for the differing entities that would be subject to 

these limits. See CL–WGCEF supra note 35 at 26, 

‘‘Internal data collected and analyzed by members 

of the Working Group suggest that the average cost 

per hour is approximately $120, much higher than 

SIFMA’s $78.61, as relied upon by the 

Commission.’’ In any event, even using the Working 

Group’s higher estimated wage cost, the resulting 

cost per firm of approximately $18,000 per firm 

would not materially change the Commission’s 

consideration of these costs in relation to the 

benefits from the limits, and in light of the factors 

in CEA section 15(a), 7 U.S.C. 19(a). 

399Among other things, a market participant will 

be required to identify which swap positions are 

subject to position limits (i.e., swaps that are 

Referenced Contracts) and allocate these positions 

to the appropriate compliance categories (e.g., the 

spot month, all months, or a single month of a 

Referenced Contract). 

With regard to the scope of 

‘‘economically equivalent’’ contracts 

that are subject to limits concurrently 

with the 28 Core Referenced Futures 

Contract limits, this definition 

incorporates contracts that price the 

same commodity at the same delivery 

location or that utilize the same cash 

settlement price series of the Core 

Referenced Futures Contracts (i.e., 

‘‘look-alikes’’ as discussed above in 

II.B.).394 The Commission continues to 

believe, as mentioned in the proposal, 

that 

‘‘[t]he proliferation of economically 

equivalent instruments trading in multiple 

trading venues, * * * warrants extension of 

Commission-set position limits beyond 

agricultural products to metals and energy 

commodities. The Commission anticipates 

this market trend will continue as, consistent 

with the regulatory structure established by 

the Dodd-Frank Act, economically equivalent 

derivatives based on exempt and agricultural 

commodities are executed pursuant to the 

rules of multiple DCMs and SEFs and other 

Commission registrants. Under these 

circumstances, uniform position limits 

should be established across such venues to 

prevent regulatory arbitrage and ensure a 

level playing field for all trading venues.’’ 395

In addition, by imposing position limits 

on contracts that are based on an 

identical commodity reference price 

(directly or indirectly) or the price of the 

same commodity at the same delivery 

location, the final rules help to prevent 

manipulative behavior. Absent such 

limits on related markets, a trader 

would have a significant incentive to 

attempt to manipulate the physicaldelivery market to benefit a large 

position in the cash-settled market. 

The final rule should provide for 

lower costs than the proposal with 

respect to determining whether a 

contract is a Referenced Contract 

because the final rule provides an 

objective test for determining 

Referenced Contracts and does not 

require case by case analysis of the 

correlation between contracts. In 

response to comments, the Commission 

eliminated the category of Referenced 

Contracts regarding contracts that have 

substantially the same supply and 

demand fundamentals of the Core 

Referenced Futures Contracts because 

this category did not establish objective 

criteria and would be difficult to 

administer when the correlation 

between two contracts change over time. 

The final categories of economically 

equivalent Referenced Contracts should 

also limit the costs of determining 

whether a contract is a Referenced 

Contract because the scope is 

objectively defined and does not require 

case by case analysis of the correlation 

between contracts. In this regard, the 

Commission eliminated the category of 

Referenced Contracts regarding 

contracts that have substantially the 

same supply and demand fundamentals 

of the Core Referenced Futures 

Contracts because this category did not 

establish objective criteria and would be 

difficult to administer when the 

correlation between two contracts 

change over time. 

The definitional criteria for the core 

physical delivery futures contracts, 

together with the criteria for ‘‘economic 

equivalent’’ derivatives, are intended to 

ensure that those contracts that are of 

major significance to interstate 

commerce and show a sufficient nexus 

to create a single market across multiple 

venues are subject to Federal position 

limits.396 Nevertheless, the Commission 

recognizes that the criteria informing 

the scope of Referenced Contracts may 

need to evolve given the Commission’s 

limited data and changes in market 

structure over time. As the Commission 

gains further experience in the swaps 

market, it may determine to expand, 

restrict, or otherwise modify through 

rulemaking the 28 Core Referenced 

Futures Contracts and the related 

definition of ‘‘economically equivalent’’ 

contracts. 

The Commission anticipates that the 

additional cost of monitoring positions 

in Referenced Contracts should be 

minimal for market participants that 

currently monitor their positions 

throughout the day for purposes such as 

compliance with existing DCM or 

Commission position limits, to meet 

their fiduciary obligations to 

shareholders, to anticipate margin 

requirements, etc. The Commission 

estimates that trading firms that 

currently track compliance with DCM or 

Commission position limits will incur 

an additional implementation cost of 

two or three labor weeks in order to 

adjust their monitoring systems to track 

the position limits for Referenced 

Contracts. Assuming an hourly wage of 

$78.61,397 multiplied by 120 hours, this 

implementation cost would amount to 

approximately $12,300 per firm, for a 

total across all estimated participants 

affected by such limits (as described in 

subsequent sections) of $4.2 million.398

These costs are generally associated 

with adjusting systems for monitoring 

futures and swaps Referenced Contracts 

to track compliance with position 

limits.399

Participants currently without 

reportable futures positions (i.e., those 

who trade solely or mostly in the swaps 

marketplaces, or ‘‘swaps-only’’ traders), 

and traders with certain positions 

outside of the spot month in Referenced 

Contracts that do not currently have 

position limits or position 

accountability levels, would likely incur 

an initial cost in excess of those traders 

that do monitor their positions for the 

purpose of compliance with position 

limits. Because firms with positions in 

the futures markets should already have 

systems and procedures in place for 

monitoring compliance with position 

limits, the Commission believes that 

firms with positions mostly or only in 

the swaps markets would be 

representative of the highest 

incremental costs of the rules. 

Specifically, swaps-only traders may 

incur larger start-up costs to develop a 

compliance system to monitor their 


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400These notional values were determined based 

on notional values determined as of September 7, 

2011 closing prices. The computation used was a 

position at the size of the spot-month limit in 

appendix A to part 151 (e.g., 600 contracts in 

wheat) times the unit of trading (e.g., 5,000 bushels 

per contract) times the closing price per quantity of 

commodity (e.g., dollars per bushel). 

401These costs would likely be lower for firms 

with swaps-only positions far below the speculative 

limit, as those firms may not need comprehensive, 

real-time analysis of their swaps positions for 

position limit compliance to observe whether they 

are at or near the limit. Costs may be higher for 

firms with very large or very complex positions, as 

those firms may need comprehensive, real-time 

analysis for compliance purposes. Due to the 

variation in both number of positions held and 

degree of sophistication in existing risk 

management systems, it is not feasible for the 

Commission to provide a greater degree of 

specificity as to the particularized costs for firms in 

the swaps market. 

402The Commission notes that generally, entities 

have not previously tracked their swaps positions 

for purposes of position limit compliance. With 

regard to implementing systems to monitor 

positions for this rule, the Commission also notes 

that some entities that engage in only a small 

amount of swaps activity significantly below the 

applicable position limit may determine, based on 

their own assessment, not to track their position on 

an intraday basis because their positions do not 

raise concerns about a limit. 

403CL–COPE supra note 21 at 5; and CL–Utility 

Group supra note 21 at 6. See also CL–Barclays I 

supra note 164 at 5; CL–API supra note 21 at 14; 

and CL–Shell supra note 35 at 6–7. 

404See section II.F of this release. See also 

Commodity Futures Trading Commission Division 

of Market Oversight, Advisory Regarding 

Compliance with Speculative Position Limits (May 

7, 2010), available at http://www.cftc.gov/ucm/ 

groups/public/@industryoversight/documents/file/ 

specpositionlimitsadvisory0510.pdf. See e.g., CME 

Rulebook, Rule 443, quoted at http:// 

www.cmegroup.com/rulebook/files/ 

CME_Group_RA0909-5.pdf’’) (amended Sept. 14, 

2009); ICE OTC Advisory, Updated Notice 

Regarding Position Limit Exemption Request Form 

for Significant Price Discovery Contracts, available 

at https://www.theice.com/publicdocs/otc/ 

advisory_notices/ICE_OTC_Advisory_0110001.pdf 

(Jan. 4, 2010). 

405The Commission notes that the CEA mandates 

DCMs and SEFs to have methods for conducting 

real-time monitoring of trading. Sections 5(d)(4)(A) 

and 5h(f)(4)(B) of the CEA, 7 U.S.C. 7(d)(4)(A), 7b– 

3(f)(4)(B). 

positions in Referenced Contracts and to 

comply with an applicable position 

limit. The Commission estimates that 

approximately 100 swaps-only firms 

would be subject to position limits for 

the first time. 

The Commission believes that many 

swaps-only market participants 

potentially affected by the spot month 

limits are likely to have developed 

business processes to control the size of 

swap positions for a variety of business 

reasons, including (i) managing 

counterparty credit risk exposure, (ii) 

limiting the value at risk to such swap 

positions, and (iii) ensuring desired 

accounting treatment (e.g., hedge 

accounting under Generally Accepted 

Accounting Principles (‘‘GAAP’’)). 

These processes are more likely to be 

well developed by people with a larger 

exposure to swaps, particularly those 

persons with position sizes with a 

notional value close to a spot-month 

position limit. For example, traders with 

positions in Referenced Contracts at the 

spot-month limit in the final rule would 

have a notional value of approximately 

$8.2 million to a maximum of $544.3 

million, depending on the underlying 

physical commodity.400 The minimum 

value in this range represents a 

significant exposure in a single payment 

period for swaps; therefore, the 

Commission expects that traders with 

positions at the spot-month limit will 

have already developed some system to 

control the size of their positions on an 

intraday basis. The Commission also 

anticipates, based on current swap 

market data, comment letters, and trade 

interviews, that very few swaps-only 

traders would have positions close to 

the non-spot-month position limits 

imposed by the final rules, given that 

the notional value of a position at an allmonths-combined limit will be much 

larger than that of a position at a spotmonth limit. 

As explained above, the Commission 

expects that traders with positions at the 

spot-month limit will have already 

developed some system to control the 

size of their positions on an intraday 

basis. However, the Commission 

recognizes that there may be a variety of 

ways to monitor positions for 

compliance with Federal position 

limits. While specific cost information 

regarding such swaps-only entities was 

not provided to the Commission in 

comment letters, the Commission 

anticipates that a firm could implement 

a monitoring regime amid a wide range 

of compliance systems based on the 

specific, individual needs of the firm. 

For example, a firm may elect to utilize 

an automatic software system, which 

may include high initial costs but lower 

long-term operational and labor costs. 

Conversely, a firm may decide to use a 

less capital-intensive system that 

requires more human labor to monitor 

positions. Thus, taking this range into 

account, the Commission anticipates, on 

average, labor costs per entity ranging 

from 40 to 1,000 annual labor hours, 

$5,000 to $100,000 in total annualized 

capital/start-up costs, and $1,000 to 

$20,000 in annual operating and 

maintenance costs.401

During the initial period of 

implementation, a large number of 

traders are expected to be able to avail 

themselves of the pre-existing position 

exemption as defined in § 151.9. As 

preexisting positions are replaced with 

new positions, traders will be able to 

incorporate an understanding of the 

new regime into existing and new 

trading strategies. The Commission has 

also incorporated a broader exclusion 

for swaps entered into before the 

effective date of the Dodd-Frank Act in 

addition to the general application of 

position limits to pre-existing futures 

and swaps positions entered into before 

the effective date of this rulemaking, 

which should allow swaps market 

participants to gradually transition their 

trading activity into compliance with 

the position limits set forth in part 151. 

The final position limit rules impose 

the costs outlined above on traders who 

hold or control Referenced Contracts to 

monitor their futures and swaps 

positions on both an end-of-day and on 

an intraday basis to ensure compliance 

with the limit.402 Commenters raised 

concerns regarding the ability for their 

current compliance systems to conduct 

the requisite tracking and monitoring 

necessary to comply with the Proposed 

Rules, citing the additional contracts 

and markets needing monitoring in realtime.403

The Commission and DCMs have 

historically applied position limits to 

both intraday and end-of-day positions; 

the regulations do not represent a 

departure from this practice.404 In this 

regard, the costs necessary to monitor 

positions in Referenced Contracts on an 

intraday basis outlined above do not 

constitute a significant additional cost 

on market participants.405 Positions 

above the limit levels, at any time of 

day, provide opportunity and incentive 

to trade such large quantities as to 

unduly influence market prices. The 

absence of position limits during the 

trading day would make it impossible 

for the Commission to detect and 

prevent market manipulation and 

excessive speculation as long as 

positions were below the limit at the 

end of the day. 

Further, as discussed above, the 

Commission anticipates that the cost of 

monitoring positions on an intraday 

basis should be marginal for market 

participants that are already required to 

monitor their positions throughout the 

day for compliance purposes. For those 

entities whose positions historically 

have been only in the swaps or OTC 

markets, the costs of monitoring 

intraday positions have been calculated 

as part of the costs to create and monitor 

compliance systems for position limits 

in general, discussed above in further 

detail. 

As the Commission gains further 

experience and data regarding the swaps 

market and market participants trading 


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71668 Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / Rules and Regulations 

406Core Principle 3 specifies that a board of trade 

shall list only contracts that are not readily 

susceptible to manipulation, while Core Principle 5 

obligates a DCM to establish position limits and 

position accountability provisions where necessary 

and appropriate ‘‘to reduce the threat of market 

manipulation or congestion, especially during the 

delivery month.’’ 

407See appendix B, part 38, Commission 

regulations. 

408See e.g., CL–API supra note 21 at 5. 

409 ‘‘Available deliverable supply’’ includes (i) all 

available local supply (including supply committed 

to long-term commitments), (ii) all deliverable nonlocal supply, and (iii) all comparable supply (based 

on factors such as product and location). See CL– 

ISDA/SIFMA supra note 21 at 21. Another 

commenter, AIMA, similarly advocated a more 

expansive definition of deliverable supply. CL– 

AIMA supra note 35 at 3 (‘‘This may include all 

supplies available in the market at all prices and at 

all locations, as if a party were seeking to buy a 

commodity in the market these factors would be 

relevant to the price.’’). 

410See e.g., CL–MGEX supra note 74 at 2–4; and 

CL–BGA supra note 35 at 20. 

411The Commission’s estimates of the number of 

affected participants for both spot-month and nonspot-month limits are based on the data it currently 

has on futures, options, and the limited set of data 

it has on cleared swaps. As such, the actual number 

of affected participants may vary from these 

estimates. 

412These estimates are based on the number of 

unique traders holding hedge exemptions for 

existing DCM, ECM, or FBOT spot-month position 

limits for Referenced Contracts. 

413To illustrate this, the Commission selected 

examples from each category of Core Referenced 

Futures Contracts. In the CBOT Corn contract (a 

legacy agricultural Referenced Contract), only 

approximately 4.8 percent of reportable traders are 

estimated to be impacted using the methods 

explained above. Using the ICE Futures Coffee 

contract as an example of a non-legacy agricultural 

Referenced Contract, COMEX Gold as an example 

of a metal Referenced Contracts, and NYMEX Crude 

Oil as an example of an energy Referenced Contract, 

the Commission estimates only 1.7 percent, 1.2 

percent, and 8 percent (respectively) of all 

reportable traders in those markets would be 

impacted by the spot-month limit for physicaldelivery contracts. These estimates indicate that the 

number of affected entities is expected to be small 

in comparison to the rest of the market. 

414Currently, DCMs report to the Commission 

which participants receive hedging and other 

exemptions that allow those participants to exceed 

position limit levels in the spot month. 

415The Commission notes that under the preexisting positions exemption, a trader would not be 

in violation of a position limit based solely upon 

the trader’s pre-existing positions in Referenced 

Contracts. Further, swaps entered into before the 

effective date of the Dodd-Frank Act will not count 

toward a speculative limit, unless the trader elects 

to net such swaps positions to reduce its aggregate 

position. 

therein, it may reevaluate the scope of 

the Core Referenced Futures Contracts, 

including the definition of economically 

equivalent contracts. 

a. Spot-Month Limits for Physical 

Delivery Contracts 

The Commission is establishing 

position limits during the spot-month 

for physically delivered Core 

Referenced Futures Contracts. For nonenumerated agricultural, as well as 

energy and metal Referenced Contracts, 

the Commission initially will impose 

spot-month position limits for physicaldelivery contracts at the levels currently 

imposed by the DCMs. Thereafter, the 

Commission will establish the levels 

based on the 25 percent of estimated 

deliverable supply formula with DCMs 

submitting estimates of deliverable 

supply to the Commission to assist in 

establishing the limit. For legacy 

agricultural Reference Contracts, the 

Commission will impose the spotmonth limits currently imposed by the 

Commission. 

Pursuant to Core Principles 3 and 5 

under the CEA, DCMs generally are 

required to fix spot-month position 

limits to reduce the potential for 

manipulation and the threat of 

congestion, particularly in the spot 

month.406 Pursuant to these Core 

Principles and the Commission’s 

implementing guidance,407 DCMs have 

generally set the spot-month position 

limits for physical-delivery futures 

contracts based on the deliverable 

supply of the commodity in the spot 

month. These spot-month limits under 

current DCM rules are generally within 

the levels that would be established 

using the 25 percent of deliverable 

supply formula described in these final 

rules. The Commission received several 

comments regarding costs of position 

limits in the spot month. 

One commenter noted the definition 

of deliverable supply was vague and 

could increase costs to market 

participants.408 One commenter 

suggested that the Commission instead 

base spot-month limits on ‘‘available 

deliverable supply,’’ a broader measure 

of physical supply.409 Commenters also 

raised an issue with the schedule for 

resetting limits, explaining that resetting 

the limits on an annual basis would 

introduce uncertainty into the market, 

increase the burden on DCMs, and 

increase costs for the Commission.410

In addition to the costs associated 

with generally monitoring positions in 

Referenced Contracts, the Commission 

anticipates some costs associated with 

the level of this spot-month position 

limit for physical-delivery contracts. 

The Commission estimates,411 on an 

annual basis, 84 traders in legacy 

agricultural Core Referenced Futures 

Contracts, approximately 50 traders in 

non-legacy agricultural Referenced 

Contracts, 12 traders in metal 

Referenced Contract, and 85 traders in 

energy Referenced Contracts would hold 

or control positions that could exceed 

the spot-month position limits in 

§ 151.4(a).412 For the majority of 

participants, the 25 percent of 

deliverable supply formula is estimated 

to impose limits that are sufficiently 

high, so as not to affect their hedging or 

speculative activity; thus, the number of 

participants potentially in excess of 

these limits is expected to be small in 

proportion to the market as a whole.413

To estimate the number of traders 

potentially affected by the spot-month 

position limits in physically delivered 

contracts, the Commission looked to the 

number of traders currently relying on 

hedging and other exemptions from 

DCM position limits.414 While the 

Commission believes that the statutory 

definition of bona fide hedging will to 

a certain extent overlap with the bona 

fide hedging exemptions applied at the 

various DCMs, the definitions are not 

completely co-extensive. As such, the 

costs of adjusting hedging strategies or 

reducing the size of positions both 

within and outside of the spot-month 

are difficult to determine. For example, 

some of the traders relying on a current 

DCM hedging exemption may be eligible 

for bona fide hedging or other 

exemptions from the limits adopted 

herein, and thus incur the costs 

associated with filing exemption 

paperwork. However, other traders may 

incur the costs associated with the 

reduction of positions to ensure 

compliance. Absent data on the 

application of a bona fide hedge 

exemption, the Commission cannot 

determine at this time the number of 

entities who will be eligible for an 

exemption under the revised statute, 

and thus cannot determine the number 

of participants who may realize the 

benefits of being exempt from position 

limits and would incur a filing cost for 

the exemption, compared to those who 

may need to reduce their positions.415

The estimated monetary costs associated 

with claiming a bona fide hedge 

exemption are discussed below in 

consideration of the costs and benefits 

for bona fide hedging as well as in the 

PRA section of this final rule. 

Regarding costs related to market 

participation and trading strategies that 

need to take into account the new 

position limits rule, as mentioned 

above, the Commission is currently 

unable to estimate these costs associated 

with the spot-month position limit. 

Market participants who are the primary 

source of such information did not 

provide the Commission with any such 

information in their comments on the 

proposal. Additionally, the Commission 

believes it would not be feasible to 

require market participants to share 

such strategies with the Commission, or 

for the Commission to attempt its own 


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416 64 FR 24038, 24039, May 5, 1999. 

417CL–ISDA/SIFMA supra note 21 at 6–7, 19; 

CL–Goldman supra note 90 at 5; CL–ICI supra note 

21 at 10; CL–MGEX supra note 74 at 4 (particularly 

current MGEX Index Contracts that do not settle to 

a Referenced Contract should be considered exempt 

from position limits because cash-settled index 

contracts are not subject to potential market 

manipulation or creation of market disruption in 

the way that physical-delivery contracts might be); 

CL–WGCEF supra note 35 at 20 (‘‘the Commission 

should reconsider setting a limit on cash-settled 

contracts as a function of deliverable supply and 

establish a much higher, more appropriate spotmonth limit, if any, on cash-settled contracts’’); CL– 

MFA supra note 21 at 16–17; and CL–SIFMA AMG 

I supra note 21 at 7. 

418CL–BGA supra note 35 at 19; CL–ICI supra 

note 21 at 10; CL–MFA supra note 21 at 16–17; CL– 

WGCEF supra note 35 at 20; CL–Cargill supra note 

76 at 13; CL–EEI/EPSA supra note 21 at 9; and CL– 

AIMA supra note 35 at 2. See also CL–NGSA/NCGA 

supra note 124 at 4–5 (cash-settled contracts should 

have no limits, or at least limits much greater than 

the proposed limit, given the different economic 

functions of the two classes of contracts). 

419CL–BGA supra note 35 at 10. 

assessment of the costs of potential 

business strategies of market 

participants. While the Commission 

does anticipate some cost for certain 

firms to adjust their trading and hedging 

strategy to account for position limits, 

the Commission does not believe such 

costs to be overly burdensome. All of 

the 28 Core Referenced Futures 

Contracts have some form of spot-month 

position limits currently in place by 

their respective DCMs, and thus market 

participants with very large positions (at 

least those whose primary activity is in 

futures and options markets) should be 

currently incurring costs (or foregoing 

benefits) associated with those limits. 

Further, the Commission notes that CEA 

section 4a(a) mandates the imposition of 

a spot-month position limit, and 

therefore, a certain level of costs is 

already necessary to comply with the 

Congressional mandate. 

The Commission further notes that 

the spot limits continue current market 

practice of establishing spot-month 

position limits at 25 percent of 

deliverable supply. This continuity in 

the regulatory scheme should reduce the 

number of strategy changes that 

participants may need to make as a 

result of the promulgation of the final 

rule, particularly for current futures 

market participants who already must 

comply with this limit under the current 

position limits regimes. 

With regard to the use of deliverable 

supply to set spot-month position 

limits, in the Commission’s experience 

of overseeing the position limits 

established at the exchanges as well as 

federally-set position limits, ‘‘spotmonth speculative position limits levels 

are ‘based most appropriately on an 

analysis of current deliverable supplies 

and the history of various spot-month 

expirations.’ ’’ 416 The comments 

received provide no compelling reason 

for changing that view. The Commission 

continues to believe that deliverable 

supply represents the best estimate of 

how much of a commodity is actually 

available in the cash market, and is thus 

the best basis for determining the proper 

level to deter manipulation and 

excessive speculation while retaining 

liquidity and protecting price discovery. 

In this regard, the Commission and 

exchanges have historically applied the 

formula of 25 percent of deliverable 

supply to set the spot-month position 

limit, and in the Commission’s 

experience, this formula is effective in 

diminishing the potential for 

manipulative behavior and excessive 

speculation without unduly restricting 

liquidity for bona fide hedgers or 

negatively impacting the price discovery 

process. Further, the definition of 

deliverable supply adopted in these 

final rules is consistent with the current 

DCM practice in setting spot-month 

limits. The Commission believes that 

this consistent approach facilitates an 

orderly transition to Federal limits. 

The final rules require DCMs to 

submit estimates of deliverable supply 

to the Commission every other year for 

each non-legacy Referenced Contract. 

The Commission will use this 

information to estimate deliverable 

supply for a particular commodity in 

resetting position limits. The 

Commission does not anticipate a 

significant additional burden on DCMs 

to submit estimates of deliverable 

supply because DCMs currently monitor 

deliverable supply to comply with Core 

Principles 3 and 5 and they must, as 

part of their self-regulatory 

responsibilities, make such calculations 

to justify initial limits for newly listed 

contracts or to justify changes to 

position limits for listed contracts. 

Given that DCMs that list Core 

Referenced Futures Contracts have 

considerable experience in estimating 

deliverable supply for purposes of 

position limits, this expertise will be of 

significant benefit to the Commission in 

its determination of the level of 

deliverable supply for the purpose of 

resetting spot-month position limits. 

The additional data provided by DCMs 

will help the Commission to accurately 

determine the amounts of deliverable 

supply, and therefore the proper level of 

spot-month position limits. 

Moreover, the Commission has 

staggered the resetting of position limits 

for agricultural contracts, energy 

contracts, and metal contracts as 

outlined in II.D.5. and II.E.3. of this 

release in order to further reduce the 

burden of calculating and submitting 

estimates of deliverable supply to the 

Commission. As explained in the PRA 

section, the Commission estimates the 

cost to DCMs to submit deliverable 

supply data to be a total marginal 

burden, across the six affected entities, 

of 5,000 annual labor hours for a total 

of $511,000 in labor costs and $50,000 

in annualized capital and start-up costs 

and annual total operating and 

maintenance costs. 

b. Spot-Month Limits for Cash-Settled 

Contracts 

A spot-month limit is also being 

implemented for cash-settled contract 

markets, including cash-settled futures 

and swaps. Under the final rules, with 

the exception of natural gas contracts, a 

market participant could hold positions 

in cash-settled Referenced Contracts 

equal to twenty-five percent of 

deliverable supply underlying the 

relevant Core Referenced Futures 

Contracts. With regard to cash-settled 

natural gas contracts, a market 

participant could hold positions in 

cash-settled Referenced Contracts that 

are up to five times the limit applicable 

to the relevant physical-delivery Core 

Referenced Futures Contracts. The final 

rules also impose an aggregate spotmonth limit across physical-delivery 

and cash-settled natural gas contracts at 

a level of five times the spot month limit 

for physical-delivery contracts. The 

Commission has determined not to 

adopt the proposed conditional spotmonth limit, under which a trader could 

maintain a position of five times the 

position limit in the Core Referenced 

Futures Contract only if the participant 

did not hold positions in physicaldelivery Core Referenced Futures 

Contracts and did not hold 25 percent 

or more of the deliverable supply of the 

underlying cash commodity. 

Several commenters questioned the 

application of proposed spot-month 

position limits to cash-settled 

contracts.417 Some of these commenters 

suggested that cash-settled contracts 

should not be subject to spot-month 

limits based on estimated deliverable 

supply, and should be subject to 

relatively less restrictive spot-month 

position limits, if subject to any limits 

at all.418

BGA, for example, argued that 

position limits on swaps should be set 

based on the size of the open interest in 

the swaps market because swap 

contracts do not provide for physical 

delivery.419 Further, certain commenters 

argued that imposing an aggregate 

speculative limit on all cash-settled 

contracts will reduce substantially the 

cash-settled positions that a trader can 


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420See e.g., CL–FIA I supra note 21 at 10; and 

CL–ICE I supra note 69 at 6. 

421See e.g., CL–ISDA/SIFMA supra note 21 at 8. 

422CL–AFIA supra note 94 at 3; CL–AFR supra 

note 17 at 6; CL–ATAA supra note 94 at 7; CL–BGA 

supra note 35 at 11–12; CL–Centaurus Energy supra 

note 21 at 3; CL–CME I supra note 8 at 10; CL– 

WGCEF supra note 35 at 21–22; and CL–PMAA/ 

NEFI supra note 6 at 14. 

423CL–CME I supra note 8 at 10. Similarly, BGA 

argued that conditional limits incentivize the 

migration of price discovery from the physical 

contracts to the financial contracts and have the 

unintended effect of driving participants from the 

market, thereby increasing the potential for market 

manipulation with a very small volume of trades. 

CL–BGA supra note 35 at 12. 

424CL–AIMA supra note 35 at 2. 

425CL–CME I supra note 8 at 10; CL–KCBT I 

supra note 97 at 4; and CL–APGA supra note 17 at 

6, 8. Specifically, the KCBT argued that parity 

should exist in all position limits (including spotmonth limits) between physical-delivery and cashsettled Referenced Contracts; otherwise, these limits 

would unfairly advantage the look-alike cashsettled contracts and result in the cash-settled 

contract unduly influencing price discovery. 

Moreover, the higher spot-month limit for the 

financial contract unduly restricts the physical 

market’s ability to compete for spot-month trading, 

which provides additional liquidity to commercial 

market participants that roll their positions forward. 

CL–KCBT I supra note 97 at 4. 

426CL–AIMA supra note 35 at 2; and CL–ICE I 

supra note 69 at 8. 

427CL–ICE I supra note 69 at 8. ICE also 

recommended that the Commission remove the 

prohibition on holding a position in the physicaldelivery contract or the duration to a narrower 

window of trading than the final three days of 

trading. 

428See e.g., CL–KCBT I supra note 97 at 4 ‘‘[T]he 

higher spot-month limit for the financial contract 

unduly restricts the physical market’s ability to 

compete for spot month speculative trading 

interests, which provide additional liquidity to 

commercial market participants (bona fide hedgers) 

as they unwind or roll their positions forward.’’) 

429See e.g., CL–Centaurus Energy supra note 21 

at 3. 

430See e.g., CL–Prof. Pirrong supra note 124. 

hold because, currently, each cashsettled contract is subject to a separate, 

individual limit, and there is no 

aggregate limit.420 Other commenters 

urged the Commission to eliminate class 

limits and allow for netting across 

futures and swaps contracts so as not to 

impact liquidity.421

A number of commenters objected to 

limiting the availability of a higher limit 

in the cash-settled contract to traders 

not holding any physical-delivery 

contract.422 For example, CME argued 

that the proposed conditional limits 

would encourage price discovery to 

migrate to the cash-settled contracts, 

rendering the physical-delivery contract 

‘‘more susceptible to sudden price 

movements during the critical 

expiration period.’’ 423 AIMA 

commented that the prohibition against 

holding positions in the physicaldelivery Core Referenced Futures 

Contract will cause investors to trade in 

the physical commodity markets 

themselves, resulting in greater price 

pressure in the physical commodity.424

Some of these commenters, including 

the CME Group and KCBT, 

recommended that cash-settled 

Referenced Contracts and physicaldelivery contracts be subject to the same 

position limits.425 Two commenters 

opined that if the conditional limits are 

adopted, they should be greater than 

five times the 25 percent of deliverable 

supply formula.426 ICE recommended 

that they be increased to at least ten 

times the 25 percent of deliverable 

supply.427

Several commenters expressed 

concern that the conditional spot-month 

limits would ‘‘restrict the physicallydelivered contract market’s ability to 

compete for spot-month speculative 

trading interest,’’ thereby restricting 

liquidity for bona fide hedgers in those 

contracts.428 Another noted that the 

limit may be detrimental to the 

physically settled contracts because it 

restricts the ability of a trader to be in 

both the physical-delivery and cashsettled markets.429 Conversely, one 

commenter expressed concern that the 

anti-manipulation goal of spot-month 

position limits would not be met 

because the structure of the conditional 

limit in the Proposed Rule allowed a 

trader to be active in both the physical 

commodity and cash-settled contracts, 

and so could use its position in the cash 

commodity to manipulate the price of a 

physically settled contract to benefit a 

leveraged cash-settled position.430

With regard to the application of 

position limits to cash-settled contracts, 

the Commission notes that Congress 

specifically directed the Commission to 

impose aggregate spot-month limits on 

DCM futures contracts and swaps that 

are economically equivalent to such 

contracts. Therefore, the Commission is 

required to impose limits on such 

contracts. As explained in the proposal, 

the Commission believes that ‘‘limiting 

a trader’s position at expiration of cashsettled contracts diminishes the 

incentive to exert market power to 

manipulate the cash-settlement price or 

index to advantage a trader’s position in 

the cash-settlement contract.’’ Further, 

absent such limits on related markets, a 

trader would have a significant 

incentive to attempt to manipulate the 

physical-delivery market to benefit a 

large position in the cash-settled 

economically equivalent contract. 

The Commission is adopting, on an 

interim final rule basis, spot-month 

limits for cash-settled contract, other 

than natural gas contracts, at 25 percent 

of the estimated deliverable supply. 

These limits will be in parity with the 

spot-month limits set for the related 

physical-delivery contracts. As 

discussed in section II.D.3. of this 

release, the Commission has determined 

that the one-to-one ratio for 

commodities other than natural gas 

between the level of spot-month limits 

on physical-delivery contracts and the 

level on cash-settled contracts 

maximizes the objectives enumerated in 

section 4a(a)(3) of the CEA by ensuring 

market liquidity for bona fide hedgers, 

while deterring the potential for market 

manipulation, squeezes, and corners. 

The Commission further notes that this 

formula is consistent with the level the 

Commission staff has historically 

deemed acceptable for cash-settled 

contracts, as well as the formula for 

physical-delivery contracts under 

Acceptable Practices for Core Principle 

5 set forth in part 38 of the 

Commission’s regulations. 

At this time, the Commission’s data 

set does not allow the Commission to 

estimate the specific number of traders 

that could potentially be impacted by 

the limits on cash-settled contracts in 

the spot-month for agricultural, metals 

and energy commodities (other than 

natural gas). However, given the 

Commission’s understanding of the 

overall size of the swaps market in these 

commodities, the Commission believes 

that a one-to-one ratio of position limits 

for physical-delivery and cash-settled 

Referenced Contracts maximizes the 

four statutory factors in section 

4a(a)(3)(B) of the CEA. 

The Commission is also adopting, on 

an interim final rule basis, an aggregate 

spot-month limit for physical-delivery 

and cash-settled natural gas contracts, as 

well as a class limit for cash-settled 

natural gas contracts, both set at a level 

of five times the level of the spot-month 

limit in the relevant Core Referenced 

physical-delivery natural gas contract. 

As discussed in section II.D.3. of this 

release, the Commission has determined 

that the one-to-five ratio between the 

level of spot-month limits on physicaldelivery natural gas contracts and the 

level of spot-month limits on cashsettled natural gas contracts maximizes 

the objectives enumerated in section 

4a(a)(3) of the CEA by ensuring market 

liquidity for bona fide hedgers, while 

deterring the potential for market 

manipulation, squeezes, and corners. 

The Commission notes that this formula 

is consistent with the administrative 

experience with conditional limits in 

DCM and exempt commercial market 

natural gas contracts. 

As described in section II.D.3. of the 

release, this aggregate limit for natural 

gas contracts responds to commenters’ 


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431CL–ISDA/SIFMA supra note 21 at 7. 

432The Commission notes that it is currently 

unable to determine the applicability of bona fide 

hedge exemptions because of differences in the 

revised statutory definition compared to the current 

definition applied by DCMs and ECMs. In addition, 

traders may net cash-settled contracts for purposes 

of the class limit in the spot month. Thus, absent 

complete data on swaps positions, the Commission 

cannot accurately estimate a trader’s position for 

the purposes of compliance with spot-month limits 

for cash-settled contracts. 

433This observation is based upon Commission 

staff discussions with members of industry. See 

https://www.cftc.gov/LawRegulation/. 

434See 17 CFR part 150 (2010). 

435See e.g., CL–Teucrium supra note 124 at 2; 

and CL–ICE I supra note 69 at 6. 

436See e.g., CL–WGCEF supra note 35 at 5; and 

CL–Goldman supra note 89 at 2. 

437See e.g., CL–DBCS supra note 247 at 8–9. 

438CL–AIMA supra note at 35 pg. 3; CL–CME I 

supra note 8 at 12 (for energy and metals); CL–FIA 

I supra note 21 at 12 (10% of open interest for first 

25,000 contracts and then 5%); CL–ICI supra note 

21 at 10 (10% of open interest until requisite market 

data is available); CL–ISDA/SIFMA supra note 21 

at 20; CL–NGSA/NCGA supra note 124 at 5 (25% 

of open interest); and CL–PIMCO supra note 21 at 

11. 

439CL–Greenberger supra note 6 at 13; and CL– 

FWW supra note 81 at 12. 

440See e.g., CL–ATA supra note 81 at 4–5; CL– 

AFR supra note 17 at 5–6; CL–ATAA supra note 94 

at 3, 6, 9–10, 12; CL–Better Markets supra note 37 

at 70–71 (recommending the Commission to limit 

non-commodity index and commodity index 

speculative participation in the market to 30% and 

10% of open interest respectively); CL–Delta supra 

note 20 atpg.5; and CL–PMAA/NEFI supra note 6 

at 7. 

441CL–ABA supra note 150 at 3–4; CL–AFIA 

supra note 94 at 3; CL–Amcot supra note 150 at 2; 

CL–FWW supra note 81 at 13; CL–IATP supra note 

113 at 5; and CL–NGFA supra note 72 at 1–2. 

442CL–ABA supra note 150 at 3–4. 

concerns regarding potentially negative 

impacts on liquidity and the price 

discovery function of the physicaldelivery contract if traders are not 

permitted to hold any positions in the 

physical-delivery contract when they 

hold contracts in the cash-settled 

Referenced Contract (which are subject 

to higher limits than the physicaldelivery contracts). 

The Commission is also no longer 

restricting the higher limit for cashsettled natural gas contracts to entities 

that hold or control less than 25 percent 

of the deliverable supply in the cash 

commodity. As pointed out by certain 

commenters,431 this provision would 

create significant compliance costs for 

entities to track whether they meet such 

a condition. The Commission believes at 

this time that the class and aggregate 

limits in the spot month for natural gas 

contracts should adequately account for 

market manipulation concerns with 

regard to entities with large cash-market 

positions; however, the Commission 

will continue to monitor developments 

in the market to determine whether to 

incorporate a cash-market restriction in 

the higher cash-settled contract limit, 

and the extent of the benefit provided 

through restricting cash-market 

positions. 

The Commission expects that its 

estimate as to the number of traders 

affected by the limits in cash-settled 

contracts will change as swap positions 

are reported to the Commission through 

its Large Swaps Trader Reporting and 

SDR regulations. Given the 

Commission’s limited data with regard 

to swaps, the Commission looked to 

exemptions from position limits granted 

by DCMs and ECMs to estimate the 

number of traders that may be affected 

by the finalized limits for cash-settled 

contracts. At this time, the only data 

available pertains to energy 

commodities. The Commission 

estimates that approximately 70 to 75 

traders hold exemptions from DCM and 

ECM limits and therefore at least this 

number of traders may be impacted by 

the spot-month limit for cash-settled 

contracts. Until the Commission has 

accurate information on the size and 

composition of off-exchange cashsettled Referenced Contracts for 

agricultural, metal, and energy 

contracts, it is unable more precisely to 

determine the number of traders 

potentially impacted by the aggregate 

limit.432 As discussed above, by 

implementing the one-to-one and oneto-five ratios on an interim basis, the 

Commission can further gather and 

analyze the ratio and its impact on the 

market. 

The Commission also notes that swap 

dealers and commercial firms enter into 

a significant number of swap 

transactions that are not submitted to 

clearing.433 Based on the nature of the 

commercial counterparty to such 

transactions, the Commission 

anticipates that many of these 

transactions involving commercial firm 

counterparties would likely be entitled 

to bona fide hedging exemptions as 

provided for in § 151.5, which should 

limit the number of persons affected by 

the spot-month limit in cash-settled 

contracts without an applicable 

exemption. 

The Commission also notes that 

swaps and other over-the-counter 

market participants may face additional 

costs (including foregone benefits) in 

terms of adjusting position levels and 

trading strategies to the position limits 

on cash-settled contracts. While current 

data precludes estimating the extent of 

the financial impact to swap market 

participants, these costs are inherent in 

establishing limits that reach swaps that 

are economically equivalent to DCM 

futures contracts, as required under 

section 4a(a)(5). 

c. Non-Spot-Month Limits 

Section 151.4(b) provides that the 

non-spot-month position limits for nonlegacy Referenced Contracts shall be 

fixed at a number determined as a 

function of the level of open interest in 

the relevant Referenced Contract. This 

formula is defined as 10 percent of the 

open interest up to the first 25,000 

contracts plus 2.5 percent of open 

interest thereafter (‘‘10–2.5 percent 

formula’’). This is the same formula that 

has been historically used to set 

position limits on futures exchanges.434

With regard to the nine legacy 

agricultural Core Referenced Futures 

Contracts, which are currently subject to 

Commission imposed non-spot-month 

position limits, as described in section 

II.E.4. of this release, the Commission is 

raising those existing position limits to 

the levels described in the CME 

petition. 

Commenters expressed concern that 

non-spot-month limits could be 

harmful, potentially distorting price 

discovery or liquidity and damaging 

long term hedging strategies.435 Others 

argued that there should be no limits 

outside the spot-month or that the 

Commission had not adequately 

justified non-spot-month limits.436 One 

commenter argued that the proposed 

non-spot-month class limits would 

increase costs for hedgers and harm 

market liquidity.437 Several commenters 

opined that the Commission should 

increase the open interest multipliers 

used in determining the non-spot-month 

position limits,438 while some 

commenters explained that the 

Commission should decrease the open 

interest multipliers to 5 percent of open 

interest for first 25,000 contracts and 2.5 

percent thereafter.439 Other commenters 

suggested significantly different 

methodologies for setting limits that 

would result in relatively more 

restrictive limits on speculators.440

Several commenters recommended 

that the Commission should keep the 

legacy limits for legacy agricultural 

Referenced Contracts.441 One 

commenter argued that raising these 

limits would increase hedging margins 

and increase volatility which would 

ultimately undermine commodity 

producers’ ability to sell their product to 

consumers.442 Another opined that the 

Commission need not proceed with 

phased implementation for the legacy 

agricultural markets because it could set 


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443CL–Amcot supra note 150 at 3. 

444CL–AIMA supra note 35 at 4; CL–Bunge supra 

note 153 at 1–2; CL–DB supra note 153 at 6; CL– 

Gresham supra note 153 at 4–5; CL–FIA I supra 

note 21 at 12; CL–MGEX supra note 74 at 2; CL– 

MFA supra note 21 at 18–19; and USCF supra note 

153 at 10–11. 

445CL–USCF supra note 153 at 10–11. 

446CL–Bunge supra note 153 at 1–2; CL–FIA I 

supra note 21 at 12; and CL–Gresham supra note 

153 at 5. See CME Petition for Amendment of 

Commodity Futures Trading Commission 

Regulation 150.2 (April 6, 2010), available at 

http//www.cftc.gov/LawRegulation/DoddFrankAct/ 

Rulemaking/DF_26_PosLimits/index.htm. 

447CL–CMC supra note 21 at 3; CL–DB supra note 

153 at 10; and CL–MFA supra note 21 at 19. 

448CL–CMC supra note 21 at 3; CL–KCBT I supra 

note 97 at 1–2; CL–MGEX supra note 74 at 2; and 

CL–NGFA supra note 72 at 4. 

449The data was based on the Commission’s large 

trader reporting data for futures contracts and 

limited swaps data covering certain cleared swap 

transactions. 

450To illustrate this, the Commission selected 

examples from each category of Core Referenced 

Futures Contracts. In the CBOT Corn contract (an 

agricultural Referenced Contract), only 

approximately 4.8% of reportable traders are 

estimated to be impacted using the methods 

explained above. Using the COMEX Gold contract 

as an example of a metal Referenced Contracts, and 

NYMEX Crude Oil as an example of an energy 

Referenced Contract, the Commission estimates 

only 1.4% and .2% (respectively) of all reportable 

traders in those markets would be impacted by the 

non-spot-month limit. These estimates indicate that 

the number of affected entities is expected to be 

small in comparison to the rest of the market. 

451These estimates do not take into account open 

interests from a significant number of swap 

transactions, and therefore, the Commission 

believes that the size of the non-spot position limit 

will increase over this estimate as the Commission 

is able to analyse additional data. 

452The estimated monetary costs associated with 

claiming a bona fide hedge exemption are discussed 

below in consideration of the costs and benefits for 

bona fide hedging as well as in the Paperwork 

Reduction Act section of this final rule. 

453As previously noted, the costs to an individual 

firm of filing an exemption are estimated at section 

III.A.3. 

454The Commission notes that under the preexisting positions exemption, a trader would not be 

in violation of a position limits based solely upon 

the trader’s pre-existing positions in Referenced 

Contracts. Further, swaps entered before the 

effective date of the Dodd-Frank Act will not count 

toward a speculative limit, unless the trader elects 

to net such swaps positions to reduce their 

aggregate position. 

their limits based on existing legacy 

limits.443

Several other commenters 

recommended that the Commission 

abandon the legacy limits.444 One 

commenter argued that the Commission 

offered no justification for treating 

legacy agricultural contracts differently 

than other Referenced Contract 

commodities.445 Some of these 

commenters endorsed the limits 

proposed by CME.446 Other commenters 

recommended the use of the open 

interest formula proposed by the 

Commission in determining the position 

limits applicable to the legacy 

agricultural Referenced Contract 

markets.447 Finally, four commenters 

expressed their preference that non-spot 

position limits be kept consistent for the 

wheat Referenced Contracts.448

In addition to the costs associated 

with generally monitoring positions in 

Referenced Contracts on an intraday 

basis, the Commission anticipates some 

costs to result from the establishment of 

the non-spot-month position limit, 

though the Commission expects the 

resulting costs should be minimal for 

most market participants. To determine 

the number of potentially affected 

entities, the Commission took existing 

data and calculated the number of 

traders whose positions would be over 

the final non-spot-month limits.449 For 

the majority of participants, the nonspot-month levels are estimated to 

impose limits that are sufficiently high 

so as to not affect their hedging or 

speculative activity; thus, the 

Commission projects that relatively few 

market participants will have to adjust 

their activities to ensure that their 

positions are not in excess of the 

limits.450 According to these estimates, 

the position limits in § 151.4(d) would 

affect, on an annual basis, eighty traders 

in agricultural Referenced Contracts, 

twenty-five traders in metal Referenced 

Contracts, and ten traders in energy 

Referenced Contracts.451

As noted above, the Commission’s 

data on uncleared swaps is limited. The 

information currently available to the 

Commission indicates that the 

uncleared swaps market is primarily 

comprised of transactions between swap 

dealers and commercial entities. As 

such, some of the above entities that 

may hold positions in excess of the nonspot-month limits may be entitled to 

bona fide hedging exemptions as 

provided for in § 150.5. Moreover, the 

Commission understands that swap 

dealers, who constitute a large 

percentage of those anticipated to be 

near or above the position limits set 

forth in § 151.4, generally use futures 

contracts to offset the residual portfolio 

market risk of their uncleared swaps 

positions.452 Under these final rules, 

market participants can net their 

physical delivery and cash-settled 

futures contracts with their swaps 

transactions for purposes of complying 

with the non-spot-month limit. In this 

regard, the netting of futures and swaps 

positions for such swap dealers would 

reduce their exposure to an applicable 

position limit. 

Taking these considerations into 

account, the Commission anticipates 

that for the majority of participants, the 

non-spot month levels are estimated to 

impose limits that are sufficiently high 

so as to not affect their hedging or 

speculative activity as these participants 

could either rely on a bona fide hedge 

exemption or hold a net position that is 

under the limit. Thus, the Commission 

projects that relatively few market 

participants will have to adjust their 

activities to ensure that their positions 

are not in excess of the limits. 

The economic costs (or foregone 

benefits) of the level of position limits 

is difficult to determine accurately or 

quantify because, for example, some 

participants may be eligible for bona 

fide hedging or other exemptions from 

limits, and thus incur the costs 

associated with filing exemption 

paperwork, while others may incur the 

costs associated with altering their 

business strategies to ensure that their 

aggregate positions do not exceed the 

limits. In the absence of data on the 

extent to which the bona fide hedge 

exemption will apply to swaps 

transactions, at this time the 

Commission cannot determine or 

estimate the number of entities that will 

be eligible for such an exemption. 

Accordingly, the Commission cannot 

determine or estimate the total costs 

industry-wide of filing for the 

exemption.453

Similarly, the Commission is unable 

to determine or estimate the number of 

entities that may need to alter their 

business strategies.454 Commenters did 

not provide any quantitative data as to 

such potential impacts from the 

proposed limits, and the Commission 

cannot independently evaluate the 

potential costs to market participants of 

such changes in strategies, which would 

necessarily be based on the underlying 

business models and strategies of the 

various market participants. 

While the Commission is unable to 

quantify the resulting costs to the 

relatively few number of market 

participants that the Commission 

estimates may be affected by these 

limits; to a certain extent costs 

associated with a change in business or 

trading strategies to comply with the 

non-spot-month position limits imposed 

by the Commission are a consequence of 

the Congressionally-imposed mandate 

for the Commission to establish such 

limits. Commenters suggesting that the 

Commission should not adopt non-spotmonth position limits fail to address the 

mandate of Congress in CEA section 

4a(a)(3)(A) that the Commission impose 

non-spot-month limits. Based on the 

Commission’s long-standing experience 

with the application of the 10—2.5 

percent formula to establish non-spotmonth limits in the futures market as 


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455 58 FR 18057, April 7, 1993. 

456For a discussion of the historical approach, see 

64 FR 24038, 24039, May 5, 1999. 

457As discussed in section II.L of this release, the 

Commission is not extending position visibility 

reporting to agricultural contracts because the 

Commission believes that reporting related to bona 

fide hedging and other exemptions should provide 

the Commission with sufficient data on the largest 

traders in agricultural Referenced Contracts. 

458See e.g., CL–BGA supra note 35 at 19–20; CL– 

CME I supra note 8 at 6; CL–WGCEF supra note 35 

at 23; and CL–MFA supra note 21 at 3. 

459See e.g., CL–USCF supra note 153 at 11. 

460See e.g., CL–USCF supra note 153 at 11; and 

CL–WGCEF supra note 35 at 22–23. 

461CL–FIA I supra note 21, at 13. 

462See section 719 of the Dodd-Frank Act. 

463See § 151.6. 

well as the Commission’s limited swaps 

data, the Commission anticipates that 

the application of this similar formula to 

both the futures and swaps market will 

appropriately maximize the statutory 

objectives in section 4a(a)(3). The data 

regarding the swaps market that is 

currently available to the Commission 

indicates that a limited number of 

market participants will be at or near 

the speculative position limits and that 

the imposition of these limits should 

not result in a significant decrease in 

liquidity in these markets. Accordingly, 

the Commission believes that non-spotmonth limits imposed as a result of 

these final rules will ensure there 

continues to be sufficient liquidity for 

bona fide hedgers and the price 

discovery of the underlying market will 

not be disrupted. 

The Commission has determined to 

adopt the position limit levels proposed 

by the CME for the legacy Referenced 

Contracts. Such levels would be 

effective 60 days after the publication 

date of this rulemaking and those levels 

would be subject to the existing 

provisions of current part 150 until the 

compliance date of these rules, which is 

60 days after the Commission further 

defines the term ‘‘swap’’ under the 

Dodd-Frank Act. At that point, the 

relevant provisions of this part 151, 

including those relating to bona-fide 

hedging and account aggregation, would 

also apply. In the Commission’s 

judgment, the CME proposal represents 

a measured approach to increasing 

legacy limits, similar to that previously 

implemented.455 The Commission will 

use the CME’s all-months-combined 

petition levels as the basis to increase 

the levels of the non-spot-month limits 

for legacy Referenced Contracts. The 

petition levels were based on 2009 

average month-end open interest. 

Adoption of the petition levels results in 

increases in limit levels that range from 

23 to 85 percent higher than the levels 

in existing § 150.2. 

The Commission has determined to 

maintain the current approach to setting 

and resetting legacy limits because it is 

consistent with the Commission’s 

historical approach to setting such 

limits and ensures the continuation of 

maintaining a parity of limit levels for 

the major wheat contracts at DCMs. In 

response to comments supporting this 

approach, the Commission will also 

increase the levels of the limits on 

wheat at the MGEX and the KCBT to the 

level for the wheat contract at the 

CBOT.456

d. Position Visibility 

As discussed in II.L. of this release, 

the Commission is adopting position 

visibility levels as a supplement to 

position limits. These levels will 

provide the Commission with the ability 

to conduct surveillance of market 

participants with large positions in the 

energy and metal Reference 

Contracts.457 As discussed in the 

Paperwork Reduction Act section of 

these final rules, the Commission 

increased the position visibility levels 

and reduced the reporting requirements 

in order to decrease the compliance 

costs associated with position visibility 

levels. 

Commenters generally stated that the 

position visibility requirements are 

unnecessary, redundant, burdensome, 

and overly restrictive.458 While some 

commenters acknowledged the 

usefulness of the data collected through 

position visibility requirements, they 

maintained the burden associated with 

complying with these requirements was 

too great.459 One commenter noted that 

it is too costly to require monthly 

visibility reporting; another suggested 

these compliance costs would most 

affect bona fide hedgers because of the 

extra information required of those 

claiming a bona fide hedging 

exemption.460 Another commenter 

noted that position visibility 

requirements may prove duplicative 

once the Commission can evaluate data 

received from swaps dealers and major 

swaps participants, DCOs, SEFs and 

SDRs.461

The comments that suggested semiannual reporting or no reporting at all, 

instead of monthly reporting, have not 

been adopted because of the 

surveillance utility afforded by the 

visibility reporting. The Commission 

notes that once an affected person 

adopts processes to comply with the 

standard reporting format, visibility 

reporting may result in a lesser burden 

when compared to the alternative of 

frequent production of books and 

records under special calls. With regard 

to frequency, reporting that is too 

infrequent may undermine the 

effectiveness of the Commission’s 

surveillance efforts, as one goal of 

reporting under position visibility levels 

is to provide the Commission with 

timely and accurate data regarding the 

current positions of a market’s largest 

traders in order to detect and deter 

manipulative behavior. The 

Commission notes that until SDRs are 

operational and the Commission’s large 

trader reporting for physical commodity 

swaps are fully implemented, the 

Commission would not have access to 

the data necessary to have a holistic 

view of the marketplace and to set 

appropriate position limit levels. 

To further mitigate costs on reporting 

entities, the Commission has 

determined to reduce the filing burden 

associated with position visibility to one 

filing per trader per calendar quarter, as 

opposed to a monthly filing. This 

reduced reporting is not anticipated to 

significantly impact the overall 

surveillance benefit provided through 

the position visibility reporting. 

However, if the large position holders 

subject to position visibility reporting 

requirements were to submit reports any 

less often, then the reports would not 

provide sufficiently regular information 

for the Commission to be able to 

determine the nature (hedging or 

speculative) of the largest positions in 

the market. This data should assist the 

Commission in its required report to 

Congress regarding implementation of 

position limits,462 and in ongoing 

assessment of the appropriateness of the 

levels of such limits. 

The Commission has also raised the 

visibility levels to approximately 50 to 

60 percent of the projected aggregate 

position limits for the Reference 

Contract (from 10 to 30 percent of the 

limit in the Proposed Rule), with the 

exception of the Light, Sweet Crude Oil 

(CL) and Henry Hub Natural Gas (NG) 

Referenced Contracts, for which these 

levels have been raised from the 

proposal but are still lower than 50 to 

60 percent of projected aggregate 

position limits in order to capture a 

target number of traders.463 Based on 

the Commission’s current data regarding 

futures and certain cleared swap 

transactions, the higher visibility levels 

as compared to the Proposed Rule will 

reduce the number of traders (including 

bona fide hedgers) subject to the 

reporting requirements, while still 

providing the Commission sufficient 

data on the positions of the largest 

traders in the respective Referenced 

Contract. 

The Commission estimates that, on an 

annual basis, at most 73 traders would 


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464For example, traders could utilize swaps not 

traded on a DCM or SEF. 

465The Commission has further provided for 

acceptable practices for DCMs and SEFs seeking 

compliance with their respective position limit and 

accountability-related Core Principles in other 

commodity contracts. 

be subject to position visibility reporting 

requirements. As discussed in the PRA 

section of this release, the Commission 

estimates the costs of compliance to be 

a total burden, across all of these 

entities, of 7,760 annual labor hours 

resulting in a total of $611,000 in annual 

labor costs and $7 million in annualized 

capital and start-up costs and annual 

total operating and maintenance costs. 

The Commission estimates that 25 of 

the traders affected by position visibility 

regulations would be bona fide hedgers. 

Specifically with regard to bona fide 

hedgers, the Commission estimates 

compliance costs for position visibility 

reporting to be a total burden, across all 

bona fide hedgers, of 2,000 total annual 

labor hours resulting in a total of 

$157,200 in annual labor costs and 

$1.625 million in annualized capital 

and start-up costs and annual total 

operating and maintenance costs. The 

Commission notes that these estimated 

costs for bona fide hedgers are a subset 

of, and not in addition to, the costs for 

all participants combined enumerated 

above. 

The information gained from position 

visibility levels provides essential 

transparency to the Commission as a 

means of preventing potentially 

manipulative behavior. In the 

Commission’s judgment, such data is a 

critical component of an effective 

position limit regime as it will help to 

maximize to the extent practicable the 

statutory objectives of preventing 

excessive speculation and 

manipulation, while ensuring sufficient 

liquidity for bona fide hedgers and 

protecting the price discovery function 

of the underlying market. It allows the 

Commission to monitor the positions of 

the largest traders and the effects of 

those positions in the affected markets. 

While the extent of these benefits is not 

readily quantifiable, the ability to better 

understand the balance in the market 

between speculative and nonspeculative positions is critical to the 

Commission’s ability to monitor the 

effectiveness of position limits and 

potentially recalibrate the levels in 

order to ensure the limits sufficiently 

address the statutory objectives that the 

Commission must consider and 

maximize in establishing appropriate 

position limits. In this way, position 

visibility levels are not unlike position 

accountability levels that are currently 

utilized for many DCM contracts. 

Finally, as discussed under section 

II.C.2. of this release, position visibility 

reporting will enable the Commission to 

address data gaps that will exist prior to 

the availability of comprehensive data 

from SDRs. 

e. DCMs and SEFs 

Pursuant to Core Principle 5(B) for 

DCMs and Core Principle 6(B) for SEFs 

that are trading facilities, such 

registered entities are required to 

establish position limits ‘‘[f]or any 

contract that is subject to a position 

limitation established by the 

Commission pursuant to section 4a(a).’’ 

The core principles require that these 

levels be set ‘‘at a level not higher than 

the position limitation established by 

the Commission.’’ As such, the final 

rules require DCMs and SEFs to set 

position limits on the 28 physical 

commodity Referenced Contracts traded 

or executed on such DCMs and SEFs. 

Under the proposal, DCMs and SEFs 

would have been required to implement 

a position limit regime for all physical 

commodity contracts executed on their 

facility. This proposal would effectively 

create a class limit for the trading 

facility’s contracts. Because the 

Commission determined to eliminate 

class limits outside of the spot-month 

for the 28 contracts subject to 

Commission limits, the Commission has 

determined not to adopt the proposed 

requirements that would have 

effectively created class limits for a 

particular trading venue. Accordingly, 

the final rules permit the trading facility 

to grant spread or arbitrage exemptions 

regardless of the trading facility or 

market in which such positions are 

held. To remain consistent with the 

Commission’s class limits within the 

spot-month, DCMs and SEFs cannot 

grant spread or arbitrage exemptions 

with regard to physical-delivery 

commodity contracts. These provisions 

allow DCMs and SEFs to comply with 

the core principles for contracts subject 

to Commission position limits without 

creating an incentive for traders to 

migrate their speculative positions off of 

the trading facility to avoid the SEF or 

DCM limit.464

The Commission notes that the 

establishment of Federal limits on the 

28 Core Referenced Futures Contracts 

should not significantly affect the 

compliance costs for DCMs because they 

currently impose spot-month limits for 

physical commodity contracts in 

compliance with existing Core Principle 

5.465 DCMs in particular have long 

enforced spot-month limits, and the 

Commission notes that such spot-month 

position limits are currently in place for 

all physical-delivery physical 

commodity futures under Core Principle 

5 of section 5(d) of the CEA. The final 

rule on physical-delivery spot-month 

limits should impose minimal, if any, 

additional compliance costs on DCMs. 

As outlined above in this section 

III.A.3, the Commission believes that the 

position limits finalized herein will 

likely cause relevant DCMs, SEFs, and 

market participants to incur various 

additional costs (or forego benefits). At 

this time, the Commission is unable to 

quantify the cost of such changes 

because the effect of this determination 

will vary per market and because the 

requirements applicable to SEFs extend 

to swaps, which heretofore were 

generally not subject to federally-set 

position limits. The Commission also 

notes that to a certain extent these costs 

are a consequence of the statutory 

requirement for DCMs and SEFs to set 

and administer position limits on 

contracts that have Federal position 

limits in accordance with the Core 

Principles applicable to such facilities. 

For the remaining physical 

commodity contracts executed on a 

DCM or SEF that is a trading facility, 

i.e., those contracts which are not 

Referenced Contracts, DCMs and SEFs 

are required to comply with new Core 

Principle 5 for DCMs and Core Principle 

6 for SEFs in establishing position 

limitations or position accountability 

levels. The costs resulting from this 

requirement also are a consequence of 

the statutory provision requiring DCMs 

and SEFs to set and administer position 

limits or accountability levels. 

f. CEA Section 15(a) Considerations: 

Position Limits 

As stated above, section 15(a) of the 

CEA requires the Commission to 

consider the costs and benefits of its 

actions 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. 

i. Protection of Market Participants and 

the Public 

Congress has determined that 

excessive speculation causing ‘‘sudden 

or unreasonable fluctuations or 

unwarranted changes in the price of 

such commodity, is an undue and 

unnecessary burden on interstate 

commerce in such commodity.’’ 

Further, Congress directed that for the 

purpose of ‘‘diminishing, eliminating, or 

preventing such burden,’’ the 


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466Section 4a(a)(1) of the CEA, 7 U.S.C. 6a(a)(1). 

467See section 4a(a)(3)(B) of the CEA, 7 U.S.C. 

6a(a)(3)(B). 

Commission ‘‘shall * * * proclaim and 

fix such [position] limits * * * as the 

Commission finds are necessary to 

diminish, eliminate, or prevent such 

burden.’’ 466 This rulemaking responds 

to the Congressional mandate for the 

Commission to impose position limits 

both within and outside of the spotmonth on DCM futures and 

economically equivalent swaps. 

The Congressional mandate also 

directed that the Commission set limits, 

to the maximum extent practicable, in 

its discretion, to diminish, eliminate or 

prevent excessive speculation, deter or 

prevent market manipulation, ensure 

sufficient liquidity for bona fide 

hedgers, and ensure that the price 

discovery function of the underlying 

market is not disrupted.467 To that end, 

the Commission evaluated its historical 

experience setting limits and overseeing 

DCMs that administer limits, reviewed 

available futures and swaps data, and 

considered comments from the public in 

order to establish limits that address, to 

the maximum extent practicable within 

the Commission’s discretion, the above 

mentioned statutory objectives. 

The spot-month limit, set at 25% of 

deliverable supply, retains current 

practice in setting spot-month position 

limits, and in the Commission’s 

experience this formula is effective in 

diminishing the potential for 

manipulative behavior and excessive 

speculation within the spot-month. As 

evidenced by the limited number of 

traders that may need to adjust their 

trading strategies to account for the 

limits, the Commission does not believe 

that this formula will impose an overly 

stringent constraint on speculative 

activity; and therefore, should ensure 

sufficient liquidity for bona fide hedgers 

and that the price discovery function of 

the underlying market is not disrupted. 

In addition, continuing the practice of 

registered entity spot-month position 

limits should serve to more effectively 

monitor trading to prevent manipulation 

and in turn protect market participants 

and the price discovery process. 

With regard to the interim final rules 

for cash-settled contracts in the spotmonth, as previously explained the 

Commission believes that the level of 

five times the applicable limit for the 

physical-delivery natural gas contracts 

should protect market participants 

through maximizing, to the extent 

practicable, the objectives set forth by 

Congress in CEA section 4a(a)(3)(B). In 

addition, based upon the Commission’s 

limited swaps data, the limits on cashsettled agricultural, metals, and energy 

(other than natural gas) contracts should 

ensure sufficient liquidity for bona fide 

hedgers and avoid disruption to price 

discovery in the underlying market due 

to the overall size of the swap market in 

those commodities. Nevertheless, the 

Commission intends to monitor trading 

activity under the new limits to 

determine the effect on market liquidity 

of these limits and whether the limits 

should be modified to further maximize 

the four statutory objectives set forth in 

CEA section 4a(a)(3)(B). The 

Commission also invites public 

comment as to these determinations. 

With regard to the non-spot-month 

position limits, which are set at a 

percentage of open interest, the 

Commission believes such limits will 

also protect market participants and the 

public through maximization, to the 

extent practicable, the four objectives 

set forth in CEA section 4a(a)(3)(B). The 

Commission selected the general 10– 

2.5% formula for calculating position 

limits as a percentage of market open 

interest based on the Commission’s 

longstanding experience overseeing 

DCM position limits outside of the spotmonth, which are based on the same 

formula. Further, as evidenced by the 

relatively few traders that the 

Commission estimates would hold 

positions in excess of such levels, the 

relatively small percentage of total open 

interest these traders would hold in 

excess of these limits, and that many 

large traders are expected to be bona 

fide hedgers; the Commission concludes 

that these limits should protect the 

public through ensuring sufficient 

liquidity for bona fide hedgers and 

protecting the price discovery function 

of the underlying market. 

Finally, the position visibility levels 

established in these final rules should 

protect market participants by giving the 

Commission data to monitor the largest 

traders in Referenced metal and energy 

contracts. The data reported under 

position visibility levels will help the 

Commission in considering whether to 

reset position limits to maximize further 

the four statutory objectives in section 

4a(a)(3(B) of the CEA. Further, 

monitoring the largest traders in these 

markets should provide the Commission 

with data that may help prevent or 

detect potentially manipulative 

behavior. 

ii. Efficiency, Competiveness, and 

Financial Integrity of Futures Markets 

The Federal spot-month and nonspot-month formulas adopted under the 

final rules are designed, in accordance 

with CEA section 4a(a)(3)(B),to deter 

and prevent manipulative behavior and 

excessive speculation, while also 

maintaining sufficient liquidity for 

hedging and protecting the price 

discovery process. To the extent that the 

position limit formulas achieve these 

objectives, the final rules should protect 

the efficiency, competitiveness, and 

financial integrity of futures markets. 

iii. Price Discovery 

Based on its historical experience, the 

Commission believes that adopting 

formulas for position limits that are 

based on formulas that have historically 

been used by the Commission and 

DCMs to establish position limits 

maximizes the extent practicable, at this 

time, the four statutory objectives set 

forth by Congress in CEA section 

4a(a)(3). Based on its prior experience 

with these limits, the Commission 

believes that the price discovery 

function of the underlying market will 

not be disrupted. Similarly, as effective 

price discovery relies on the accuracy of 

prices in futures markets, and to the 

extent that the position limits described 

herein protect prices from market 

manipulation and excessive 

speculation, the final rules should 

protect the price discovery function of 

futures markets. 

iv. Sound Risk Management Practices 

To the extent that these position 

limits prevent any market participant 

from holding large positions that could 

cause unwarranted price fluctuations in 

a particular market, facilitate 

manipulation, or disrupt the price 

discovery process, such limits serve to 

prevent market participants from 

holding positions that present risks to 

the overall market and the particular 

market participant as well. To this 

extent, requiring market participants to 

ensure that they do not accumulate 

positions that, when traded, could be 

disruptive to the overall market—and 

hence themselves as well—promotes 

sound risk management practices by 

market participants. 

v. Public Interest Considerations 

The Commission has not identified 

any other public interest considerations 

related to the costs and benefits of the 

rules establishing limits on positions. 

5. Exemptions: Bona Fide Hedging 

As discussed section II.G. of this 

release, the Dodd-Frank Act provided a 

definition of bona fide hedging for 

futures contracts that is more narrow 

than the Commission’s existing 

definition under regulation § 1.3(z). 

Pursuant to sections 4a(c)(1) and (2) of 

the CEA, the Commission incorporated 

the narrowed definition of bona fide 


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468This appendix provides examples of 

transactions that would qualify as an enumerated 

hedge transaction; the enumerated examples do not 

represent the only transactions that could qualify. 

469The Commission notes that the impact of the 

definition of bona fide hedging for both futures and 

swaps will vary depending of the positions of each 

entity. Due to this variability among potentially 

affected entities, the specifics of which are not 

known to the Commission, and cannot be 

reasonably ascertained, the Commission cannot 

reasonably quantify the impact of applying the 

same definition of bona fide hedging for swaps and 

futures transactions. 

470See e.g., CL–Gavilon supra note 276 at 6; CL– 

FIA I supra note 21 at 14–15. 

471See e.g., CL–Commercial Alliance I supra note 

42 at 2; CL–FIA I supra note 21 at 14; and CL– 

Economists Inc. supra note 172 at 19. 

472See e.g., CL–Gavilon supra note 276 at 6. 

473CL–BGA supra note 35 at 17. 

474See e.g., CL–FIA I supra note 21 at 17–18; and 

CL–Katten supra note 21 at 2–3. 

475CL–ABA supra note 150 at 6. 

476CL–NREC/AAPP/ALLPC supra note 266 at 27. 

477See e.g., CL–API supra note 21 at 10; CL– 

Encana supra note 145 at 3; CL–FIA I supra note 

21 at 21; CL–WGCEF supra note 35 at 14–15; CL– 

ICE I supra note 69 at 11–12; CL–COPE supra note 

21 at 12; CL–EEI/ESPA supra note 21 at 6–7. 

478See e.g., CL–FIA I supra note 21 at 16; and 

CL–ISDA/SIFMA supra note 21 at 11. 

479See e.g., CL–Economists, Inc. supra note 172 

at 20–21. 

480See e.g., CL–AGA supra note 124 at 7. 

481Some commenters suggested that the 

Commission should use its exemptive authority in 

section 4a(a)(7) of the CEA, 7 U.S.C. 6a(a)(7), to 

expand the definition of bona fide hedging to 

include certain transactions; however, the 

Commission cannot use its exemptive authority to 

reshape the statutory definition provided in section 

4a(c)(2) of the CEA, 7 U.S.C. 6a(c)(2). 

482As discussed in II.G.1, the plain text of the 

new statutory definition directs the Commission to 

define bona fide hedging for futures contracts to 

include hedging for physical commodities (other 

than excluded commodities derivatives) only if 

such transactions or positions represent substitutes 

for cash market transactions and offset cash market 

risks. This definition excludes hedges of general 

swap position risk (i.e., a risk-management 

exemption), but does include a limited exception 

for pass-through swaps. 

483The removal of class limits should also 

generally mitigate the impact of not having a risk 

management exemption across futures and swaps 

because affected traders can net risk-reducing 

positions in the same Referenced Contract outside 

of the spot-month. 

hedging into the Proposed Rules, and 

incorporates this definition into these 

final rules. The Commission also 

limited bona fide hedging transactions 

to those specifically enumerated 

transactions and pass-through swap 

transactions set forth in final § 151.5. In 

response to commenters’ inquiries over 

whether certain transactions qualified as 

an enumerated hedge transaction, the 

Commission expanded the list of 

enumerated hedge transactions eligible 

for the bona fide hedging exemption, 

and also gave examples of enumerated 

hedge transactions in appendix B to this 

release.468

Pursuant to CEA section 4a(c)(1), the 

Commission also proposed to extend the 

definition of bona fide hedging 

transactions to all referenced contracts, 

including swaps transactions. The 

Commission is adopting the definition 

of bona fide hedging as proposed. The 

Commission believes that applying the 

statutory definition of bona fide hedging 

to swaps is consistent with 

congressional intent as embodied in the 

expansion of the Commission’s 

authority to swaps (i.e., those that are 

economically-equivalent and SPDFs). In 

granting the Commission authority over 

such swaps, Congress recognized that 

such swaps warrant similar treatment to 

their economically equivalent futures 

for purposes of position limits and 

therefore, intended that statutory 

definition of bona fide hedging also be 

extended to swaps.469

The Commission also established a 

reporting and recordkeeping regime for 

bona fide hedge exemptions. Under the 

proposal, a trader with positions in 

excess of the applicable position limit 

would be required to file daily reports 

to the Commission regarding any 

claimed bona fide hedge transactions. In 

addition, all traders would be required 

to maintain records related to bona fide 

hedging exemptions, including the 

exemption for ‘‘pass-through’’ swaps. In 

response to comments, the Commission 

has reduced the reporting frequency 

from daily to monthly, and streamlined 

the recordkeeping requirements for 

pass-through swap counterparties. 

These modifications should permit the 

Commission to retain its surveillance 

capabilities to ensure the proper 

application of the bona fide hedge 

exemption as defined in the statute, 

while addressing commenters’ concerns 

regarding costs. 

Commenters argued that the 

definition of bona fide hedging, as 

proposed, was too narrow and, if 

applied, would reduce liquidity in 

affected markets.470 These commenters 

suggested that the list of enumerated 

transactions did not adequately take 

into account all possible hedging 

transactions.471 The lack of a broad risk 

management exemption also caused 

concerns among some commenters, who 

noted that the cost of reclassifying 

transactions would be significant and 

could induce companies to do business 

in other markets.472 Other commenters 

expressed concerns regarding the passthrough exemption for swap dealers 

whose counterparties are bona fide 

hedgers, suggesting that the provision 

implied bona fide hedgers must manage 

the hedging status of their transactions 

and report them to the swap dealer, thus 

burdening the hedger in favor of the 

swap dealer.473 Some commenters 

suggested that the Commission develop 

a method for exempting liquidity 

providers in order to retain the valuable 

services such participants provide.474

One commenter urged the Commission 

to remove limit exemptions for index 

fund investors in agricultural markets in 

order to decrease volatility and allow for 

true price discovery.475 Another 

commenter requested that the 

Commission allow categorical 

exemptions for trade associations to 

reduce the burden on smaller 

entities.476

Many commenters argued that the 

reporting requirements were overly 

burdensome and requested monthly 

reporting of bona fide hedging activity 

as opposed to the daily reporting that 

would be required by the Proposed 

Rule.477 The commenters also criticized 

proposed restrictions on holding a 

hedge into the last five days of 

trading.478 Some commenters on 

anticipatory hedging exemptions noted 

the proposed one year limitation on 

anticipatory hedging was biased toward 

agricultural products and did not take 

into account the different structure of 

other markets.479 One commenter noted 

that the requirement to obtain approval 

for anticipatory hedge exemptions at a 

time close to when the position may 

exceed the limit is burdensome.480

The Commission is implementing the 

statutory directive to define bona fide 

hedging for futures contracts as 

provided in CEA section 4a(c)(2). In this 

respect, the Commission does not have 

the discretion to disregard a directive 

from Congress concerning the narrowed 

scope of the definition of bona fide 

hedging transactions.481 Thus, for 

example, as discussed in section II.G. of 

this release, the final rules do not 

provide for risk management 

exemptions, given that the statutory 

definition of bona fide hedging 

generally excludes the application of a 

risk management exemption for entities 

that generally manage the exposure of 

their swap portfolio.482 As discussed 

above, the Commission is authorized to 

define bona fide hedging for swaps and 

in this regard, may construe bona fide 

hedging to include risk management 

transactions. The Commission, however, 

does not believe that including a risk 

management provision is necessary or 

appropriate given that the elimination of 

the class limits outside of the spotmonth will allow entities, including 

swap dealers, to net Referenced 

Contracts whether futures or 

economically equivalent swaps.483 As 

such, under the final rules, positions in 


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484The statutory definition of bona fide hedging 

does not include a risk management exemption for 

futures contracts. The impact of not having a riskmanagement exemption will vary depending on the 

positions of each entity, and the extent of mitigation 

through netting futures and swaps outside of the 

spot-month will also vary depending on the 

positions of each entity. Due to this variability 

among potentially affected entities, the specifics of 

which are not known to the Commission, and 

cannot be reasonably ascertained, the Commission 

cannot reasonably quantify the impact of not 

incorporating a risk-management exemption within 

the definition of bona fide hedging. Further, as 

noted above, the Commission is currently unable to 

quantify the cost that a firm may incur as a result 

of position limits impacting trading strategies. 

485See II.G.1. of this release. 

486For the reasons discussed above in this section 

III.A.4., the Commission is defining bona fide 

hedging for swaps to replicate the statutory 

definition for futures contracts. 

Referenced Contracts entered to reduce 

the general risk of a swap portfolio will 

be netted with the positions in the 

portfolio outside of the spot-month.484

The Commission estimates that there 

may be significant costs (or foregone 

benefits) associated with the 

implementation of the new statutory 

definition of bona fide hedging to the 

extent that the restricted definition of 

bona fide hedging may require traders to 

potentially adjust their trading 

strategies. Additionally, there may be 

costs associated with the application of 

the narrowed bona fide hedging 

definition to swaps. The Commission 

anticipates that certain firms may need 

to adjust their trading and hedging 

strategies to ensure that their aggregate 

positions do not exceed position limits. 

As previously noted, however, the 

Commission is unable to estimate the 

costs to market participants from such 

adjustments in trading and hedging 

strategies. Commenters did not provide 

any quantitative data as to such 

potential impacts from the proposed 

limits and the Commission does not 

have access to any such business 

strategies of market participants; thus, 

the Commission cannot independently 

evaluate the potential costs to market 

participants of such changes in 

strategies. 

In light of the requests from 

commenters for clarity on whether 

specific transactions qualified as bona 

fide hedge transactions, the Commission 

developed Appendix B to these Final 

Rules to detail certain examples of bona 

fide hedge transactions provided by 

commenters that the Commission 

believes represent legitimate hedging 

activity as defined by the revised 

statute.485

As described further in the PRA 

section, the Commission estimates the 

costs of bona fide hedging-related 

reporting requirements will affect 

approximately 200 entities annually and 

result in a total burden of approximately 

$29.8 million across all of these entities, 

including 29,700 annual labor hours 

resulting in a total of $2.3 million in 

annual labor costs and $27.5 million in 

annualized capital and start-up costs 

and annual total operating and 

maintenance costs. These estimated 

costs amount to approximately $149,000 

per entity. The reduction in the 

frequency of reporting from daily in the 

proposal to monthly in the final rule 

will decrease the burden on bona fide 

hedgers while still providing the 

Commission with adequate data to 

ensure the proper application of the 

statutory definition of bona fide hedging 

transaction. Further, the advance 

application required for an anticipatory 

exemption has also been changed to a 

notice filing, which should also 

decrease costs for bona fide hedgers as 

such entities can rely on the exemption 

and implement hedging strategies upon 

filing the notice as opposed to incurring 

a delay while awaiting the Commission 

to respond to the application. 

The Commission has also eliminated 

restrictions on maintaining certain types 

of bona fide hedges (e.g., anticipatory 

hedges) in the last five days of trading 

for all cash-settled Referenced 

Contracts. The Commission will 

maintain this general restriction for 

physically-delivered Referenced 

Contracts. However, the Commission is 

clarifying the time period for these 

restrictions in the physical delivery 

contracts, distinguishing the agricultural 

physical-delivery contacts from the nonagricultural physical delivery contracts. 

The Commission will retain the 

proposed restrictions for the last five 

days of trading in agricultural physicaldelivery Referenced Contracts, while 

non-agricultural physical delivery 

Referenced Contracts will be subject to 

a prohibition that applies to holding the 

hedge into the spot month. The 

Commission has removed these 

restrictions in cash settled contracts in 

order to avoid, for example, requiring a 

trader with an anticipatory hedge 

exemption either to apply for a hedge 

exemption based on newly produced 

inventories (i.e., the hedge no longer 

being anticipatory) or to roll before the 

spot period restriction. The restriction 

on holding an anticipatory hedge into 

the last days of trading on a physicaldelivery contract mitigates concerns that 

liquidation of a very large bona fide 

hedging position would have a negative 

impact on a physical-delivery contract 

during the last few days since such an 

anticipatory hedger neither intended to 

make nor take delivery and, thus, would 

liquidate a large position at a time of 

reduced trading activity, impacting 

orderly trading in the contracts. Such 

concerns generally are not present in 

cash-settled contracts, since a trader has 

no need to liquidate to avoid delivery. 

The Commission believes that 

permitting the maintenance of such 

hedges in cash settled contracts will not 

negatively affect the integrity of these 

markets. 

Also in response to commenters, the 

one-year limitation on anticipatory 

hedging has been amended in the final 

rules to apply only to agricultural 

markets; the limitation has been lifted 

on energy and metal markets, in 

recognition of the differences in the 

characteristics of the markets for 

different commodities, such as the 

annual crop cycle for agricultural 

commodities, that are not present in 

energy and metal commodities. 

a. CEA Section 15(a) Considerations: 

Bona Fide Hedging 

Congress established the definition of 

bona fide hedge transaction for contracts 

of future delivery in CEA section 

4a(c)(2), and the Commission 

incorporated this definition into the 

final rules. As described in section II.G. 

of this release and in the consideration 

of costs and benefits, Congress limited 

the scope of bona fide hedging 

transactions to those tied to a physical 

marketing channel.486 The Commission 

believes the enumerated hedges provide 

an appropriate scope of exemptions for 

market participants, consistent with the 

statutory directive for the Commission 

to define bona fide hedging transactions 

and positions. 

i. Protection of Market Participants and 

the Public 

The Commission’s filing and 

recordkeeping requirements for bona 

fide hedging activity are intended to 

enhance the Commission’s ability to 

monitor bona fide hedging activities, 

and in particular, to ascertain whether 

large positions in excess of an 

applicable position limit reflect bona 

fide hedging and thus are exempt from 

position limits. The Commission 

anticipates that the filing and 

recordkeeping provisions will impose 

costs on entities. However, the 

Commission believes that these costs 

provide the benefit of ensuring that the 

Commission has access to information 

to determine whether positions in 

excess of a position limit relate to bona 

fide hedging or speculative activity. To 

reduce the compliance burden on bona 

fide hedgers, the Commission has 

reduced the reporting frequency from 

daily to monthly. As a necessary 


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487As described in earlier sections and as found 

in Appendix B of these rules. 

488The Commission did not propose any 

substantive changes to existing § 150.4(d), which 

allows an FCM to disaggregate positions in 

discretionary accounts participating in its customer 

trading programs provided that the FCM does not, 

among other things, control trading of such 

accounts and the trading decisions are made 

independently of the trading for the FCM’s other 

accounts. As further described below, however, the 

FCM disaggregation exemption would no longer be 

self-executing; rather, such relief would be 

contingent upon the FCM applying to the 

Commission for relief. 

489See e.g. CL–DBCS supra note 247 at 6; CL– 

Morgan Stanley supra note 21 at 8–9; and CL– 

PIMCO supra note 21 at 4. 

490CL–Willkie supra note 276 at 3–4. 

491See e.g. CL–PIMCO supra note 21 at 4–5; CL– 

BGA supra note 35 at 22; CL–FIA I supra note 21 

at 24; CL–ICE I supra note 69 at 6; and CL–CME 

I supra note 8 at 16. 

492See e.g. CL–ICE I supra note 69 at 13; CL–CME 

I supra note 8 at 17; CL–FIA I supra note 21 at 26– 

27; and CL–Cargill supra note 76 at 9. 

493See e.g. CL–MFA supra note 21 at 14–15; and 

CL–Blackrock supra note 21 at 6–7. 

494See e.g. CL–CME I supra note 8 at 18; and CL– 

Blackrock supra note 21 at 14. 

component of an effective position 

limits regime, the Commission believes 

that the requirements related to bona 

fide hedging will protect participants 

and the public. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

In CEA section 4a, as amended by the 

Dodd-Frank Act, Congress explicitly 

exempted those market participants 

with legitimate bona fide hedge 

positions from position limits. In 

implementing this definition, the final 

rules’ position limits will not constrict 

the ability for hedgers to mitigate risk— 

a fundamental function of futures 

markets. In addition, as previously 

noted, the Commission has set these 

position limits at levels that will, in the 

Commission’s judgment, to the 

maximum extent practicable at this 

time, meet the objectives set forth in 

CEA section 4a(a)(3)(B), which includes 

ensuring sufficient liquidity for bona 

fide hedgers. In maximizing these 

objectives, the Commission believes that 

such limits will preserve the efficiency, 

competitiveness, and financial integrity 

of futures markets. Similarly, the filing 

and recordkeeping requirements should 

help to ensure the proper application of 

the bona fide hedge exemption. 

However, Congress also narrowed the 

definition of what the Commission 

could consider to be a bona fide hedge 

for contracts as compared to the 

Commission’s definition in regulation 

1.3(z). The Commission has attempted 

to mitigate concerns regarding any 

potential negative impact to the 

efficiency of futures markets based upon 

the new statutory definition. For 

instance, the Commission has expanded 

the list of enumerated hedging 

transactions to clarify the application of 

the statutory definition.487 In addition, 

the Commission has removed the 

application of class limits outside of the 

spot-month, which should mitigate the 

impact of narrowing the bona fide hedge 

exemption, since positions taken in the 

futures market to hedge the risk from a 

position established in the swaps 

market (or vice versa) can be netted for 

the purpose of calculating whether such 

positions are in excess of any applicable 

position limits. In light of these 

considerations, the Commission 

anticipates that the Commission’s 

implementation of the statutory 

definition of bona fide hedging will not 

negatively affect the competitiveness or 

efficiency of the futures markets. 

iii. Price Discovery 

As discussed above, the Commission 

is implementing the new statutory 

definition of bona fide hedging. Based 

on its historical experience with 

position limits at the levels similar to 

those established in the final rules, and 

in light of the measures taken to 

mitigate the effects of the narrowed 

statutory definition of bona fide 

hedging, the Commission does not 

anticipate the rules relating to the bona 

fide hedge exemption will disrupt the 

price discovery process. 

iv. Sound Risk Management Practices 

While the bona fide hedging 

requirements will cause market 

participants to monitor their physical 

commodity positions to track 

compliance with limits, the bona fide 

hedging requirements do not necessarily 

affect how a firm establishes and 

implements sound risk management 

practices. 

v. Public Interest Considerations 

The Commission has not identified 

any other public interest considerations 

related to the costs and benefits of the 

rules with respect to bona fide hedging. 

6. Aggregation of Accounts 

The final regulations, as adopted, 

largely clarify existing Commission 

aggregation standards under part 150 of 

the Commission’s regulations. As 

discussed in section II.H. of this release, 

the Commission proposed to 

significantly alter the current 

aggregation rules and exemptions. 

Specifically, proposed part 151 would 

eliminate the independent account 

controller (IAC) exemption under 

current § 150.3(a)(4), restrict many of 

the disaggregation provisions currently 

available under § 150.4 and create a new 

owned-financial entity exemption. The 

proposal would also require a trader to 

aggregate positions in multiple accounts 

or pools, including passively managed 

index funds, if those accounts or pools 

have identical trading strategies. Lastly, 

disaggregation exemptions would no 

longer be available on a self-executing 

basis; rather, an entity seeking an 

exemption from aggregation would need 

to apply to the Commission, with the 

relief being effective only upon 

Commission approval.488

Commenters asserted that the 

elimination of the longstanding IAC 

exemption would lead to a variety of 

negative effects, including reduced 

liquidity and distorted price signals, 

among many other things.489 One 

commenter mentioned that without the 

IAC exemption, multi-advisor 

commodity pools may become 

impossible.490 Commenters also 

expressed concerns that the proposed 

owned non-financial entity exemption 

lacked a rational basis for drawing a 

distinction between financial and nonfinancial entities; and the absence of the 

IAC exemption could force a firm to 

violate other Federal laws by sharing of 

position information across otherwise 

separate entities.491 Other commenters 

criticized the costs of the aggregation 

exemption applications, stating that the 

process would be burdensome for 

participants.492

In addition, commenters objected to 

the changes to the disaggregation 

exemption as it applies to interests in 

commodity pools, arguing that forcing 

aggregation of independent traders 

would increase concentration, limit 

investment opportunities, and thus 

potentially reduce liquidity in the U.S. 

futures markets.493 Commenters also 

objected to the Commission’s proposal 

to aggregate on the basis of identical 

trading strategies, arguing that it would 

decrease index fund participation and 

reduce liquidity.494

The primary rationale for the 

aggregation of positions or accounts is 

the concern that a single trader, through 

common ownership or control of 

multiple accounts, may establish 

positions in excess of the position 

limits—or otherwise attain large 

concentrated positions—and thereby 

increase the risk of market manipulation 

or disruption. Consistent with this goal, 

the Commission, in its design of the 

aggregation policy, has strived to ensure 

the participation of a minimum number 

of traders that are independent of each 


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495The Commission has long recognized that 

concerns regarding large concentrated positions are 

mitigated in circumstances involving client 

accounts managed under the discretion and control 

of an independent trader, and subject to effective 

information barriers. 

496 In retaining the IAC exemption, the 

Commission has decided not to adopt the proposed 

exemption for owned non-financial entities, which 

addresses commenters’ concern that the proposal 

would have resulted in unfair over discriminatory 

treatment of financial entities. 

497The Commission notes that this cost is directly 

attributable to the congressional mandate that the 

Commission impose limits on economically 

equivalent swaps. That is to say, unless the 

aggregation policy is extended to swaps on equal 

basis, the express congressional mandate to impose 

limits on futures (options) and economically 

equivalent swaps would be undermined. 

498The cost to monitor positions in identical 

trading strategies is reflected in the Commission’s 

general estimates to track positions on a real-time 

basis. 

499Section 4a(a)(1) also directs that the 

Commission aggregate ‘‘trading done by, two or 

more persons acting pursuant to an express or 

implied agreement or understanding, the same as if 

the positions were held by, or trading were done by, 

a single person.’’ 7 U.S.C. 6a(a)(1). 

other and have different trading 

objectives and strategies. 

Upon further consideration, and in 

response to commenters, the 

Commission is retaining the IAC 

exemption in existing § 150.4, 

recognizing that to the extent that an 

eligible entity’s client accounts are 

traded by independent account 

controllers,495 with appropriate 

safeguards, such trading may enhance 

market liquidity and promote efficient 

price discovery without increasing the 

risk of market manipulation or 

disruption.496

The final rules expressly provide that 

the Commission’s aggregation policy 

will apply to swaps and futures. The 

extension of the aggregation 

requirement to swaps may force a trader 

to adjust its business model or trading 

strategies to avoid exceeding the limits. 

The Commission is unable to provide a 

reliable estimation or quantification of 

the costs (including foregone benefits) of 

such changes because, among other 

things, the effect of this determination 

will vary per entity and would require 

information concerning the subject 

entity’s underlying business models and 

strategies, to which the Commission 

does not have access.497

To further respond to concerns from 

commenters, the Commission is 

establishing an exemption from the 

aggregation standards in circumstances 

where the aggregation of an account 

would result in the violation of other 

Federal laws or regulations, and an 

exemption for the temporary ownership 

or control of accounts related to 

underwriting securities. In addition, in 

response to commenters’ concerns 

regarding potential negative market 

impacts on liquidity and 

competitiveness, the Commission is not 

adopting the proposed changes to the 

standards for commodity pool 

aggregation and is instead retaining the 

existing standards. However, the 

Commission is retaining the provision 

that requires aggregation for identical 

trading strategies in order to prevent the 

evasion of speculative position 

limits.498

In light of the importance of the 

aggregation standards in an effective 

position limits regime, it is critical that 

the Commission effectively and 

efficiently monitor the extent to which 

traders rely on any of the disaggregation 

exemptions. During the period of time 

that the exemptions from aggregation 

were self-certified, the Commission did 

not have an adequate ability to monitor 

whether entities were properly 

interpreting the scope of an exemption 

or whether entities followed the 

conditions applicable for exemptive 

relief. Accordingly, traders seeking to 

rely on any disaggregation exemption 

will be required to file a notice with the 

Commission; the disaggregation 

exemption is no longer self-executing. 

As discussed in the PRA section, the 

Commission estimates costs associated 

with reporting regulations will affect 

approximately ninety entities resulting 

in a total burden, across all of these 

entities, of 225,000 annual labor hours 

and $5.9 million in annualized capital 

and start-up costs and annual total 

operating and maintenance costs. 

a. CEA Section 15(a) Considerations: 

Aggregation 

The aggregation standards finalized 

herein largely track the Commission’s 

longstanding policy on aggregation, 

which will now apply to futures and 

swaps transactions. The Commission 

has added certain additional safeguards 

to ensure the proper aggregation of 

accounts for position limit purposes. 

i. Protection of Market Participants and 

the Public 

The Commission’s general policy on 

aggregation is derived from CEA section 

4a(a)(1), which directs the Commission 

to aggregate based on the positions held 

as well as the trading done by any 

persons directly or indirectly controlled 

by such person.499 The Commission has 

historically interpreted this provision to 

require aggregation based upon 

ownership or control. The commenters 

largely supported the existing 

aggregation standards, and as noted 

above, the Commission has largely 

retained the aggregation policy from 

part 150 and extended its application to 

positions in swaps. 

As discussed above, the Commission 

anticipates that the aggregation 

standards will impose additional costs 

to various market participants, 

including the monitoring of positions 

and filing for an applicable exemption. 

However, the benefits derived from a 

notice filing, which ensure proper 

application of aggregation exemptions, 

and the general monitoring of positions, 

which are a necessary cost to the 

imposition of position limits, warrant 

adoption of the final aggregation rules. 

The continued use of existing 

aggregation standards, which are 

followed at the Commission and DCM 

level, may mitigate costs for entities to 

continue to aggregate their positions. In 

addition, the new aggregation provision 

related to identical trading strategies 

furthers the Commission policy on 

aggregation by preventing evasion of the 

limits through the use of positions in 

funds that follow the same trading 

strategy. Accordingly, as a necessary 

component of an effective position limit 

regime, and based on its experience 

with the current aggregation rules, the 

Commission believes that the provisions 

relating to aggregation in the final rules 

will promote the protection of market 

participants and the public. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

For reasons discussed above, an 

effective position limits regime must 

include a robust aggregation policy that 

is designed to prevent a trader from 

attaining market power through 

ownership or control over multiple 

accounts. To the extent that the 

aggregation policy under the final rules 

prevent any market participant from 

holding large positions that could cause 

unwarranted price fluctuations in a 

particular market, facilitate 

manipulation, or disrupt the price 

discovery process, the aggregation 

standards finalized herein operate to 

help ensure the efficiency, 

competitiveness and financial integrity 

of futures markets. In addition to the 

existing exemptions under part 150, to 

address commenter concerns over 

forced information sharing in violation 

of Federal law and regarding the 

underwriting of securities, the 

Commission is providing for limited 

exemptions to cover such 

circumstances. 

iii. Price Discovery 

For similar reasons, the Commission 

believes that the aggregation 

requirements will further the price 

discovery process. An effective 


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500 5 U.S.C. 601 et seq. 

501 5 U.S.C. sections 601(2), 603, 604 and 605. 

502 76 FR 4765. 

503Not-For-Profit Electric End User Coalition 

(‘‘EEUC’’) on March 28, 2011 (‘‘CL–EEUC’’) at 29. 

504 Id. at 15. 

505Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618, Apr. 30, 

1982 (FCM, DCM and large trader determinations). 

506See 47 FR at 18618; 72 FR 34417, Jun. 22, 2007 

(foreign broker determination). 

507See 75 FR 63745, Oct. 18, 2010. 

508See 76 FR 6715, Feb. 8, 2011. 

509 44 U.S.C. 3501 et seq. 

aggregation policy has been a 

longstanding component of the 

Commission’s position limit regime. As 

a necessary component of an effective 

position limit regime, and based on its 

experience with the current aggregation 

rules, the Commission believes that the 

provisions relating to aggregation in the 

final rules will also help protect the 

price discovery process. 

iv. Sound Risk Management 

As a necessary component of an 

effective position limits regime, and 

based on its experience with the current 

aggregation rules, the Commission 

believes that the provisions relating to 

aggregation in the final rules will 

promote sound risk management. 

v. Public Interest Considerations 

The Commission has not identified 

any other public interest considerations 

related to the costs and benefits of the 

rules with respect to aggregation. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires Federal agencies to 

consider the impact of its rules on 

‘‘small entities.’’ 500 A regulatory 

flexibility analysis or certification 

typically is required for ‘‘any rule for 

which the agency publishes a general 

notice of proposed rulemaking pursuant 

to’’ the notice-and-comment provisions 

of the Administrative Procedure Act, 5 

U.S.C. 553(b).501 In its proposal, the 

Commission explained that ‘‘[t]he 

requirements related to the proposed 

amendments fall mainly on [DCMs and 

SEFs], futures commission merchants, 

swap dealers, clearing members, foreign 

brokers, and large traders.’’ 502

In response to the Proposed Rules, the 

Not-For-Profit Electric End User 

Coalition (‘‘Coalition’’) submitted a 

comment generally criticizing the 

Commission’s ‘‘rule-makings [as] an 

accumulation of interrelated regulatory 

burdens and costs on non-financial 

small entities like the NFP Electric End 

Users, who seek to transact in Energy 

Commodity Swaps and ‘‘Referenced 

Contracts’’ only to hedge the 

commercial risks of their not-for-profit 

public service activities.’’ 503 In 

addition, the Coalition requested ‘‘that 

the Commission streamline the use of 

the bona fide hedging exemption for 

non-financial entities, especially for 

those that engage in CFTC-regulated 

transactions as ‘end user only/bona fide 

hedger only’ market participants.’’ 504

However, such persons necessarily 

would be large traders. 

The Commission has determined that 

this position limits rule will not have a 

significant economic impact on a 

substantial number of small businesses. 

With regard to the position limits and 

position visibility levels, these would 

only impact large traders, which the 

Commission has previously determined 

not to be small entities for RFA 

purposes.505 The Commission would 

impose filing requirements under final 

§§ 151.5(c) and (d) associated with bona 

fide hedging if a person exceeds or 

anticipates exceeding a position limit. 

Although regulation § 151.5(h) of these 

rules requires counterparties to passthrough swaps to keep records 

supporting the transaction’s 

qualification for an enumerated hedge, 

the marginal burden of this requirement 

is mitigated through overlapping 

recordkeeping requirements for 

reportable futures traders (Commission 

regulation 18.05) and reportable swap 

traders (Commission regulation 20.6(b)). 

Further, the Commission understands 

that entities subject to the recordkeeping 

requirements for their swaps 

transactions maintain records of these 

contracts, as they would other 

documents evidencing material 

financial relationships, in the ordinary 

course of their businesses. Therefore, 

these rules would not impose a 

significant economic impact even if 

applied to small entities. 

The remaining requirements in this 

final rule generally apply to DCMs, 

SEFs, futures commission merchants, 

swap dealers, clearing members, and 

foreign brokers. The Commission 

previously has determined that DCMs, 

futures commission merchants, and 

foreign brokers are not small entities for 

purposes of the RFA.506 Similarly, swap 

dealers, clearing members, and traders 

would be subject to the regulations only 

if carrying large positions. 

The Commission has proposed, but 

not yet determined, that SEFs should 

not be considered to be small entities for 

purposes of the RFA for essentially the 

same reasons that DCMs have 

previously been determined not to be 

small entities.507 Similarly, the 

Commission has proposed, but not yet 

determined, that swap dealers should 

not be considered ‘‘small entities’’ for 

essentially the same reasons that FCMs 

have previously been determined not to 

be small entities.508 For all of the 

reasons stated in those previous 

releases, the Commission has 

determined that SEFs and swap dealers 

are not ‘‘small entities’’ for purposes of 

the RFA. 

The Commission notes that it has not 

previously determined whether clearing 

members should be considered small 

entities for purposes of the RFA. The 

Commission does not believe that 

clearing members who will be subject to 

the requirements of this rulemaking will 

constitute small entities for RFA 

purposes. First, most clearing members 

will also be registered as FCMs, who as 

a category have been previously 

determined to not be small entities. 

Second, any clearing member effected 

by this rule will also, of necessity be a 

large trader, who as a category has also 

been determined to not be small 

entities. For all of these reasons, the 

Commission has determined that 

clearing members are not ‘‘small 

entities’’ for purposes of the RFA. 

Accordingly, the Chairman, on behalf 

of the Commission, certifies, pursuant to 

5 U.S.C. 605(b), that the actions to be 

taken herein will not have a significant 

economic impact on a substantial 

number of small entities. 

C. Paperwork Reduction Act 

1. Overview 

The Paperwork Reduction Act 

(‘‘PRA’’) 509 imposes certain 

requirements on Federal agencies in 

connection with their conducting or 

sponsoring any collection of 

information as defined by the PRA. 

Certain provisions of the regulations 

will result in new collection of 

information requirements within the 

meaning of the PRA. An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid control number. The 

Commission submitted the proposing 

release to the Office of Management and 

Budget (‘‘OMB’’) for review in 

accordance with 44 U.S.C. 3507(d) and 

5 CFR 1320.11. The Commission 

requested that OMB approve and assign 

a new control number for the collections 

of information covered by the proposing 

release. 

The Commission invited the public 

and other Federal agencies to comment 

on any aspect of the reporting and 

recordkeeping burdens discussed above. 

Pursuant to 44 U.S.C. 3506(c)(2)(B), the 


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510CL–WGC supra note 21 at 5. 

511CL–MGEX supra note 74 at 4. 

512 Id. 

513 In this regard the Commission notes that the 

cost estimate for annualized capital and start-up 

costs and annual total operating and maintenance 

costs was $55,000. 

514CL–WGCEF supra note 35 at 25–26. 

515 7 U.S.C. 12(a)(1). 

516 5 U.S.C. 552a. 

517The Commission staff’s estimates concerning 

the wage rates are based on salary information for 

the securities industry compiled by the Securities 

Industry and Financial Markets Association 

(‘‘SIFMA’’). The $78.61 per hour is derived from 

figures from a weighted average of salaries and 

bonuses across different professions from the 

SIFMA Report on Management & Professional 

Earnings in the Securities Industry 2010, modified 

to account for an 1800-hour work-year and 

multiplied by 1.3 to account for overhead and other 

benefits. The wage rate is a weighted national 

average of salary and bonuses for professionals with 

the following titles (and their relative weight): 

‘‘programmer (senior)’’ (30 percent); ‘‘programmer’’ 

(30 percent); ‘‘compliance advisor (intermediate)’’ 

(20 percent); ‘‘systems analyst’’ (10 percent); and 

‘‘assistant/associate general counsel’’ (10 percent). 

518The capital/start-up cost component of 

‘‘annualized capital/start-up, operating, and 

maintenance costs’’ is based on an initial capital/ 

start-up cost that is straight-line depreciated over 

five years. 

Commission solicited comments in 

order to (i) Evaluate whether the 

proposed collections of information are 

necessary for the proper performance of 

the functions of the Commission, 

including whether the information will 

have practical utility, (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed 

collections of information, (iii) 

determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected, and 

(iv) minimize the burden of the 

collections of information on those who 

are to respond, including through the 

use of automated collection techniques 

or other forms of information 

technology. 

The Commission received three 

comments on the burden estimates and 

information collection requirements 

contained in its proposing release. The 

World Gold Council stated that the 

recordkeeping and reporting costs were 

not addressed.510 MGEX argued that the 

Commission’s estimated burden for 

DCMs to determine deliverable supply 

levels was too low.511 Specifically, it 

commented that the Commission’s 

estimate of ‘‘6,000 hours per year for all 

DCMs at a combined annual cost of 

$50,000 among all DCMs’’ would result 

‘‘in an hourly wage of less than $10’’ to 

comply with the rules.512 The combined 

annual cost estimate cited by MGEX 

appears to be the amount the 

Commission estimated for annualized 

capital and start-up costs and annual 

total operating and maintenance 

costs; 513 this estimate is separate from 

any calculation of labor costs. The 

Working Group commented that it could 

not meaningfully respond to the costs 

until it had a complete view of all the 

Dodd-Frank Act rulemakings, that the 

Commission did not provide sufficient 

explanation for its estimates of the 

number of market participants affected 

by the final regulations, and that the 

Commission underestimated wage and 

personnel estimates.514 As further 

discussed below, the Commission has 

carefully reviewed its burden analysis 

and estimates, and it has determined its 

estimates to be reasonable. 

Responses to the collections of 

information contained within these final 

rules are mandatory, and the 

Commission will protect proprietary 

information according to the Freedom of 

Information Act and 17 CFR part 145, 

headed ‘‘Commission Records and 

Information.’’ In addition, the 

Commission emphasizes that section 

8(a)(1) of the Act strictly prohibits the 

Commission, unless specifically 

authorized by the Act, from making 

public ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ 515 The Commission also is 

required to protect certain information 

contained in a government system of 

records pursuant to the Privacy Act of 

1974.516

The title for this collection of 

information is ‘‘Part 151—Position Limit 

Framework for Referenced Contracts.’’ 

OMB has approved and assigned OMB 

control number 3038–[ll] to this 

collection of information. 

2. Information Provided and 

Recordkeeping Duties 

Proposed § 151.4(a)(2) provided for a 

special conditional spot-month limit for 

traders under certain conditions, 

including the submission of a 

certification that the trader met the 

required conditions, to be filed within a 

day after the trader exceeded a 

conditional spot-month limit. The 

Commission anticipated that 

approximately one hundred traders per 

year would submit conditional spotmonth limit certifications and estimated 

that these one hundred entities would 

incur a total burden of 2,400 annual 

labor hours, resulting in a total of 

$189,000 in annual labor costs 517 and 

$1 million in annualized capital, startup,518 total operating, and maintenance 

costs. As described above, the 

Commission has eliminated the 

conditional spot-month limit as 

described in the Proposed Rules. These 

final rules now provide for a limit on 

cash-settled Referenced Contracts of five 

times the limit on the physical-delivery 

Referenced Contract. The cash-settled 

and physical-delivery contracts would 

also be subject to separate class limits, 

and the Commission would impose an 

aggregate limit set at five times the level 

of the spot-month limit in the relevant 

Core Referenced Futures Contract that is 

physically delivered. As such, traders 

need not file a certification to avail 

themselves of the conditional limit for 

cash-settled contracts. Therefore, these 

capital and labor cost estimates do not 

apply to the final regulations. 

Section 151.4(c) requires that DCMs 

submit an estimate of deliverable supply 

for each Referenced Contract that is 

subject to a spot-month position limit 

and listed or executed pursuant to the 

rules of the DCM. Under the Proposed 

Rules, the Commission estimated that 

the reporting would affect 

approximately six entities annually, 

resulting in a total marginal burden, 

across all of these entities, of 6,000 

annual labor hours and $55,000 in 

annualized capital, start-up, total 

operating, and maintenance costs. As 

discussed above, in response to 

comments concerning the process for 

determining deliverable supply, the 

Commission has determined to update 

spot-month limits biennially (every two 

years) instead of annually in the case of 

energy and metal contracts, and to 

stagger the dates on which estimates of 

deliverable supply shall be submitted by 

DCMs. As a result of these changes, the 

Commission estimates that this 

reporting will result in a total marginal 

burden, across the six affected entities, 

of 5,000 annual labor hours for a total 

of $511,000 in annual labor costs and 

$50,000 in annualized capital, start-up, 

total operating, and maintenance costs. 

Section 151.5 sets forth the 

application procedure for bona fide 

hedgers and counterparties to bona fide 

hedging swap transactions that seek an 

exemption from the Commission-set 

Federal position limits for Referenced 

Contracts. If a bona fide hedger seeks to 

claim an exemption from position limits 

because of cash market activities, then 

the hedger would submit a 404 filing 

pursuant to § 151.5(b). The 404 filing 

would be submitted when the bona fide 

hedger exceeds the applicable position 

limit and claims an exemption or when 

its hedging needs increase. Similarly, 

parties to bona fide hedging swap 

transactions would be required to 

submit a 404S filing to qualify for a 

hedging exemption, which would also 

be submitted when the bona fide hedger 

exceeds the applicable position limit 

and claims an exemption or when its 


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519The Commission notes that entities would 

have to retain such books and records in 

compliance with § 1.31. 

520For the visibility level-related 404 filing 

requirements, the estimated burden is based on 

reporting duties not already accounted for in the 

hedging needs increase. If a bona fide 

hedger seeks an exemption for 

anticipated commercial production or 

anticipatory commercial requirements, 

then the hedger would submit a 404A 

filing pursuant to § 151.5(c). 

Under the Proposed Rules, 404 and 

404S filings would have been required 

on a daily basis. In light of comments 

concerning the burden of daily filings to 

both market participants and the 

Commission, the final regulations 

require only monthly reporting of 404 

and 404S filings. These monthly reports 

would provide information on daily 

positions for the month reporting 

period. 

The Commission estimated in the 

Proposed Rules that these bona fide 

hedging-related reporting requirements 

would affect approximately two 

hundred entities annually and result in 

a total burden of approximately $37.6 

million across all of these entities, 

168,000 annual labor hours, resulting in 

a total of $13.2 million in annual labor 

costs and $25.4 million in annualized 

capital, start-up, total operating, and 

maintenance costs. As a result of 

modifications made to the Proposed 

Rules, under the final regulations these 

bona fide hedging-related reporting 

requirements will affect approximately 

two hundred entities annually and 

result in a total burden of approximately 

$28.6 million across all of these entities, 

29,700 annual labor hours, resulting in 

a total of $2.3 million in annual labor 

costs and $26.3 million in annualized 

capital, start-up, total operating, and 

maintenance costs. 

With regard to 404 filings, under the 

Proposed Rules, the Commission 

estimated that 404 filing requirements 

would affect approximately ninety 

entities annually, resulting in a total 

burden, across all of these entities, of 

108,000 total annual labor hours and 

$11.7 million in annualized capital, 

start-up, total operating, and 

maintenance costs. Under the final 

regulations, 404 filing requirements will 

affect approximately ninety entities 

annually, resulting in a total burden, 

across all of these entities, of 108,000 

total annual labor hours and $11.7 

million in annualized capital, start-up, 

total operating, and maintenance costs. 

With regard to 404A filings, under the 

Proposed Rules, the Commission 

estimated that 404A filing requirements 

would affect approximately sixty 

entities annually, resulting in a total 

burden, across all of these entities, of 

6,000 total annual labor hours and $4.2 

million in annualized capital, start-up, 

total operating, and maintenance costs. 

In addition to adjustments in these 

estimates stemming from the change in 

the frequency of filings, the estimate of 

entities affected by 404A filing 

requirements has been modified to 

reflect the fact that the final regulations 

include certain anticipatory hedging 

exemptions that were absent from the 

Proposed Rules. Thus, under the final 

regulations, 404A filing requirements 

will affect approximately ninety entities 

annually, resulting in a total burden, 

across all of these entities, of 2,700 total 

annual labor hours and $6.3 million in 

annualized capital, start-up, total 

operating, and maintenance costs. 

With regard to 404S filings, under the 

Proposed Rules the Commission 

estimated that 404S filing requirements 

would affect approximately forty-five 

entities annually, resulting in a total 

burden, across all of these entities, of 

54,000 total annual labor hours and $9.5 

million in annualized capital, start-up, 

total operating, and maintenance costs. 

Under the final regulations, 404S filing 

requirements will affect approximately 

forty-five entities annually, resulting in 

a total burden, across all of these 

entities, of 16,200 total annual labor 

hours and $9.5 million in annualized 

capital, start-up, total operating, and 

maintenance costs. 

Section 151.5(e) specifies 

recordkeeping requirements for traders 

who claim bona fide hedge exemptions. 

These recordkeeping requirements 

include complete books and records 

concerning all of their related cash, 

futures, and swap positions and 

transactions and make such books and 

records, along with a list of swap 

counterparties to the Commission. 

Regulations 151.5(g) and 151.5(h) 

provide procedural documentation 

requirements for those availing 

themselves of a bona fide hedging 

transaction exemption. These firms 

would be required to document a 

representation and confirmation by at 

least one party that the swap 

counterparty is relying on a bona fide 

hedge exemption, along with a 

confirmation of receipt by the other 

party to the swap. Paragraph (h) of 

§ 151.5 also requires that the written 

representation and confirmation be 

retained by the parties and available to 

the Commission upon request.519 The 

marginal impact of this requirement is 

limited because of its overlap with 

existing recordkeeping requirements 

under § 15.03. The Commission 

estimates, as it did under the Proposed 

Rules, that bona fide hedging-related 

recordkeeping regulations will affect 

approximately one hundred sixty 

entities, resulting in a total burden, 

across all of these entities, of 40,000 

total annual labor hours and $10.4 

million in annualized capital, start-up, 

total operating, and maintenance costs. 

Section 151.6 requires traders with 

positions exceeding visibility levels in 

Referenced Contracts in metal and 

energy commodities to submit 

additional information about cash 

market and derivatives activity in 

substantially the same commodity. 

Section 151.6(b) requires the submission 

of a 401 filing which would provide 

basic position information on the 

position exceeding the visibility level. 

Section151.6(c) requires additional 

information, through a 402S filing, on a 

trader’s uncleared swaps in 

substantially the same commodity. The 

Commission has determined to increase 

the visibility levels from the proposed 

levels, meaning fewer market 

participants will be affected by the 

relevant reporting requirements. In 

addition, the Proposed Rules included a 

requirement to submit 404A filings 

under proposed § 151.6, but the 

Commission has eliminated this 

requirement in order to reduce the 

compliance burden for firms reporting 

under § 151.6. 

Requirements under 401 filing 

reporting regulations in the Proposed 

Rules would have affected 

approximately one hundred forty 

entities annually, resulting in a total 

burden, across all of these entities, of 

16,800 total annual labor hours and 

$15.4 million in annualized capital, 

start-up, total operating, and 

maintenance costs. In the final 

regulations, these requirements will 

affect approximately seventy entities 

annually, resulting in a total burden, 

across all of these entities, of 8,400 total 

annual labor hours and $5.3 million in 

annualized capital, start-up, total 

operating, and maintenance costs. 

Requirements under 402S filing 

reporting regulations in the Proposed 

Rules would have affected 

approximately seventy entities 

annually, resulting in a total burden, 

across all of these entities, of 5,600 total 

annual labor hours and $4.9 million in 

annualized capital, start-up, total 

operating, and maintenance costs. In the 

final regulations, the Commission has 

eliminated the 402S filing, thus 

eliminating any burden stemming from 

such reports. 

Requirements under visibility levelrelated 404 filing reporting 

regulations 520 in the Proposed Rules 


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burden estimate for those submitting 404 filings 

pursuant to proposed § 151.5. For many of these 

firms, the experience and infrastructure developed 

submitting or preparing to submit a 404 filing under 

§ 151.5 would reduce the marginal burden imposed 

by having to submit filings under § 151.6. 

would have affected approximately 

sixty entities annually, resulting in a 

total burden, across all of these entities, 

of 4,800 total annual labor hours and 

$4.2 million in annualized capital, startup, total operating, and maintenance 

costs. In the final regulations, these 

requirements will affect approximately 

thirty entities annually, resulting in a 

total burden, across all of these entities, 

of 2,400 total annual labor hours and 

$2.1 million in annualized capital, startup, total operating, and maintenance 

costs. 

As noted above, 404A filing 

requirements under § 151.6 have been 

eliminated in the final regulations. 

Therefore, the burden estimates for this 

requirement under the Proposed Rules 

(approximately forty entities affected 

annually, resulting in a total burden, 

across all of these entities, of 3,200 total 

annual labor hours and $2.8 million in 

annualized capital, start-up, total 

operating, and maintenance costs) do 

not apply to the final regulations. 

As a result of this modification and 

higher visibility levels, estimates for the 

overall burden of visibility level-related 

reporting regulations have been 

modified. In the Proposed Rules, the 

Commission estimated that visibility 

level-related reporting regulations 

would affect approximately one 

hundred forty entities annually, 

resulting in a total burden, across all of 

these entities, of 30,400 annual labor 

hours, resulting, a total of $2.4 million 

in annual labor costs, and $27.3 million 

in annualized capital, start-up, total 

operating, and maintenance costs. 

Under the final regulations, visibility 

level-related reporting regulations will 

affect approximately seventy entities 

annually, resulting in a total burden, 

across all of these entities, of 8,160 

annual labor hours, resulting in a total 

of $642,000 in annual labor costs and 

$7.4 million in annualized capital, startup, total operating, and maintenance 

costs. 

Section 151.7 concerns the 

aggregation of trader accounts. Proposed 

§ 151.7(g) provided for a disaggregation 

exemption for certain limited partners 

in a pool, futures commission 

merchants that met certain independent 

trading requirements, and 

independently controlled and managed 

non-financial entities in which another 

entity had an ownership or equity 

interest of 10 percent or greater. In all 

three cases, the exemption would 

become effective upon the 

Commission’s approval of an 

application described in proposed 

§ 151.7(g), and renewal was required for 

each year following the initial 

application for exemption. 

As discussed in greater detail above, 

in the final regulations the Commission 

has made several modifications to 

account aggregation rules and 

exemptions. The modifications include 

reinstatement of the IAC exemption and 

exemption for certain interests in 

commodity pools (both of which are 

part of current Commission account 

aggregation policy but were absent from 

the Proposed Rules), an exemption from 

aggregation related to the underwriting 

of securities, and an exemption for 

situations in which aggregation across 

commonly owned affiliates would 

require the sharing of position 

information that would result in the 

violation of Federal law. In addition, the 

final regulations contain a modified 

procedure for exemptive relief under 

§ 151.7. The Commission has eliminated 

the provision in the Proposed Rules 

requiring a trader seeking a 

disaggregation exemption to file an 

application for exemptive relief as well 

as annual renewals. Instead, under the 

final regulations the trader must file a 

notice, effective upon filing, setting 

forth the circumstances that warrant 

disaggregation and a certification that 

they meet the relevant conditions. 

As a result of these modifications, 

estimates for the burden of reporting 

regulations related to account 

aggregation have been modified. Under 

the Proposed Rules, the Commission 

estimated that these reporting 

regulations would affect approximately 

sixty entities, resulting in a total burden, 

across all of these entities, of 300,000 

annual labor hours and $9.9 million in 

annualized capital, start-up, total 

operating, and maintenance costs. 

Under the final regulations, these 

reporting regulations will affect 

approximately ninety entities, resulting 

in a total burden, across all of these 

entities, of 225,000 annual labor hours 

and $5.9 million in annualized capital, 

start-up, total operating, and 

maintenance costs. 

List of Subjects 

17 CFR Part 1 

Brokers, Commodity futures, 

Consumer protection, Reporting and 

recordkeeping requirements. 

17 CFR Part 150 

Commodity futures, Cotton, Grains. 

17 CFR Part 151 

Position limits, Bona fide hedging, 

Referenced Contracts. 

In consideration of the foregoing, 

pursuant to the authority contained in 

the Commodity Exchange Act, the 

Commission hereby amends chapter I of 

title 17 of the Code of Federal 

Regulations as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. The authority citation for part 1 is 

revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 

6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1, 

16, 16a, 19, 21, 23, and 24, as amended by 

Title VII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Pub. L. 

111–203, 124 Stat. 1376 (2010). 

§ 1.3 [Revised] 

■ 2. Revise § 1.3 (z) to read as follows: 

(z) Bona fide hedging transactions 

and positions for excluded 

commodities. (1) General definition. 

Bona fide hedging transactions and 

positions shall mean any agreement, 

contract or transaction in an excluded 

commodity on a designated contract 

market or swap execution facility that is 

a trading facility, where such 

transactions or positions normally 

represent a substitute for transactions to 

be made or positions to be taken at a 

later time in a physical marketing 

channel, and where they are 

economically appropriate to the 

reduction of risks in the conduct and 

management of a commercial enterprise, 

and where they arise from: 

(i) The potential change in the value 

of assets which a person owns, 

produces, manufactures, processes, or 

merchandises or anticipates owning, 

producing, manufacturing, processing, 

or merchandising, 

(ii) The potential change in the value 

of liabilities which a person owns or 

anticipates incurring, or 

(iii) The potential change in the value 

of services which a person provides, 

purchases, or anticipates providing or 

purchasing. 

(iv) Notwithstanding the foregoing, no 

transactions or positions shall be 

classified as bona fide hedging unless 

their purpose is to offset price risks 

incidental to commercial cash or spot 

operations and such positions are 

established and liquidated in an orderly 

manner in accordance with sound 

commercial practices and, for 

transactions or positions on contract 

markets subject to trading and position 

limits in effect pursuant to section 4a of 


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the Act, unless the provisions of 

paragraphs (z)(2) and (3) of this section 

have been satisfied. 

(2) Enumerated hedging transactions. 

The definitions of bona fide hedging 

transactions and positions in paragraph 

(z)(1) of this section includes, but is not 

limited to, the following specific 

transactions and positions: 

(i) Sales of any agreement, contract, or 

transaction in an excluded commodity 

on a designated contract market or swap 

execution facility that is a trading 

facility which do not exceed in quantity: 

(A) Ownership or fixed-price 

purchase of the same cash commodity 

by the same person; and 

(B) Twelve months’ unsold 

anticipated production of the same 

commodity by the same person 

provided that no such position is 

maintained in any agreement, contract 

or transaction during the five last 

trading days. 

(ii) Purchases of any agreement, 

contract or transaction in an excluded 

commodity on a designated contract 

market or swap execution facility that is 

a trading facility which do not exceed 

in quantity: 

(A) The fixed-price sale of the same 

cash commodity by the same person; 

(B) The quantity equivalent of fixedprice sales of the cash products and byproducts of such commodity by the 

same person; and 

(C) Twelve months’ unfilled 

anticipated requirements of the same 

cash commodity for processing, 

manufacturing, or feeding by the same 

person, provided that such transactions 

and positions in the five last trading 

days of any agreement, contract or 

transaction do not exceed the person’s 

unfilled anticipated requirements of the 

same cash commodity for that month 

and for the next succeeding month. 

(iii) Offsetting sales and purchases in 

any agreement, contract or transaction 

in an excluded commodity on a 

designated contract market or swap 

execution facility that is a trading 

facility which do not exceed in quantity 

that amount of the same cash 

commodity which has been bought and 

sold by the same person at unfixed 

prices basis different delivery months of 

the contract market, provided that no 

such position is maintained in any 

agreement, contract or transaction 

during the five last trading days. 

(iv) Purchases or sales by an agent 

who does not own or has not contracted 

to sell or purchase the offsetting cash 

commodity at a fixed price, provided 

that the agent is responsible for the 

merchandising of the cash position that 

is being offset, and the agent has a 

contractual arrangement with the person 

who owns the commodity or has the 

cash market commitment being offset. 

(v) Sales and purchases described in 

paragraphs (z)(2)(i) through (iv) of this 

section may also be offset other than by 

the same quantity of the same cash 

commodity, provided that the 

fluctuations in value of the position for 

in any agreement, contract or 

transaction are substantially related to 

the fluctuations in value of the actual or 

anticipated cash position, and provided 

that the positions in any agreement, 

contract or transaction shall not be 

maintained during the five last trading 

days. 

(3) Non-Enumerated cases. A 

designated contract market or swap 

execution facility that is a trading 

facility may recognize, consistent with 

the purposes of this section, 

transactions and positions other than 

those enumerated in paragraph (2) of 

this section as bona fide hedging. Prior 

to recognizing such non-enumerated 

transactions and positions, the 

designated contract market or swap 

execution facility that is a trading 

facility shall submit such rules for 

Commission review under section 5c of 

the Act and part 40 of this chapter. 

* * * * * 

§ 1.47 [Removed and Reserved] 

■ 3. Remove and reserve § 1.47. 

§ 1.48 [Removed and Reserved] 

■ 4. Remove and reserve § 1.48. 

PART 150—LIMITS ON POSITIONS 

■ 5. Revise § 150.2 to read as follows: 

§ 150.2 Position limits. 

No person may hold or control 

positions, separately or in combination, 

net long or net short, for the purchase 

or sale of a commodity for future 

delivery or, on a futures-equivalent 

basis, options thereon, in excess of the 

following: 

SPECULATIVE POSITION LIMITS

Limits by number of contracts 

Contract Spot month Single month All months 

Chicago Board of Trade 

Corn and Mini-Corn 1 ....................................................................................................... 600 33,000 33,000 

Oats ................................................................................................................................. 600 2,000 2,000 

Soybeans and Mini-Soybeans 1 ....................................................................................... 600 15,000 15,000 

Wheat and Mini-Wheat 1 .................................................................................................. 600 12,000 12,000 

Soybean Oil ..................................................................................................................... 540 8,000 8,000 

Soybean Meal .................................................................................................................. 720 6,500 6,500 

Minneapolis Grain Exchange 

Hard Red Spring Wheat .................................................................................................. 600 12,000 12,000 

ICE Futures U.S. 

Cotton No. 2 .................................................................................................................... 300 5,000 5,000 

Kansas City Board of Trade 

Hard Winter Wheat .......................................................................................................... 600 12,000 12,000 

1For purposes of compliance with these limits, positions in the regular sized and mini-sized contracts shall be aggregated. 


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■ 6. Add part 151 to read as follows: 

PART 151—POSITION LIMITS FOR 

FUTURES AND SWAPS 

Sec. 

151.1 Definitions. 

151.2 Core Referenced Futures Contracts. 

151.3 Spot months for Referenced 

Contracts. 

151.4 Position limits for Referenced 

Contracts. 

151.5 Bona fide hedging and other 

exemptions for Referenced Contracts. 

151.6 Position visibility. 

151.7 Aggregation of positions. 

151.8 Foreign boards of trade. 

151.9 Pre-existing positions. 

151.10 Form and manner of reporting and 

submitting information or filings. 

151.11 Designated contract market and 

swap execution facility position limits 

and accountability rules. 

151.12 Delegation of authority to the 

Director of the Division of Market 

Oversight. 

151.13 Severability. 

Appendix A to Part 151—Spot-Month 

Position Limits 

Appendix B to Part 151—Examples of Bona 

Fide Hedging Transactions and Positions 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 

6g, 6t, 12a, 19, as amended by Title VII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376 (2010). 

§ 151.1 Definitions. 

As used in this part— 

Basis contract means an agreement, 

contract or transaction that is cashsettled based on the difference in price 

of the same commodity (or substantially 

the same commodity) at different 

delivery locations; 

Calendar spread contract means a 

cash-settled agreement, contract, or 

transaction that represents the 

difference between the settlement price 

in one or a series of contract months of 

an agreement, contract or transaction 

and the settlement price of another 

contract month or another series of 

contract months’ settlement prices for 

the same agreement, contract or 

transaction. 

Commodity index contract means an 

agreement, contract, or transaction that 

is not a basis or any type of spread 

contract, based on an index comprised 

of prices of commodities that are not the 

same or substantially the same; 

provided that, a commodity index 

contract used to circumvent speculative 

position limits shall be considered to be 

a Referenced Contract for the purpose of 

applying the position limits of § 151.4. 

Core Referenced Futures Contract 

means a futures contract that is listed in 

§ 151.2. 

Eligible Entity means a commodity 

pool operator; the operator of a trading 

vehicle which is excluded, or which 

itself has qualified for exclusion from 

the definition of the term ‘‘pool’’ or 

‘‘commodity pool operator,’’ 

respectively, under § 4.5 of this chapter 

the limited partner or shareholder in a 

commodity pool the operator of which 

is exempt from registration under § 4.13 

of this chapter; a commodity trading 

advisor; a bank or trust company; a 

savings association; an insurance 

company; or the separately organized 

affiliates of any of the above entities: 

(1) Which authorizes an independent 

account controller independently to 

control all trading decisions with 

respect to the eligible entity’s client 

positions and accounts that the 

independent account controller holds 

directly or indirectly, or on the eligible 

entity’s behalf, but without the eligible 

entity’s day-to-day direction; and 

(2) Which maintains: 

(i) Only such minimum control over 

the independent account controller as is 

consistent with its fiduciary 

responsibilities to the managed 

positions and accounts, and necessary 

to fulfill its duty to supervise diligently 

the trading done on its behalf; or 

(ii) If a limited partner or shareholder 

of a commodity pool the operator of 

which is exempt from registration under 

§ 4.13 of this chapter, only such limited 

control as is consistent with its status. 

Entity means a ‘‘person’’ as defined in 

section 1a of the Act. 

Excluded commodity means an 

‘‘excluded commodity’’ as defined in 

section 1a of the Act. 

Independent Account Controller 

means a person: 

(1) Who specifically is authorized by 

an eligible entity independently to 

control trading decisions on behalf of, 

but without the day-to-day direction of, 

the eligible entity; 

(2) Over whose trading the eligible 

entity maintains only such minimum 

control as is consistent with its 

fiduciary responsibilities for managed 

positions and accounts to fulfill its duty 

to supervise diligently the trading done 

on its behalf or as is consistent with 

such other legal rights or obligations 

which may be incumbent upon the 

eligible entity to fulfill; 

(3) Who trades independently of the 

eligible entity and of any other 

independent account controller trading 

for the eligible entity; 

(4) Who has no knowledge of trading 

decisions by any other independent 

account controller; and 

(5) Who is registered as a futures 

commission merchant, an introducing 

broker, a commodity trading advisor, or 

an associated person of any such 

registrant, or is a general partner of a 

commodity pool the operator of which 

is exempt from registration under § 4.13 

of this chapter. 

Intercommodity spread contract 

means a cash-settled agreement, 

contract or transaction that represents 

the difference between the settlement 

price of a Referenced Contract and the 

settlement price of another contract, 

agreement, or transaction that is based 

on a different commodity. 

Referenced Contract means, on a 

futures equivalent basis with respect to 

a particular Core Referenced Futures 

Contract, a Core Referenced Futures 

Contract listed in § 151.2, or a futures 

contract, options contract, swap or 

swaption, other than a basis contract or 

commodity index contract, that is: 

(1) Directly or indirectly linked, 

including being partially or fully settled 

on, or priced at a fixed differential to, 

the price of that particular Core 

Referenced Futures Contract; or 

(2) Directly or indirectly linked, 

including being partially or fully settled 

on, or priced at a fixed differential to, 

the price of the same commodity 

underlying that particular Core 

Referenced Futures Contract for delivery 

at the same location or locations as 

specified in that particular Core 

Referenced Futures Contract. 

Spot month means, for Referenced 

Contracts, the spot month defined in 

§ 151.3. 

Spot-month, single-month, and allmonths-combined position limits mean, 

for Referenced Contracts based on a 

commodity identified in § 151.2, the 

maximum number of contracts a trader 

may hold as set forth in § 151.4. 

Spread contract means either a 

calendar spread contract or an 

intercommodity spread contract. 

Swap means ‘‘swap’’ as defined in 

section 1a of the Act and as further 

defined by the Commission. 

Swap dealer means ‘‘swap dealer’’ as 

that term is defined in section 1a of the 

Act and as further defined by the 

Commission. 

Swaption means an option to enter 

into a swap or a physical commodity 

option. 

Trader means a person that, for its 

own account or for an account that it 

controls, makes transactions in 

Referenced Contracts or has such 

transactions made. 

§ 151.2 Core Referenced Futures 

Contracts. 

(a) Agricultural commodities. Core 

Referenced Futures Contracts in 

agricultural commodities include the 

following futures contracts and options 

thereon: 

(1) Core Referenced Futures Contracts 

in legacy agricultural commodities: 


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(i) Chicago Board of Trade Corn (C); 

(ii) Chicago Board of Trade Oats (O); 

(iii) Chicago Board of Trade Soybeans 

(S); 

(iv) Chicago Board of Trade Soybean 

Meal (SM); 

(v) Chicago Board of Trade Soybean 

Oil (BO); 

(vi) Chicago Board of Trade Wheat 

(W); 

(vii) ICE Futures U.S. Cotton No. 2 

(CT); 

(viii) Kansas City Board of Trade 

Hard Winter Wheat (KW); and 

(ix) Minneapolis Grain Exchange 

Hard Red Spring Wheat (MWE). 

(2) Core Referenced Futures Contracts 

in non-legacy agricultural commodities: 

(i) Chicago Mercantile Exchange Class 

III Milk (DA); 

(ii) Chicago Mercantile Exchange 

Feeder Cattle (FC); 

(iii) Chicago Mercantile Exchange 

Lean Hog (LH); 

(iv) Chicago Mercantile Exchange Live 

Cattle (LC); 

(v) Chicago Board of Trade Rough 

Rice (RR); 

(vi) ICE Futures U.S. Cocoa (CC); 

(vii) ICE Futures U.S. Coffee C (KC); 

(viii) ICE Futures U.S. FCOJ–A(OJ); 

(ix) ICE Futures U.S. Sugar No. 11 

(SB); and 

(x) ICE Futures U.S. Sugar No. 16 

(SF). 

(b) Metal commodities. Core 

Referenced Futures Contracts in metal 

commodities include the following 

futures contracts and options thereon: 

(1) Commodity Exchange, Inc. Copper 

(HG); 

(2) Commodity Exchange, Inc. Gold 

(GC); 

(3) Commodity Exchange, Inc. Silver 

(SI); 

(4) New York Mercantile Exchange 

Palladium (PA); and 

(5) New York Mercantile Exchange 

Platinum (PL). 

(c) Energy commodities. The Core 

Referenced Futures Contracts in energy 

commodities include the following 

futures contracts and options thereon: 

(1) New York Mercantile Exchange 

Henry Hub Natural Gas (NG); 

(2) New York Mercantile Exchange 

Light Sweet Crude Oil (CL); 

(3) New York Mercantile Exchange 

New York Harbor Gasoline Blendstock 

(RB); and 

(4) New York Mercantile Exchange 

New York Harbor Heating Oil (HO). 

§ 151.3 Spot months for Referenced 

Contracts. 

(a) Agricultural commodities. For 

Referenced Contracts based on 

agricultural commodities, the spot 

month shall be the period of time 

commencing: 

(1) At the close of business on the 

business day prior to the first notice day 

for any delivery month and terminating 

at the end of the delivery period in the 

underlying Core Referenced Futures 

Contract for the following Referenced 

Contracts: 

(i) ICE Futures U.S. Cocoa (CC) 

contract; 

(ii) ICE Futures U.S. Coffee C (KC) 

contract; 

(iii) ICE Futures U.S. Cotton No. 2 

(CT) contract; 

(iv) ICE Futures U.S. FCOJ–A (OJ) 

contract; 

(v) Chicago Board of Trade Corn (C) 

contract; 

(vi) Chicago Board of Trade Oats (O) 

contract; 

(vii) Chicago Board of Trade Rough 

Rice (RR) contract; 

(viii) Chicago Board of Trade 

Soybeans (S) contract; 

(ix) Chicago Board of Trade Soybean 

Meal (SM) contract; 

(x) Chicago Board of Trade Soybean 

Oil (BO) contract; 

(xi) Chicago Board of Trade Wheat 

(W) contract; 

(xii) Minneapolis Grain Exchange 

Hard Red Spring Wheat (MW) contract; 

and 

(xiii) Kansas City Board of Trade 

Hard Winter Wheat (KW) contract; 

(2) At the close of business of the first 

business day after the fifteenth calendar 

day of the calendar month preceding the 

delivery month if the fifteenth calendar 

day is a business day, or at the close of 

business of the second business day 

after the fifteenth day if the fifteenth day 

is a non-business day and terminating at 

the end of the delivery period in the 

underlying Core Referenced Futures 

Contract for the ICE Futures U.S. Sugar 

No. 11 (SB) Referenced Contract; 

(3) At the close of business on the 

sixth business day prior to the last 

trading day and terminating at the end 

of the delivery period in the underlying 

Core Referenced Futures Contract for 

the ICE Futures U.S. Sugar No. 16 (SF) 

Referenced Contract; 

(4) At the close of business on the 

business day immediately preceding the 

last five business days of the contract 

month and terminating at the end of the 

delivery period in the underlying Core 

Referenced Futures Contract for the 

Chicago Mercantile Exchange Live 

Cattle (LC) Referenced Contract; 

(5) On the ninth trading day prior to 

the last trading day and terminating on 

the last trading day for Chicago 

Mercantile Exchange Feeder Cattle (FC) 

contract; 

(6) On the first trading day of the 

contract month and terminating on the 

last trading day for the Chicago 

Mercantile Exchange Class III Milk (DA) 

contract; and 

(7) At the close of business on the 

fifth business day prior to the last 

trading day and terminating on the last 

trading day for the Chicago Mercantile 

Exchange Lean Hog (LH) contract. 

(b) Metal commodities. The spot 

month shall be the period of time 

commencing at the close of business on 

the business day prior to the first notice 

day for any delivery month and 

terminating at the end of the delivery 

period in the underlying Core 

Referenced Futures Contract for the 

following Referenced Contracts: 

(1) Commodity Exchange, Inc. Gold 

(GC) contract; 

(2) Commodity Exchange, Inc. Silver 

(SI) contract; 

(3) Commodity Exchange, Inc. Copper 

(HG) contract; 

(4) New York Mercantile Exchange 

Palladium (PA) contract; and 

(5) New York Mercantile Exchange 

Platinum (PL) contract. 

(c) Energy commodities. The spot 

month shall be the period of time 

commencing at the close of business of 

the third business day prior to the last 

day of trading in the underlying Core 

Referenced Futures Contract and 

terminating at the end of the delivery 

period for the following Referenced 

Contracts: 

(1) New York Mercantile Exchange 

Light Sweet Crude Oil (CL) contract; 

(2) New York Mercantile Exchange 

New York Harbor No. 2 Heating Oil 

(HO) contract; 

(3) New York Mercantile Exchange 

New York Harbor Gasoline Blendstock 

(RB) contract; and 

(4) New York Mercantile Exchange 

Henry Hub Natural Gas (NG) contract. 

§ 151.4 Position limits for Referenced 

Contracts. 

(a) Spot-month position limits. In 

accordance with the procedure in 

paragraph (d) of this section, and except 

as provided or as otherwise authorized 

by § 151.5, no trader may hold or 

control a position, separately or in 

combination, net long or net short, in 

Referenced Contracts in the same 

commodity when such position is in 

excess of: 

(1) For physical-delivery Referenced 

Contracts, a spot-month position limit 

that shall be based on one-quarter of the 

estimated spot-month deliverable 

supply as established by the 

Commission pursuant to paragraphs 

(d)(1) and (d)(2) of this section; and 

(2) For cash-settled Referenced 

Contracts: 

(i) A spot-month position limit that 

shall be based on one-quarter of the 


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estimated spot-month deliverable 

supply as established by the 

Commission pursuant to paragraphs 

(d)(1) and (d)(2) of this section. 

Provided, however, 

(ii) For New York Mercantile 

Exchange Henry Hub Natural Gas 

Referenced Contracts: 

(A) A spot-month position limit equal 

to five times the spot-month position 

limit established by the Commission for 

the physical-delivery New York 

Mercantile Exchange Henry Hub Natural 

Gas Referenced Contract pursuant to 

paragraph (a)(1); and 

(B) An aggregate spot-month position 

limit for physical-delivery and cashsettled New York Mercantile Exchange 

Henry Hub Natural Gas Referenced 

Contracts equal to five times the spotmonth position limit established by the 

Commission for the physical-delivery 

New York Mercantile Exchange Henry 

Hub Natural Gas Referenced Contract 

pursuant to paragraph (a)(1). 

(b) Non-spot-month position limits. In 

accordance with the procedure in 

paragraph (d) of this section, and except 

as otherwise authorized in § 151.5, no 

person may hold or control positions, 

separately or in combination, net long or 

net short, in the same commodity when 

such positions, in all months combined 

(including the spot month) or in a single 

month, are in excess of: 

(1) Non-legacy Referenced Contract 

position limits. All-months-combined 

aggregate and single-month position 

limits, fixed by the Commission based 

on 10 percent of the first 25,000 

contracts of average all-monthscombined aggregated open interest with 

a marginal increase of 2.5 percent 

thereafter as established by the 

Commission pursuant to paragraph 

(d)(3) of this section; 

(2) Aggregate open interest 

calculations for non-spot-month 

position limits for non-legacy 

Referenced Contracts. (i) For the 

purpose of fixing the speculative 

position limits for non-legacy 

Referenced Contracts in paragraph (b)(1) 

of this section, the Commission shall 

determine: 

(A) The average all-months-combined 

aggregate open interest, which shall be 

equal to the sum, for 12 or 24 months 

of values obtained under paragraph (B) 

and (C) of this section for a period of 12 

or 24 months prior to the fixing date 

divided by 12 or 24 respectively as of 

the last day of each calendar month; 

(B) The all-months-combined futures 

open interest of a Referenced Contract is 

equal to the sum of the month-end open 

interest for all of the Referenced 

Contract’s open contract months in 

futures and option contracts (on a delta 

adjusted basis) across all designated 

contract markets; and 

(C) The all-months-combined swaps 

open interest is equal to the sum of all 

of a Referenced Contract’s month-end 

open swaps positions, considering open 

positions attributed to both cleared and 

uncleared swaps, where the uncleared 

all-months-combined swaps open 

positions shall be the absolute sum of 

swap dealers’ net uncleared open swaps 

positions by counterparty and by single 

Referenced Contract month as reported 

to the Commission pursuant to part 20 

of this chapter, provided that, other than 

for the purpose of determining initial 

non-spot-month position limits, open 

swaps positions attributed to swaps 

with two swap dealer counterparties 

shall be counted once for the purpose of 

determining uncleared all-monthscombined swaps open positions, 

provided further that, upon entry of an 

order under § 20.9 of this chapter 

determining that operating swap data 

repositories are processing positional 

data that will enable the Commission 

effectively to conduct surveillance in 

swaps, the Commission shall rely on 

data from such swap data repositories to 

compute the all-months-combined 

swaps open interest; 

(ii) Notwithstanding the provisions of 

this section, for the purpose of 

determining initial non-spot-month 

position limits for non-legacy 

Referenced Contracts, the Commission 

may estimate uncleared all-monthscombined swaps open positions based 

on uncleared open swaps positions 

reported to the Commission pursuant to 

part 20 of this chapter by clearing 

organizations or clearing members that 

are swap dealers; and 

(3) Legacy agricultural Referenced 

Contract position limits. All-monthscombined aggregate and single-month 

position limits, fixed by the 

Commission at the levels provided 

below as established by the Commission 

pursuant to paragraph (d)(4) of this 

section: 

Referenced contract Position limits 

(i) Chicago Board of Trade Corn (C) contract ............................................................................................................................. 33,000 

(ii) Chicago Board of Trade Oats (O) contract ............................................................................................................................ 2,000 

(iii) Chicago Board of Trade Soybeans (S) contract ................................................................................................................... 15,000 

(iv) Chicago Board of Trade Wheat (W) contract ....................................................................................................................... 12,000 

(v) Chicago Board of Trade Soybean Oil (BO) contract ............................................................................................................. 8,000 

(vi) Chicago Board of Trade Soybean Meal (SM) contract ......................................................................................................... 6,500 

(vii) Minneapolis Grain Exchange Hard Red Spring Wheat (MW) contract ................................................................................ 12,000 

(viii) ICE Futures U.S. Cotton No. 2 (CT) contract ..................................................................................................................... 5,000 

(ix) Kansas City Board of Trade Hard Winter Wheat (KW) contract .......................................................................................... 12,000 

(c) Netting of positions. (1) For 

Referenced Contracts in the spot month. 

(i) For the spot-month position limit in 

paragraph (a) of this section, a trader’s 

positions in the physical-delivery 

Referenced Contract and cash-settled 

Referenced Contract are calculated 

separately. A trader cannot net any 

physical-delivery Referenced Contract 

with cash-settled Referenced Contracts 

towards determining the trader’s 

positions in each of the physicaldelivery Referenced Contract and cashsettled Referenced Contracts in 

paragraph (a) of this section. However, 

a trader can net positions in cash-settled 

Referenced Contracts in the same 

commodity. 

(ii) Notwithstanding the netting 

provision in paragraph (c)(1)(i) of this 

section, for the aggregate spot-month 

position limit in New York Mercantile 

Exchange Henry Hub Natural Gas 

Referenced Contracts in paragraph 

(a)(2)(ii) of this section, a trader’s 

positions shall be combined and the net 

resulting position in the physicaldelivery Referenced Contract and cashsettled Referenced Contracts shall be 

applied towards determining the 

trader’s aggregate position. 

(2) For the purpose of applying nonspot-month position limits, a trader’s 

position in a Referenced Contract shall 

be combined and the net resulting 

position shall be applied towards 

determining the trader’s aggregate 

single-month and all-months-combined 

position. 

(d) Establishing and effective dates of 

position limits. (1) Initial spot-month 

position limits for Referenced Contracts. 

(i) Sixty days after the term ‘‘swap’’ is 


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further defined under the Wall Street 

Transparency and Accountability Act of 

2010, the spot-month position limits for 

Referenced Contracts referred to in 

Appendix A shall apply to all the 

provisions of this part. 

(2) Subsequent spot-month position 

limits for Referenced Contracts. (i) 

Commencing January 1st of the second 

calendar year after the term ‘‘swap’’ is 

further defined under the Wall Street 

Transparency and Accountability Act of 

2010, the Commission shall fix position 

limits by Commission order that shall 

supersede the initial limits established 

under paragraph (d)(1) of this section. 

(ii) In fixing spot-month position 

limits for Referenced Contracts, the 

Commission shall utilize the estimates 

of deliverable supply provided by a 

designated contract market under 

paragraph (d)(2)(iii) of this section 

unless the Commission determines to 

rely on its own estimate of deliverable 

supply. 

(iii) Each designated contract market 

shall submit to the Commission an 

estimate of deliverable supply for each 

Core Referenced Futures Contract that is 

subject to a spot-month position limit 

and listed or executed pursuant to the 

rules of the designated contract market 

according to the following schedule 

commencing January 1st of the second 

calendar year after the term ‘‘swap’’ is 

further defined under the Wall Street 

Transparency and Accountability Act of 

2010: 

(A) For metal Core Referenced Futures 

Contracts listed in § 151.2(b), by the 31st 

of December and biennially thereafter; 

(B) For energy Core Referenced 

Futures Contracts listed in § 151.2(c), by 

the 31st of March and biennially 

thereafter; 

(C) For corn, wheat, oat, rough rice, 

soybean and soybean products, 

livestock, milk, cotton, and frozen 

concentrated orange juice Core 

Referenced Futures Contracts, by the 

31st of July, and annually thereafter; 

(D) For coffee, sugar, and cocoa Core 

Referenced Futures Contracts, by the 

30th of September, and annually 

thereafter. 

(iv) For purposes of estimating 

deliverable supply, a designated 

contract market may use any guidance 

adopted in the Acceptable Practices for 

Compliance with Core Principle 3 found 

in part 38 of the Commission’s 

regulations. 

(v) The estimate submitted under 

paragraph (d)(2)(iii) of this section shall 

be accompanied by a description of the 

methodology used to derive the estimate 

along with any statistical data 

supporting the designated contract 

market’s estimate of deliverable supply. 

(vi) The Commission shall fix and 

publish pursuant to paragraph (e) of this 

section, the spot-month limits by 

Commission order, no later than: 

(A) For metal Referenced Contracts 

listed in § 151.2(b), by the 28th of 

February following the submission of 

estimates of deliverable supply 

provided to the Commission under 

paragraph (d)(2)(iii)(A) of this section 

and biennially thereafter; 

(B) For energy Referenced Contracts 

listed in § 151.2(c), by the 31st of May 

following the submission of estimates of 

deliverable supply provided to the 

Commission under paragraph 

(d)(2)(iii)(B) of this section and 

biennially thereafter; 

(C) For corn, wheat, oat, rough rice, 

soybean and soybean products, 

livestock, milk, cotton, and frozen 

concentrated orange juice Referenced 

Contracts, by the 30th of September 

following the submission of estimates of 

deliverable supply provided to the 

Commission under paragraph 

(d)(2)(iii)(C) of this section and annually 

thereafter; 

(D) For coffee, sugar, and cocoa 

Referenced Contracts, by the 30th of 

November following the submission of 

estimates of deliverable supply 

provided to the Commission under 

paragraph (d)(2)(iii)(D) of this section 

and annually thereafter. 

(3) Non-spot-month position limits for 

non-legacy Referenced Contract. (i) 

Initial non-spot-month limits for nonlegacy Referenced Contracts shall be 

fixed and published within one month 

after the Commission has obtained or 

estimated 12 months of values pursuant 

to paragraphs (b)(2)(i)(B), (b)(2)(i)(C), 

and (b)(2)(ii) of this section, and shall be 

fixed and made effective as provided in 

paragraph (b)(2) and (e) of this section. 

(ii) Subsequent non-spot-month limits 

for non-legacy Referenced Contracts 

shall be fixed and published within one 

month after two years following the 

fixing and publication of initial nonspot-month position limits and shall be 

based on the higher of 12 months 

average all-months-combined aggregate 

open interest, or 24 months average allmonths-combined aggregate open 

interest, as provided for in paragraphs 

(b)(2) and (e) of this section. 

(iii) Initial non-spot-month limits for 

non-legacy Referenced Contracts shall 

be made effective by Commission order. 

(4) Non-spot-month legacy limits for 

legacy agricultural Referenced 

Contracts. The non-spot-month position 

limits for legacy agricultural Referenced 

Contracts shall be effective sixty days 

after the term ‘‘swap’’ is further defined 

under the Wall Street Transparency and 

Accountability Act of 2010, and shall 

apply to all the provisions of this part. 

(e) Publication. The Commission shall 

publish position limits on the 

Commission’s Web site at http:// 

www.cftc.gov prior to making such 

limits effective, other than those limits 

specified under paragraph (b)(3) of this 

section and appendix A to this part. 

(1) Spot-month position limits shall 

be effective: 

(i) For metal Referenced Contracts 

listed in § 151.2(b), on the 1st of May 

after the Commission has fixed and 

published such limits under paragraph 

(d)(2)(vi)(A) of this section; 

(ii) For energy Referenced Contracts 

listed in § 151.2(c), on the 1st of August 

after the Commission has fixed and 

published such limits under paragraph 

(d)(2)(vi)(B) of this section; 

(iii) For corn, wheat, oat, rough rice, 

soybean and soybean products, 

livestock, milk, cotton, and frozen 

concentrated orange juice Referenced 

Contracts, on the 1st of December after 

the Commission has fixed and 

published such limits under paragraph 

(d)(2)(vi)(C) of this section; and 

(iv) For coffee, sugar, and cocoa 

Referenced Contracts, on the 1st of 

February after the Commission has fixed 

and published such limits under 

paragraph (d)(2)(vi)(D) of this section. 

(2) The Commission shall publish 

month-end all-months-combined futures 

open interest and all-months-combined 

swaps open interest figures within one 

month, as practicable, after such data is 

submitted to the Commission. 

(3) Non-spot-month position limits 

established under paragraph (b)(2) of 

this section shall be effective on the 1st 

calendar day of the third calendar 

month immediately following 

publication on the Commission’s Web 

site under paragraph (d)(3) of this 

section. 

(f) Rounding. In determining or 

calculating all levels and limits under 

this section, a resulting number shall be 

rounded up to the nearest hundred 

contracts. 

§ 151.5 Bona fide hedging and other 

exemptions for Referenced Contracts. 

(a) Bona fide hedging transactions or 

positions. (1) Any person that complies 

with the requirements of this section 

may exceed the position limits set forth 

in § 151.4 to the extent that a transaction 

or position in a Referenced Contract: 

(i) Represents a substitute for 

transactions made or to be made or 

positions taken or to be taken at a later 

time in a physical marketing channel; 

(ii) Is economically appropriate to the 

reduction of risks in the conduct and 

management of a commercial enterprise; 

and 


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(iii) Arises from the potential change 

in the value of one or several— 

(A) Assets that a person owns, 

produces, manufactures, processes, or 

merchandises or anticipates owning, 

producing, manufacturing, processing, 

or merchandising; 

(B) Liabilities that a person owns or 

anticipates incurring; or 

(C) Services that a person provides, 

purchases, or anticipates providing or 

purchasing; or 

(iv) Reduces risks attendant to a 

position resulting from a swap that— 

(A) Was executed opposite a 

counterparty for which the transaction 

would qualify as a bona fide hedging 

transaction pursuant to paragraph 

(a)(1)(i) through (iii) of this section; or 

(B) Meets the requirements of 

paragraphs (a)(1)(i) through (iii) of this 

section. 

(v) Notwithstanding the foregoing, no 

transactions or positions shall be 

classified as bona fide hedging for 

purposes of § 151.4 unless such 

transactions or positions are established 

and liquidated in an orderly manner in 

accordance with sound commercial 

practices and the provisions of 

paragraph (a)(2) of this section regarding 

enumerated hedging transactions and 

positions or paragraphs (a)(3) or (4) of 

this section regarding pass-through 

swaps of this section have been 

satisfied. 

(2) Enumerated hedging transactions 

and positions. Bona fide hedging 

transactions and positions for the 

purposes of this paragraph mean any of 

the following specific transactions and 

positions: 

(i) Sales of Referenced Contracts that 

do not exceed in quantity: 

(A) Ownership or fixed-price 

purchase of the contract’s underlying 

cash commodity by the same person; 

and 

(B) Unsold anticipated production of 

the same commodity, which may not 

exceed one year of production for an 

agricultural commodity, by the same 

person provided that no such position is 

maintained in any physical-delivery 

Referenced Contract during the last five 

days of trading of the Core Referenced 

Futures Contract in an agricultural or 

metal commodity or during the spot 

month for other physical-delivery 

contracts. 

(ii) Purchases of Referenced Contracts 

that do not exceed in quantity: 

(A) The fixed-price sale of the 

contract’s underlying cash commodity 

by the same person; 

(B) The quantity equivalent of fixedprice sales of the cash products and byproducts of such commodity by the 

same person; and 

(C) Unfilled anticipated requirements 

of the same cash commodity, which 

may not exceed one year for agricultural 

Referenced Contracts, for processing, 

manufacturing, or use by the same 

person, provided that no such position 

is maintained in any physical-delivery 

Referenced Contract during the last five 

days of trading of the Core Referenced 

Futures Contract in an agricultural or 

metal commodity or during the spot 

month for other physical-delivery 

contracts. 

(iii) Offsetting sales and purchases in 

Referenced Contracts that do not exceed 

in quantity that amount of the same 

cash commodity that has been bought 

and sold by the same person at unfixed 

prices basis different delivery months, 

provided that no such position is 

maintained in any physical-delivery 

Referenced Contract during the last five 

days of trading of the Core Referenced 

Futures Contract in an agricultural or 

metal commodity or during the spot 

month for other physical-delivery 

contracts. 

(iv) Purchases or sales by an agent 

who does not own or has not contracted 

to sell or purchase the offsetting cash 

commodity at a fixed price, provided 

that the agent is responsible for the 

merchandising of the cash positions that 

is being offset in Referenced Contracts 

and the agent has a contractual 

arrangement with the person who owns 

the commodity or holds the cash market 

commitment being offset. 

(v) Anticipated merchandising 

hedges. Offsetting sales and purchases 

in Referenced Contracts that do not 

exceed in quantity the amount of the 

same cash commodity that is 

anticipated to be merchandised, 

provided that: 

(A) The quantity of offsetting sales 

and purchases is not larger than the 

current or anticipated unfilled storage 

capacity owned or leased by the same 

person during the period of anticipated 

merchandising activity, which may not 

exceed one year; 

(B) The offsetting sales and purchases 

in Referenced Contracts are in different 

contract months, which settle in not 

more than one year; and 

(C) No such position is maintained in 

any physical-delivery Referenced 

Contract during the last five days of 

trading of the Core Referenced Futures 

Contract in an agricultural or metal 

commodity or during the spot month for 

other physical-delivery contracts. 

(vi) Anticipated royalty hedges. Sales 

or purchases in Referenced Contracts 

offset by the anticipated change in value 

of royalty rights that are owned by the 

same person provided that: 

(A) The royalty rights arise out of the 

production, manufacturing, processing, 

use, or transportation of the commodity 

underlying the Referenced Contract, 

which may not exceed one year for 

agricultural Referenced Contracts; and 

(B) No such position is maintained in 

any physical-delivery Referenced 

Contract during the last five days of 

trading of the Core Referenced Futures 

Contract in an agricultural or metal 

commodity or during the spot month for 

other physical-delivery contracts. 

(vii) Service hedges. Sales or 

purchases in Referenced Contracts offset 

by the anticipated change in value of 

receipts or payments due or expected to 

be due under an executed contract for 

services held by the same person 

provided that: 

(A) The contract for services arises out 

of the production, manufacturing, 

processing, use, or transportation of the 

commodity underlying the Referenced 

Contract, which may not exceed one 

year for agricultural Referenced 

Contracts; 

(B) The fluctuations in the value of 

the position in Referenced Contracts are 

substantially related to the fluctuations 

in value of receipts or payments due or 

expected to be due under a contract for 

services; and 

(C) No such position is maintained in 

any physical-delivery Referenced 

Contract during the last five days of 

trading of the Core Referenced Futures 

Contract in an agricultural or metal 

commodity or during the spot month for 

other physical-delivery contracts. 

(viii) Cross-commodity hedges. Sales 

or purchases in Referenced Contracts 

described in paragraphs (a)(2)(i) through 

(vii) of this section may also be offset 

other than by the same quantity of the 

same cash commodity, provided that: 

(A) The fluctuations in value of the 

position in Referenced Contracts are 

substantially related to the fluctuations 

in value of the actual or anticipated cash 

position; and 

(B) No such position is maintained in 

any physical-delivery Referenced 

Contract during the last five days of 

trading of the Core Referenced Futures 

Contract in an agricultural or metal 

commodity or during the spot month for 

other physical-delivery contracts. 

(3) Pass-through swaps. Bona fide 

hedging transactions and positions for 

the purposes of this paragraph include 

the purchase or sales of Referenced 

Contracts that reduce the risks attendant 

to a position resulting from a swap that 

was executed opposite a counterparty 

for whom the swap transaction would 

qualify as a bona fide hedging 

transaction pursuant to paragraph (a)(2) 

of this section (‘‘pass-through swaps’’), 


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provided that no such position is 

maintained in any physical-delivery 

Referenced Contract during the last five 

days of trading of the Core Referenced 

Futures Contract in an agricultural or 

metal commodity or during the spot 

month for other physical-delivery 

contracts unless such pass-through 

swap position continues to offset the 

cash market commodity price risk of the 

bona fide hedging counterparty. 

(4) Pass-through swap offsets. For 

swaps executed opposite a counterparty 

for whom the swap transaction would 

qualify as a bona fide hedging 

transaction pursuant to paragraph (a)(2) 

of this section (pass-through swaps), 

such pass-through swaps shall also be 

classified as a bona fide hedging 

transaction for the counterparty for 

whom the swap would not otherwise 

qualify as a bona fide hedging 

transaction pursuant to paragraph (a)(2) 

of this section (‘‘non-hedging 

counterparty’’), provided that the nonhedging counterparty purchases or sells 

Referenced Contracts that reduce the 

risks attendant to such pass-through 

swaps. Provided further, that the passthrough swap shall constitute a bona 

fide hedging transaction only to the 

extent the non-hedging counterparty 

purchases or sells Referenced Contracts 

that reduce the risks attendant to the 

pass-through swap. 

(5) Any person engaging in other riskreducing practices commonly used in 

the market which they believe may not 

be specifically enumerated in 

§ 151.5(a)(2) may request relief from 

Commission staff under § 140.99 of this 

chapter or the Commission under 

section 4a(a)(7) of the Act concerning 

the applicability of the bona fide 

hedging transaction exemption. 

(b) Aggregation of accounts. Entities 

required to aggregate accounts or 

positions under § 151.7 shall be 

considered the same person for the 

purpose of determining whether a 

person or persons are eligible for a bona 

fide hedge exemption under § 151.5(a). 

(c) Information on cash market 

commodity activities. Any person with 

a position that exceeds the position 

limits set forth in § 151.4 pursuant to 

paragraphs (a)(2)(i)(A), (a)(2)(ii)(A), 

(a)(2)(ii)(B), (a)(2)(iii), or (a)(2)(iv) of this 

section shall submit to the Commission 

a 404 filing, in the form and manner 

provided for in § 151.10. 

(1) The 404 filing shall contain the 

following information with respect to 

such position for each business day the 

same person exceeds the limits set forth 

in § 151.4, up to and through the day the 

person’s position first falls below the 

position limits: 

(i) The date of the bona fide hedging 

position, an indication of under which 

enumerated hedge exemption or 

exemptions the position qualifies for 

bona fide hedging, the corresponding 

Core Referenced Futures Contract, the 

cash market commodity hedged, and the 

units in which the cash market 

commodity is measured; 

(ii) The entire quantity of stocks 

owned of the cash market commodity 

that is being hedged; 

(iii) The entire quantity of fixed-price 

purchase commitments of the cash 

market commodity that is being hedged; 

(iv) The sum of the entire quantity of 

stocks owned of the cash market 

commodity and the entire quantity of 

fixed-price purchase commitments of 

the cash market commodity that is being 

hedged; 

(v) The entire quantity of fixed-price 

sale commitments of the cash 

commodity that is being hedged; 

(vi) The quantity of long and short 

Referenced Contracts, measured on a 

futures-equivalent basis to the 

applicable Core Referenced Futures 

Contract, in the nearby contract month 

that are being used to hedge the long 

and short cash market positions; 

(viii) The total number of long and 

short Referenced Contracts, measured 

on a futures equivalent basis to the 

applicable Core Referenced Futures 

Contract, that are being used to hedge 

the long and short cash market 

positions; and 

(viii) Cross-commodity hedging 

information as required under 

paragraph (g) of this section. 

(2) Notice filing. Persons seeking an 

exemption under this paragraph shall 

file a notice with the Commission, 

which shall be effective upon the date 

of the submission of the notice. 

(d) Information on anticipated cash 

market commodity activities. (1) Initial 

statement. Any person who intends to 

exceed the position limits set forth in 

§ 151.4 pursuant to paragraph 

(a)(2)(i)(B), (a)(2)(ii)(C), (a)(2)(v), 

(a)(2)(vi), or (a)(2)(vii) of this section in 

order to hedge anticipated production, 

requirements, merchandising, royalties, 

or services connected to a commodity 

underlying a Referenced Contract, shall 

submit to the Commission a 404A filing 

in the form and manner provided in 

§ 151.10. The 404A filing shall contain 

the following information with respect 

to such activities, by Referenced 

Contract: 

(i) A description of the type of 

anticipated cash market activity to be 

hedged; how the purchases or sales of 

Referenced Contracts are consistent 

with the provisions of (a)(1) of this 

section; and the units in which the cash 

commodity is measured; 

(ii) The time period for which the 

person claims the anticipatory hedge 

exemption is required, which may not 

exceed one year for agricultural 

commodities or one year for anticipated 

merchandising activity; 

(iii) The actual use, production, 

processing, merchandising (bought and 

sold), royalties and service payments 

and receipts of that cash market 

commodity during each of the three 

complete fiscal years preceding the 

current fiscal year; 

(iv) The anticipated use production, 

or commercial or merchandising 

requirements (purchases and sales), 

anticipated royalties, or service contract 

receipts or payments of that cash market 

commodity which are applicable to the 

anticipated activity to be hedged for the 

period specified in (d)(1)(ii) of this 

section; 

(v) The unsold anticipated production 

or unfilled anticipated commercial or 

merchandising requirements of that 

cash market commodity which are 

applicable to the anticipated activity to 

be hedged for the period specified in 

(d)(1)(ii) of this section; 

(vi) The maximum number of 

Referenced Contracts long and short (on 

an all-months-combined basis) that are 

expected to be used for each 

anticipatory hedging activity for the 

period specified in (d)(1)(ii) of this 

section on a futures equivalent basis; 

(vii) If the hedge exemption sought is 

for anticipated merchandising pursuant 

to (a)(2)(v) of this section, a description 

of the storage capacity related to the 

anticipated merchandising transactions, 

including: 

(A) The anticipated total storage 

capacity, the anticipated merchandising 

quantity, and purchase and sales 

commitments for the period specified in 

(d)(1)(ii) of this section; 

(B) Current inventory; and 

(C) The total storage capacity and 

quantity of commodity moved through 

the storage capacity for each of the three 

complete fiscal years preceding the 

current fiscal year; and 

(viii) Cross-commodity hedging 

information as required under 

paragraph (g) of this section. 

(2) Notice filing. Persons seeking an 

exemption under this paragraph shall 

file a notice with the Commission. Such 

a notice shall be filed at least ten days 

in advance of a date the person expects 

to exceed the position limits established 

under this part, and shall be effective 

after that ten day period unless 

otherwise notified by the Commission. 

(3) Supplemental reports for 404A 

filings. Whenever a person intends to 


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exceed the amounts determined by the 

Commission to constitute a bona fide 

hedge for anticipated activity in the 

most recent statement or filing, such 

person shall file with the Commission a 

statement that updates the information 

provided in the person’s most recent 

filing at least ten days in advance of the 

date that person wishes to exceed those 

amounts. 

(e) Review of notice filings. (1) The 

Commission may require persons 

submitting notice filings provided for 

under paragraphs (c)(2) and (d)(2) of this 

section to submit such other 

information, before or after the effective 

date of a notice, which is necessary to 

enable the Commission to make a 

determination whether the transactions 

or positions under the notice filing fall 

within the scope of bona fide hedging 

transactions or positions described 

under paragraph (a) of this section. 

(2) The transactions and positions 

described in the notice filing shall not 

be considered, in part or in whole, as 

bona fide hedging transactions or 

positions if such person is so notified by 

the Commission. 

(f) Additional information from swap 

counterparties to bona fide hedging 

transactions. All persons that maintain 

positions in excess of the limits set forth 

in § 151.4 in reliance upon the 

exemptions set forth in paragraphs (a)(3) 

and (4) of this section shall submit to 

the Commission a 404S filing, in the 

form and manner provided for in 

§ 151.10. Such 404S filing shall contain 

the following information with respect 

to such position for each business day 

that the same person exceeds the limits 

set forth in § 151.4, up to and through 

the day the person’s position first falls 

below the position limit that was 

exceeded: 

(1) By Referenced Contract; 

(2) By commodity reference price and 

units of measurement used for the 

swaps that would qualify as a bona fide 

hedging transaction or position gross 

long and gross short positions; and 

(3) Cross-commodity hedging 

information as required under 

paragraph (g) of this section. 

(g) Conversion methodology for crosscommodity hedges. In addition to the 

information required under this section, 

persons who avail themselves of crosscommodity hedges pursuant to 

(a)(2)(viii) of this section shall submit to 

the Commission a form 404, 404A, or 

404S filing, as appropriate. The first 

time such a form is filed where a crosscommodity hedge is claimed, it should 

contain a description of the conversion 

methodology. That description should 

explain the conversion from the actual 

commodity used in the person’s normal 

course of business to the Referenced 

Contract that is being used for hedging, 

including an explanation of the 

methodology used for determining the 

ratio of conversion between the actual 

or anticipated cash positions and the 

person’s positions in the Referenced 

Contract. 

(h) Recordkeeping. Persons who avail 

themselves of bona fide hedge 

exemptions shall keep and maintain 

complete books and records concerning 

all of their related cash, futures, and 

swap positions and transactions and 

make such books and records, along 

with a list of pass-through swap 

counterparties for pass-through swap 

exemptions under (a)(3) of this section, 

available to the Commission upon 

request. 

(i) Additional requirements for passthrough swap counterparties. A party 

seeking to rely upon § 151.5(a)(3) to 

exceed the position limits of § 151.4 

with respect to such a swap may only 

do so if its counterparty provides a 

written representation (e.g., in the form 

of a field or other representation 

contained in a mutually executed trade 

confirmation) that, as to such 

counterparty, the swap qualifies in good 

faith as a bona fide hedging transaction 

under paragraph (a)(3) of this section at 

the time the swap was executed. That 

written representation shall be retained 

by the parties to the swap for a period 

of at least two years following the 

expiration of the swap and furnished to 

the Commission upon request. Any 

person that represents to another person 

that the swap qualifies as a pass-through 

swap under paragraph (a)(3) of this 

section shall keep and make available to 

the Commission upon request all 

relevant books and records supporting 

such a representation for a period of at 

least two years following the expiration 

of the swap. 

(j) Financial distress exemption. Upon 

specific request made to the 

Commission, the Commission may 

exempt a person or related persons 

under financial distress circumstances 

for a time certain from any of the 

requirements of this part. Financial 

distress circumstances are situations 

involving the potential default or 

bankruptcy of a customer of the 

requesting person or persons, affiliate of 

the requesting person or persons, or 

potential acquisition target of the 

requesting person or persons. Such 

exemptions shall be granted by 

Commission order. 

§ 151.6 Position visibility. 

(a) Visibility levels. A person holding 

or controlling positions, separately or in 

combination, net long or net short, in 

Referenced Contracts that equal or 

exceed the following levels in all 

months or in any single month 

(including the spot month), shall 

comply with the reporting requirements 

of paragraphs (b) and (c) of this section: 

(1) Visibility Levels for Metal Referenced Contracts 

(i) Commodity Exchange, Inc. Copper (HG) ............................................................................................................................... 8,500 

(ii) Commodity Exchange, Inc. Gold (GC) ................................................................................................................................... 30,000 

(iv) Commodity Exchange, Inc. Silver (SI) .................................................................................................................................. 8,500 

(v) New York Mercantile Exchange Palladium (PA) ................................................................................................................... 1,500 

(vi) New York Mercantile Exchange Platinum (PL) ..................................................................................................................... 2,000 

(2) Visibility Levels for Energy Referenced Contracts 

(i) New York Mercantile Exchange Light Sweet Crude Oil (CL) ................................................................................................. 50,000 

(ii) New York Mercantile Exchange Henry Hub Natural Gas (NG) ............................................................................................. 50,000 

(iii) New York Mercantile Exchange New York Harbor Gasoline Blendstock (RB) .................................................................... 10,000 

(iv) New York Mercantile Exchange New York Harbor No. 2 Heating Oil (HO) ......................................................................... 16,000 

(b) Statement of person exceeding 

visibility level. Persons meeting the 

provisions of paragraph (a) of this 

section, shall submit to the Commission 

a 401 filing in the form and manner 

provided for in § 151.10. The 401 filing 

shall contain the following information, 

by Referenced Contract: 

(1) A list of dates, within the 

applicable calendar quarter, on which 

the person held or controlled a position 


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that equaled or exceeded such visibility 

levels; and 

(2) As of the first business Tuesday 

following the applicable calendar 

quarter and as of the day, within the 

applicable calendar quarter, in which 

the person held the largest net position 

(on an all months combined basis) in 

excess of the level in paragraph (a) of 

this section: 

(i) Separately by futures, options and 

swaps, gross long and gross short 

futures equivalent positions in all 

months in the applicable Referenced 

Contract(s) (using economically 

reasonable and analytically supported 

deltas) on a futures-equivalent basis; 

and 

(ii) If applicable, by commodity 

referenced price, gross long and gross 

short uncleared swap positions in all 

months basis in the applicable 

Referenced Contract(s) futuresequivalent basis (using economically 

reasonable and analytically supported 

deltas). 

(c) 404 filing. A person that holds a 

position in a Referenced Contract that 

equals or exceeds a visibility level in a 

calendar quarter shall submit to the 

Commission a 404 filing in the form and 

manner provided for in § 151.10, and it 

shall contain the information regarding 

such positions as described in § 151.5(c) 

as of the first business Tuesday 

following the applicable calendar 

quarter and as of the day, within the 

applicable calendar quarter, in which 

the person held the largest net position 

in excess of the level in all months. 

(d) Alternative filing. With the express 

written permission of the Commission 

or its designees, the submission of a 

swaps or physical commodity portfolio 

summary statement spreadsheet in 

digital format, only insofar as the 

spreadsheet provides at least the same 

data as that required by paragraphs (b) 

or (c) of this section respectively may be 

substituted for the 401 or 404 filing 

respectively. 

(e) Precedence of other reporting 

obligations. Reporting obligations 

imposed by regulations other than those 

contained in this section shall 

supersede the reporting requirements of 

paragraphs (b) and (c) of this section but 

only insofar as other reporting 

obligations provide at least the same 

data and are submitted to the 

Commission or its designees at least as 

often as the reporting requirements of 

paragraphs (b) and (c) of this section. 

(f) Compliance date. The compliance 

date of this section shall be sixty days 

after the term ‘‘swap’’ is further defined 

under the Wall Street Transparency and 

Accountability Act of 2010. A document 

will be published in the Federal 

Register establishing the compliance 

date. 

§ 151.7 Aggregation of positions. 

(a) Positions to be aggregated. The 

position limits set forth in § 151.4 shall 

apply to all positions in accounts for 

which any person by power of attorney 

or otherwise directly or indirectly holds 

positions or controls trading and to 

positions held by two or more persons 

acting pursuant to an expressed or 

implied agreement or understanding the 

same as if the positions were held by, 

or the trading of the position were done 

by, a single individual. 

(b) Ownership of accounts generally. 

For the purpose of applying the position 

limits set forth in § 151.4, except for the 

ownership interest of limited partners, 

shareholders, members of a limited 

liability company, beneficiaries of a 

trust or similar type of pool participant 

in a commodity pool subject to the 

provisos set forth in paragraph (c) of this 

section or in accounts or positions in 

multiple pools as set forth in paragraph 

(d) of this section, any person holding 

positions in more than one account, or 

holding accounts or positions in which 

the person by power of attorney or 

otherwise directly or indirectly has a 10 

percent or greater ownership or equity 

interest, must aggregate all such 

accounts or positions. 

(c) Ownership by limited partners, 

shareholders or other pool participants. 

(1) Except as provided in paragraphs 

(c)(2) and (3) of this section, a person 

that is a limited partner, shareholder or 

other similar type of pool participant 

with an ownership or equity interest of 

10 percent or greater in a pooled 

account or positions who is also a 

principal or affiliate of the operator of 

the pooled account must aggregate the 

pooled account or positions with all 

other accounts or positions owned or 

controlled by that person, unless: 

(i) The pool operator has, and 

enforces, written procedures to preclude 

the person from having knowledge of, 

gaining access to, or receiving data 

about the trading or positions of the 

pool; 

(ii) The person does not have direct, 

day-to-day supervisory authority or 

control over the pool’s trading 

decisions; and 

(iii) The pool operator has complied 

with the requirements of paragraph (h) 

of this section on behalf of the person 

or class of persons. 

(2) A commodity pool operator having 

ownership or equity interest of 10 

percent or greater in an account or 

positions as a limited partner, 

shareholder or other similar type of pool 

participant must aggregate those 

accounts or positions with all other 

accounts or positions owned or 

controlled by the commodity pool 

operator. 

(3) Each limited partner, shareholder, 

or other similar type of pool participant 

having an ownership or equity interest 

of 25 percent or greater in a commodity 

pool the operator of which is exempt 

from registration under § 4.13 of this 

chapter must aggregate the pooled 

account or positions with all other 

accounts or positions owned or 

controlled by that person. 

(d) Identical trading. Notwithstanding 

any other provision of this section, for 

the purpose of applying the position 

limits set forth in § 151.4, any person 

that holds or controls the trading of 

positions, by power of attorney or 

otherwise, in more than one account, or 

that holds or controls trading of 

accounts or positions in multiple pools 

with identical trading strategies must 

aggregate all such accounts or positions 

that a person holds or controls. 

(e) Trading control by futures 

commission merchants. The position 

limits set forth in § 151.4 shall be 

construed to apply to all positions held 

by a futures commission merchant or its 

separately organized affiliates in a 

discretionary account, or in an account 

which is part of, or participates in, or 

receives trading advice from a customer 

trading program of a futures commission 

merchant or any of the officers, partners, 

or employees of such futures 

commission merchant or its separately 

organized affiliates, unless: 

(1) A trader other than the futures 

commission merchant or the affiliate 

directs trading in such an account; 

(2) The futures commission merchant 

or the affiliate maintains only such 

minimum control over the trading in 

such an account as is necessary to fulfill 

its duty to supervise diligently trading 

in the account; and 

(3) Each trading decision of the 

discretionary account or the customer 

trading program is determined 

independently of all trading decisions 

in other accounts which the futures 

commission merchant or the affiliate 

holds, has a financial interest of 10 

percent or more in, or controls. 

(f) Independent Account Controller. 

An eligible entity need not aggregate its 

positions with the eligible entity’s client 

positions or accounts carried by an 

authorized independent account 

controller, as defined in § 151.1, except 

for the spot month provided in physicaldelivery Referenced Contracts, 

provided, however, that the eligible 

entity has complied with the 

requirements of paragraph (h) of this 

section, and that the overall positions 


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held or controlled by such independent 

account controller may not exceed the 

limits specified in § 151.4. 

(1) Additional requirements for 

exemption of Affiliated Entities. If the 

independent account controller is 

affiliated with the eligible entity or 

another independent account controller, 

each of the affiliated entities must: 

(i) Have, and enforce, written 

procedures to preclude the affiliated 

entities from having knowledge of, 

gaining access to, or receiving data 

about, trades of the other. Such 

procedures must include document 

routing and other procedures or security 

arrangements, including separate 

physical locations, which would 

maintain the independence of their 

activities; provided, however, that such 

procedures may provide for the 

disclosure of information which is 

reasonably necessary for an eligible 

entity to maintain the level of control 

consistent with its fiduciary 

responsibilities and necessary to fulfill 

its duty to supervise diligently the 

trading done on its behalf; 

(ii) Trade such accounts pursuant to 

separately developed and independent 

trading systems; 

(iii) Market such trading systems 

separately; and 

(iv) Solicit funds for such trading by 

separate disclosure documents that meet 

the standards of § 4.24 or § 4.34 of this 

chapter, as applicable where such 

disclosure documents are required 

under part 4 of this chapter. 

(g) Exemption for underwriting. 

Notwithstanding any of the provisions 

of this section, a person need not 

aggregate the positions or accounts of an 

owned entity if the ownership interest 

is based on the ownership of securities 

constituting the whole or a part of an 

unsold allotment to or subscription by 

such person as a participant in the 

distribution of such securities by the 

issuer or by or through an underwriter. 

(h) Notice filing for exemption. (1) 

Persons seeking an aggregation 

exemption under paragraph (c), (e), (f), 

or (i) of this section shall file a notice 

with the Commission, which shall be 

effective upon submission of the notice, 

and shall include: 

(i) A description of the relevant 

circumstances that warrant 

disaggregation; and 

(ii) A statement certifying that the 

conditions set forth in the applicable 

aggregation exemption provision has 

been met. 

(2) Upon call by the Commission, any 

person claiming an aggregation 

exemption under this section shall 

provide to the Commission such 

information concerning the person’s 

claim for exemption. Upon notice and 

opportunity for the affected person to 

respond, the Commission may amend, 

suspend, terminate, or otherwise modify 

a person’s aggregation exemption for 

failure to comply with the provisions of 

this section. 

(3) In the event of a material change 

to the information provided in the 

notice filed under this paragraph, an 

updated or amended notice shall 

promptly be filed detailing the material 

change. 

(4) A notice shall be submitted in the 

form and manner provided for in 

§ 151.10. 

(i) Exemption for federal law 

information sharing restriction. 

Notwithstanding any provision of this 

section, a person is not subject to the 

aggregation requirements of this section 

if the sharing of information associated 

with such aggregation would cause 

either person to violate Federal law or 

regulations adopted thereunder and 

provided that such a person does not 

have actual knowledge of information 

associated with such aggregation. 

Provided, however, that such person file 

a prior notice with the Commission 

detailing the circumstances of the 

exemption and an opinion of counsel 

that the sharing of information would 

cause a violation of Federal law or 

regulations adopted thereunder. 

§ 151.8 Foreign boards of trade. 

The aggregate position limits in 

§ 151.4 shall apply to a trader with 

positions in Referenced Contracts 

executed on, or pursuant to the rules of 

a foreign board of trade, provided that: 

(a) Such Referenced Contracts settle 

against any price (including the daily or 

final settlement price) of one or more 

contracts listed for trading on a 

designated contract market or swap 

execution facility that is a trading 

facility; and 

(b) The foreign board of trade makes 

available such Referenced Contracts to 

its members or other participants 

located in the United States through 

direct access to its electronic trading 

and order matching system. 

§ 151.9 Pre-existing positions. 

(a) Non-spot-month position limits. 

The position limits set forth in 

§ 151.4(b) of this chapter may be 

exceeded to the extent that positions in 

Referenced Contracts remain open and 

were entered into in good faith prior to 

the effective date of any rule, regulation, 

or order that specifies a position limit 

under this part. 

(b) Spot-month position limits. 

Notwithstanding the pre-existing 

exemption in non-spot months, a person 

must comply with spot month limits. 

(c) Pre-Dodd-Frank and transition 

period swaps. The initial position limits 

established under § 151.4 shall not 

apply to any swap positions entered 

into in good faith prior to the effective 

date of such initial limits. Swap 

positions in Referenced Contracts 

entered into in good faith prior to the 

effective date of such initial limits may 

be netted with post-effective date swap 

and swaptions for the purpose of 

applying any position limit. 

(d) Exemptions. Exemptions granted 

by the Commission under § 1.47 for 

swap risk management shall not apply 

to swap positions entered into after the 

effective date of initial position limits 

established under § 151.4. 

§ 151.10 Form and manner of reporting 

and submitting information or filings. 

Unless otherwise instructed by the 

Commission or its designees, any person 

submitting reports under this section 

shall submit the corresponding required 

filings and any other information 

required under this part to the 

Commission as follows: 

(a) Using the format, coding structure, 

and electronic data transmission 

procedures approved in writing by the 

Commission; and 

(b) Not later than 9 a.m. Eastern Time 

on the next business day following the 

reporting or filing obligation is incurred 

unless: 

(1) A 404A filing is submitted 

pursuant § 151.5(d), in which case the 

filing must be submitted at least ten 

business days in advance of the date 

that transactions and positions would be 

established that would exceed a 

position limit set forth in § 151.4; 

(2) A 404 filing is submitted pursuant 

to § 151.5(c) or a 404S is submitted 

pursuant to § 151.5(f), the filing must be 

submitted not later than 9 a.m. on the 

third business day after a position has 

exceeded the level in a Referenced 

Contract for the first time and not later 

than the third business day following 

each calendar month in which the 

person exceeded such levels; 

(3) The filing is submitted pursuant to 

§ 151.6, then the 401 or 404, or their 

respective alternatives as provided for 

under § 151.6(d), shall be submitted 

within ten business days following the 

quarter in which the person holds a 

position in excess in the visibility levels 

provided in § 151.6(a); or 

(4) A notice of disaggregation is filed 

pursuant to § 151.7(h), in which case the 

notice shall be submitted within five 

business days of when the person 

claims a disaggregation exemption. 


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(e) When the reporting entity 

discovers errors or omissions to past 

reports, the entity so notifies the 

Commission and files corrected 

information in a form and manner and 

at a time as may be instructed by the 

Commission or its designee. 

§ 151.11 Designated contract market and 

swap execution facility position limits and 

accountability rules. 

(a) Spot-month limits. (1) For all 

Referenced Contracts executed pursuant 

to their rules, swap execution facilities 

that are trading facilities and designated 

contract markets shall adopt, enforce, 

and, establish rules and procedures for 

monitoring and enforcing spot-month 

position limits set at levels no greater 

than those established by the 

Commission under § 151.4. 

(2) For all agreements, contracts, or 

transactions executed pursuant to their 

rules that are not subject to the limits set 

forth in paragraph (a)(1) of this section, 

it shall be an acceptable practice for 

swap execution facilities that are trading 

facilities and designated contract 

markets to adopt, enforce, and establish 

rules and procedures for monitoring and 

enforcing spot-month position limits set 

at levels no greater than 25 percent of 

estimated deliverable supply, consistent 

with Commission guidance set forth in 

this title. 

(b) Non-spot-month limits. (1) 

Referenced Contracts. For Referenced 

Contracts executed pursuant to their 

rules, swap execution facilities that are 

trading facilities and designated 

contract markets shall adopt enforce, 

and establish rules and procedures for 

monitoring and enforcing single month 

and all-months limits at levels no 

greater than the position limits 

established by the Commission under 

§ 151.4(d)(3) or (4). 

(2) Non-referenced contracts. For all 

other agreements, contracts, or 

transactions executed pursuant to their 

rules that are not subject to the limits set 

forth in § 151.4, except as provided in 

§ 151.11(b)(3) and (c), it shall be an 

acceptable practice for swap execution 

facilities that are trading facilities and 

designated contract markets to adopt, 

enforce, and establish rules and 

procedures for monitoring and enforcing 

single-month and all-months-combined 

position limits at levels no greater than 

ten percent of the average delta-adjusted 

futures, swaps, and options month-end 

all months open interest in the same 

contract or economically equivalent 

contracts executed pursuant to the rules 

of the designated contract market or 

swap execution facility that is a trading 

facility for the greater of the most recent 

one or two calendar years up to 25,000 

contracts with a marginal increase of 2.5 

percent thereafter. 

(3) Levels at designation or initial 

listing. Other than in Referenced 

Contracts, at the time of its initial 

designation or upon offering a new 

contract, agreement, or transaction to be 

executed pursuant to its rules, it shall be 

an acceptable practice for a designated 

contract market or swap execution 

facility that is a trading facility to 

provide for speculative limits for an 

individual single-month or in allmonths-combined at no greater than 

1,000 contracts for physical 

commodities other than energy 

commodities and 5,000 contracts for 

other commodities, provided that the 

notional quantity for such contracts, 

agreements, or transactions, corresponds 

to a notional quantity per contract that 

is no larger than a typical cash market 

transaction in the underlying 

commodity. 

(4) For purposes of this paragraph, it 

shall be an acceptable practice for open 

interest to be calculated by combining 

the all months month-end open interest 

in the same contract or economically 

equivalent contracts executed pursuant 

to the rules of the designated contract 

market or swap execution facility that is 

a trading facility (on a delta-adjusted 

basis, as appropriate) for all months 

listed during the most recent one or two 

calendar years. 

(c) Alternatives. In lieu of the limits 

provided for under § 151.11(a)(2) or 

(b)(2), it shall be an acceptable practice 

for swap execution facilities that are 

trading facilities and designated 

contract markets to adopt, enforce, and 

establish rules and procedures for 

monitoring and enforcing position 

accountability rules with respect to any 

agreement, contract, or transaction 

executed pursuant to their rules 

requiring traders to provide information 

about their position upon request by the 

exchange and to consent to halt 

increasing further a trader’s position 

upon request by the exchange as 

follows: 

(1) On an agricultural or exempt 

commodity that is not subject to the 

limits set forth in § 151.4, having an 

average month-end open interest of 

50,000 contracts and an average daily 

volume of 5,000 contracts and a liquid 

cash market, provided, however, such 

swap execution facilities that are trading 

facilities and designated contract 

markets are not exempt from the 

requirement set forth in paragraph (a)(2) 

that they adopt a spot-month position 

limit with a level no greater than 25 

percent of estimated deliverable supply; 

or 

(2) On a major foreign currency, for 

which there is no legal impediment to 

delivery and for which there exists a 

highly liquid cash market; or 

(3) On an excluded commodity that is 

an index or measure of inflation, or 

other macroeconomic index or measure; 

or 

(4) On an excluded commodity that 

meets the definition of section 1a(19)(ii), 

(iii), or (iv) of the Act. 

(d) Securities futures products. 

Position limits for securities futures 

products are specified in 17 CFR part 

41. 

(e) Aggregation. Position limits or 

accountability rules established under 

this section shall be subject to the 

aggregation standards of § 151.7. 

(f) Exemptions. (1) Hedge exemptions. 

(i) For purposes of exempt and 

agricultural commodities, no designated 

contract market or swap execution 

facility that is a trading facility bylaw, 

rule, regulation, or resolution adopted 

pursuant to this section shall apply to 

any position that would otherwise be 

exempt from the applicable Federal 

speculative position limits as 

determined by § 151.5; provided, 

however, that the designated contract 

market or swap execution facility that is 

a trading facility may limit bona fide 

hedging positions or any other positions 

which have been exempted pursuant to 

§ 151.5 which it determines are not in 

accord with sound commercial practices 

or exceed an amount which may be 

established and liquidated in an orderly 

fashion. 

(ii) For purposes of excluded 

commodities, no designated contract 

market or swap execution facility that is 

a trading facility by law, rule, 

regulation, or resolution adopted 

pursuant to this section shall apply to 

any transaction or position defined 

under § 1.3(z) of this chapter; provided, 

however, that the designated contract 

market or swap execution facility that is 

a trading facility may limit bona fide 

hedging positions that it determines are 

not in accord with sound commercial 

practices or exceed an amount which 

may be established and liquidated in an 

orderly fashion. 

(2) Procedure. Persons seeking to 

establish eligibility for an exemption 

must comply with the procedures of the 

designated contract market or swap 

execution facility that is a trading 

facility for granting exemptions from its 

speculative position limit rules. In 

considering whether to permit or grant 

an exemption, a designated contract 

market or swap execution facility that is 

a trading facility must take into account 

sound commercial practices and 


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paragraph (d)(1) of this section and 

apply principles consistent with § 151.5. 

(g) Other exemptions. Speculative 

position limits adopted pursuant to this 

section shall not apply to: 

(1) Any position acquired in good 

faith prior to the effective date of any 

bylaw, rule, regulation, or resolution 

which specifies such limit; 

(2) Spread or arbitrage positions either 

in positions in related Referenced 

Contracts or, for contracts that are not 

Referenced Contracts, economically 

equivalent contracts provided that such 

positions are outside of the spot month 

for physical-delivery contracts; or 

(3) Any person that is registered as a 

futures commission merchant or floor 

broker under authority of the Act, 

except to the extent that transactions 

made by such person are made on 

behalf of or for the account or benefit of 

such person. 

(h) Ongoing responsibilities. Nothing 

in this part shall be construed to affect 

any provisions of the Act relating to 

manipulation or corners or to relieve 

any designated contract market, swap 

execution facility that is a trading 

facility, or governing board of a 

designated contract market or swap 

execution facility that is a trading 

facility from its responsibility under 

other provisions of the Act and 

regulations. 

(i) Compliance date. The compliance 

date of this section shall be 60 days after 

the term ‘‘swap’’ is further defined 

under the Wall Street Transparency and 

Accountability Act of 2010. A document 

will be published in the Federal 

Register establishing the compliance 

date. 

(j) Notwithstanding paragraph (i) of 

this section, the compliance date of 

provisions of paragraph (b)(1) of this 

section as it applies to non-legacy 

Referenced Contracts shall be upon the 

establishment of any non-spot-month 

position limits pursuant to § 151.4(d)(3). 

In the period prior to the establishment 

of any non-spot-month position limits 

pursuant to § 151.4(d)(3) it shall be an 

acceptable practice for a designated 

contract market or swap execution 

facility to either: 

(1) Retain existing non-spot-month 

position limits or accountability rules; 

or 

(2) Establish non-spot-month position 

limits or accountability levels pursuant 

to the acceptable practice described in 

§ 151.11(b)(2) and (c)(1) based on open 

interest in the same contract or 

economically equivalent contracts 

executed pursuant to the rules of the 

designated contract market or swap 

execution facility that is a trading 

facility. 

§ 151.12 Delegation of authority to the 

Director of the Division of Market Oversight. 

(a) The Commission hereby delegates, 

until it orders otherwise, to the Director 

of the Division of Market Oversight or 

such other employee or employees as 

the Director may designate from time to 

time, the authority: 

(1) In § 151.4(b) for determining levels 

of open interest, in § 151.4(d)(2)(ii) to 

estimate deliverable supply, in 

§ 151.4(d)(3)(ii) to fix non-spot-month 

limits, and in § 151.4(e) to publish 

position limit levels. 

(2) In § 151.5 requesting additional 

information or determining whether a 

filing should not be considered as bona 

fide hedging; 

(3) In § 151.6 for accepting alternative 

position visibility filings under 

paragraphs (c)(2) and (d) therein; 

(4) In § 151.7(h)(2) to call for 

additional information from a trader 

claiming an aggregation exemption; 

(5) In § 151.10 for providing 

instructions or determining the format, 

coding structure, and electronic data 

transmission procedures for submitting 

data records and any other information 

required under this part. 

(b) The Director of the Division of 

Market Oversight may submit to the 

Commission for its consideration any 

matter which has been delegated in this 

section. 

(c) Nothing in this section prohibits 

the Commission, at its election, from 

exercising the authority delegated in 

this section. 

§ 151.13 Severability. 

If any provision of this part, or the 

application thereof to any person or 

circumstances, is held invalid, such 

invalidity shall not affect other 

provisions or application of such 

provision to other persons or 

circumstances which can be given effect 

without the invalid provision or 

application. 

Appendix A to Part 151—Spot-Month 

Position Limits 

Contract 

Referenced 

contract spotmonth limit 

Agricultural Referenced Contracts 

ICE Futures U.S. Cocoa ................................................................................................................................................................ 1,000 

ICE Futures U.S. Coffee C ............................................................................................................................................................ 500 

Chicago Board of Trade Corn ....................................................................................................................................................... 600 

ICE Futures U.S. Cotton No. 2 ...................................................................................................................................................... 300 

ICE Futures U.S. FCOJ–A ............................................................................................................................................................ 300 

Chicago Mercantile Exchange Class III Milk ................................................................................................................................. 1,500 

Chicago Mercantile Exchange Feeder Cattle ................................................................................................................................ 300 

Chicago Mercantile Exchange Lean Hog ...................................................................................................................................... 950 

Chicago Mercantile Exchange Live Cattle .................................................................................................................................... 450 

Chicago Board of Trade Oats ....................................................................................................................................................... 600 

Chicago Board of Trade Rough Rice ............................................................................................................................................ 600 

Chicago Board of Trade Soybeans ............................................................................................................................................... 600 

Chicago Board of Trade Soybean Meal ........................................................................................................................................ 720 

Chicago Board of Trade Soybean Oil ........................................................................................................................................... 540 

ICE Futures U.S. Sugar No. 11 ..................................................................................................................................................... 5,000 

ICE Futures U.S. Sugar No. 16 ..................................................................................................................................................... 1,000 

Chicago Board of Trade Wheat ..................................................................................................................................................... 600 

Minneapolis Grain Exchange Hard Red Spring Wheat ................................................................................................................. 600 

Kansas City Board of Trade Hard Winter Wheat .......................................................................................................................... 600 

Metal Referenced Contracts 

Commodity Exchange, Inc. Copper ............................................................................................................................................... 1,200 

New York Mercantile Exchange Palladium ................................................................................................................................... 650 


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521Put-call parity describes the mathematical 

relationship between price of a put and call with 

identical strike prices and expiry. 

Contract 

Referenced 

contract spotmonth limit 

New York Mercantile Exchange Platinum ..................................................................................................................................... 500 

Commodity Exchange, Inc. Gold ................................................................................................................................................... 3,000 

Commodity Exchange, Inc. Silver ................................................................................................................................................. 1,500 

Energy Referenced Contracts 

New York Mercantile Exchange Light Sweet Crude Oil ............................................................................................................... 3,000 

New York Mercantile Exchange New York Harbor Gasoline Blendstock ..................................................................................... 1,000 

New York Mercantile Exchange Henry Hub Natural Gas ............................................................................................................. 1,000 

New York Mercantile Exchange New York Harbor Heating Oil .................................................................................................... 1,000 

Appendix B to Part 151—Examples of 

Bona Fide Hedging Transactions and 

Positions 

A non-exhaustive list of examples of bona 

fide hedging transactions or positions under 

§ 151.5 is presented below. A transaction or 

position qualifies as a bona fide hedging 

transaction or position when it meets the 

requirements under § 151.5(a)(1) and one of 

the enumerated provisions under 

§ 151.5(a)(2). With respect to a transaction or 

position that does not fall within an example 

in this Appendix, a person seeking to rely on 

a bona fide hedging exemption under § 151.5 

may seek guidance from the Division of 

Market Oversight. 

1. Royalty Payments 

a. Fact Pattern: In order to develop an oil 

field, Company A approaches Bank B for 

financing. To facilitate the loan, Bank B first 

establishes an independent legal entity 

commonly known as a special purpose 

vehicle (SPV). Bank B then provides a loan 

to the SPV. Payments of principal and 

interest from the SPV to the Bank are based 

on a fixed price for crude oil. The SPV in 

turn makes a production loan to Company A. 

The terms of the production loan require 

Company A to provide the SPV with 

volumetric production payments (VPPs) 

based on the SPV’s share of the production 

and the prevailing price of crude oil. Because 

the price of crude may fall, the SPV reduces 

that risk by entering into a NYMEX Light 

Sweet Crude Oil crude oil swap with Swap 

Dealer C. The swap requires the SPV to pay 

Swap Dealer C the floating price of crude oil 

and for Swap Dealer C to pay a fixed price. 

The notional quantity for the swap is equal 

to the expected production underlying the 

VPPs to the SPV. 

Analysis: The swap between Swap Dealer 

C and the SPV meets the general 

requirements for bona fide hedging 

transactions (§ 151.5(a)(1)(i)–(iii)) and the 

specific requirements for royalty payments 

(§ 151.5(a)(2)(vi)). The VPPs that the SPV 

receives represent anticipated royalty 

payments from the oil field’s production. The 

swap represents a substitute for transactions 

to be made in the physical marketing 

channel. The SPV’s swap position qualifies 

as a hedge because it is economically 

appropriate to the reduction of risk. The SPV 

is reasonably certain that the notional 

quantity of the swap is equal to the expected 

production underlying the VPPs. The swap 

reduces the risk associated with a change in 

value of a royalty asset. The fluctuations in 

value of the SPV’s anticipated royalties are 

substantially related to the fluctuations in 

value of the NYMEX Light Sweet Crude Oil 

Referenced Contract swap with Swap Dealer 

C. The risk-reducing position will not qualify 

as a bona fide hedge in a physical-delivery 

Referenced Contract during the spot month. 

b. Continuation of Fact Pattern: Swap 

Dealer C offsets the risk associated with the 

swap to the SPV by selling Referenced 

Contracts. The notional quantity of the 

Referenced Contracts sold by Swap Dealer C 

exactly matches the notional quantity of the 

swap with the SPV. 

Analysis: Because the SPV enters the swap 

as a bona fide hedger under § 151.5(a)(2)(vi), 

the offset of the risk of the swap in a 

Referenced Contract by Swap Dealer C 

qualifies as a bona fide hedging transaction 

under § 151.5(a)(3). As provided in 

§ 151.5(a)(3), the risk reducing position of 

Swap Dealer C does not qualify as a bona fide 

hedge in a physical-delivery Referenced 

Contract during the spot month. 

2. Sovereigns 

a. Fact Pattern: A Sovereign induces a 

farmer to sell his anticipated production of 

100,000 bushels of corn forward to User A at 

a fixed price for delivery during the expected 

harvest. In return for the farmer entering into 

the fixed-price forward sale, the Sovereign 

agrees to pay the farmer the difference 

between the market price at the time of 

harvest and the price of the fixed-price 

forward, in the event that the market price is 

above the price of the forward. The fixedprice forward sale of 100,000 bushels of corn 

reduces the farmer’s downside price risk 

associated with his anticipated agricultural 

production. The Sovereign faces commodity 

price risk as it stands ready to pay the farmer 

the difference between the market price and 

the price of the fixed-price contract. To 

reduce that risk, the Sovereign purchases 

100,000 bushels of Chicago Board of Trade 

(‘‘CBOT’’) Corn Referenced Contract call 

options. 

Analysis: Because the Sovereign and the 

farmer are acting together pursuant to an 

express agreement, the aggregation 

provisions of § 151.7 and § 151.5(b) apply 

and they are treated as a single person. 

Taking the positions of the Sovereign and 

farmer jointly, the risk profile of the 

combination of the forward sale and the long 

call is approximately equivalent to the risk 

profile of a synthetic long put.521 A synthetic 

long put may be a bona fide hedge for 

anticipated production. Thus, that single 

person satisfies the general requirements for 

bona fide hedging transactions 

(§ 151.5(a)(1)(i)–(iii)) and specific 

requirements for anticipated agricultural 

production (§ 151.5(a)(2)(i)(B)). The synthetic 

long put is a substitute for transactions that 

the farmer will make at a later time in the 

physical marketing channel after the crop is 

harvested. The synthetic long put reduces the 

price risk associated with anticipated 

agricultural production. The size of the hedge 

is equivalent to the size of the Sovereign’s 

risk exposure. As provided under 

§ 151.5(a)(2)(i)(B), the Sovereign’s riskreducing position will not qualify as a bona 

fide hedge in a physical-delivery Referenced 

Contract during the last five trading days. 

3. Services 

a. Fact Pattern: Company A enters into a 

risk service agreement to drill an oil well 

with Company B. The risk service agreement 

provides that a portion of the revenue 

receipts to Company A depends on the value 

of the oil produced. Company A is concerned 

that the price of oil may fall resulting in 

lower anticipated revenues from the risk 

service agreement. To reduce that risk, 

Company A sells 5,000 NYMEX Light Sweet 

Crude Oil Referenced Contracts, which is 

equivalent to the firm’s anticipated share of 

the oil produced. 

Analysis: Company A’s hedge of a portion 

of its revenue stream from the risk service 

agreement meets the general requirements for 

bona fide hedging (§ 151.5(a)(1)(i)–(iii)) and 

the specific provisions for services 

(§ 151.5(a)(2)(vii)). Selling NYMEX Light 

Sweet Crude Oil Referenced Contracts is a 

substitute for transactions to be taken at a 

later time in the physical marketing channel 

once the oil is produced. The Referenced 

Contracts sold by Company A are 

economically appropriate to the reduction of 

risk because the total notional quantity of the 

Referenced Contracts sold by Company A 

equals its share of the expected quantity of 

future production under the risk service 

agreement. Because the price of oil may fall, 

the transactions in Referenced Contracts arise 

from a potential reduction in the value of the 

service that Company A is providing to 

Company B. The contract for services 


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522Note that in addition to the use of Referenced 

Contracts, Producer A could have hedged this risk 

by using a basis contract, which is excluded from 

the definition of Referenced Contracts. 

involves the production of a commodity 

underlying the NYMEX Exchange Light 

Sweet Crude Oil Referenced Contract. As 

provided under § 151.5(a)(2)(vii), the risk 

reducing position will not qualify as a bona 

fide hedge during the spot month of the 

physical-delivery Referenced Contract. 

b. Fact Pattern: A City contracts with Firm 

A to provide waste management services. 

The contract requires that the trucks used to 

transport the solid waste use natural gas as 

a power source. According to the contract, 

the City will pay for the cost of the natural 

gas used to transport the solid waste by Firm 

A. In the event that natural gas prices rise, 

the City’s waste transport expenses rise. To 

mitigate this risk, the City establishes a long 

position in NYMEX Natural Gas Referenced 

Contracts that is equivalent to the expected 

use of natural gas over the life of the service 

contract. 

Analysis: This transaction meets the 

general requirements for bona fide hedging 

transaction (§ 151.5(a)(1)(i)–(iii)) and the 

specific provisions for services 

(§ 151.5(a)(2)(vii)). Because the City is 

responsible for paying the cash price for the 

natural gas used to power the trucks that 

transport the solid waste under the services 

agreement, the long hedge is a substitute for 

transactions to be taken at a later time in the 

physical marketing channel. The transaction 

is economically appropriate to the reduction 

of risk because the total notional quantity of 

the positions Referenced Contracts purchased 

equals the expected use of natural gas over 

the life of the contract. The positions in 

Referenced Contracts reduce the risk 

associated with an increase in anticipated 

liabilities that the City may incur in the event 

that the price of natural gas increases. The 

service contract involves the use of a 

commodity underlying a Referenced 

Contract. As provided under 

§ 151.5(a)(2)(vii), the risk reducing position 

will not qualify as a bona fide hedge during 

the spot month of the physical-delivery 

Referenced Contract. 

c. Fact Pattern: Natural Gas Producer A 

induces Pipeline Operator B to build a 

pipeline between Producer A’s natural gas 

wells and the Henry Hub pipeline 

interconnection by entering into a fixed-price 

contract for natural gas transportation that 

guarantees a specified quantity of gas to be 

transported over the pipeline. With the 

construction of the new pipeline, Producer A 

plans to deliver natural gas to Henry Hub at 

a price differential between his gas wells and 

Henry Hub that is higher than its 

transportation cost. Producer A is concerned, 

however, that the price differential may 

decline. To lock in the price differential, 

Producer A decides to sell outright NYMEX 

Henry Hub Natural Gas Referenced Contract 

cash-settled futures contracts and buy an 

outright swap that NYMEX Henry Hub 

Natural Gas at his gas wells. 

Analysis: This transaction satisfies the 

general requirements for a bona fide hedge 

exemption (§§ 151.5(a)(1)(i)–(iii)) and 

specific provisions for services 

(§ 151.5(a)(2)(vii)).522 The hedge represents a 

substitute for transactions to be taken in the 

future (e.g., selling natural gas at Henry Hub). 

The hedge is economically appropriate to the 

reduction of risk that the location differential 

will decline, provided the hedge is not larger 

than the quantity equivalent of the cash 

market commodity to be produced and 

transported. As provided under 

§ 151.5(a)(2)(vii), the risk reducing position 

will not qualify as a bona fide hedge during 

the spot month of the physical-delivery 

Referenced Contract. 

4. Lending a Commodity 

a. Fact Pattern: Bank B lends 1,000 ounces 

of gold to Jewelry Fabricator J at LIBOR plus 

a differential. Under the terms of the loan, 

Jewelry Fabricator J may later purchase the 

gold at a differential to the prevailing price 

of Commodity Exchange, Inc. (‘‘COMEX’’) 

Gold (i.e., an open-price purchase agreement 

embedded in the terms of the loan). Jewelry 

Fabricator J intends to use the gold to make 

jewelry and reimburse Bank B for the loan 

using the proceeds from jewelry sales. 

Because Bank B is concerned about its 

potential loss if the price of gold drops, it 

reduces the risk of a potential loss in the 

value of the gold by selling COMEX Gold 

Referenced Contracts with an equivalent 

notional quantity of 1,000 ounces of gold. 

Analysis: This transaction meets the 

general bona fide hedge exemption 

requirements (§§ 151.5(a)(1)(i)–(iii)) and the 

specific requirements associated with owing 

a cash commodity (§ 151.5(a)(2)(i)). Bank B’s 

short hedge of the gold represents a 

substitute for a transaction to be made in the 

physical marketing channel. Because the 

total notional quantity of the amount of gold 

contracts sold is equal to the amount of gold 

that Bank B owns, the hedge is economically 

appropriate to the reduction of risk. Finally, 

the transactions in Referenced Contracts arise 

from a potential change in the value of the 

gold owned by Bank B. 

b. Fact Pattern: Silver Processor A agrees 

to purchase scrap metal from a Scrap Yard 

that will be processed into 5,000 ounces of 

silver. To finance the purchase, Silver 

Processor A borrows 5,000 ounces of silver 

from Bank B and sells the silver in the cash 

market. Using the proceeds from the sale of 

silver in the cash market, Silver Processor A 

pays the Scrap Yard for the scrap metal 

containing 5,000 ounces of silver at a 

negotiated discount from the current spot 

price. To repay Bank B, Silver Processor A 

may either: Provide Bank B with 5,000 

ounces of silver and an interest payment 

based on a differential to LIBOR; or repay the 

Bank at the current COMEX Silver settlement 

price plus an interest payment based on a 

differential to LIBOR (i.e., an open-price 

purchase agreement). Silver Processor A 

processes and refines the scrap to repay Bank 

B. Although Bank B has lent the silver, it is 

still exposed to a reduction in value if the 

price of silver falls. Bank B reduces the risk 

of a possible decline in the value of their 

silver asset over the loan period by selling 

COMEX Silver Referenced Contracts with a 

total notional quantity equal to 5,000 ounces. 

Analysis: This transaction meets the 

general requirements for a bona fide hedging 

transaction (§§ 151.5(a)(1)(i)–(iii)) and 

specific provisions for owning a commodity 

(§ 151.5(a)(2)(i)). Bank B’s hedge of the silver 

that it owns represents a substitute for a 

transaction in the physical marketing 

channel. The hedge is economically 

appropriate to the reduction of risk because 

the bank owns 5,000 ounces of silver. The 

hedge reduces the risk of a potential change 

in the value of the silver that it owns. 

5. Processor Margins 

a. Fact Pattern: Soybean Processor A has a 

total throughput capacity of 100 million tons 

of soybeans per year. Soybean Processor A 

‘‘crushes’’ soybeans into products (soybean 

oil and meal). It currently has 20 million tons 

of soybeans in storage and has offset that risk 

through fixed-price forward sales of the 

amount of products expected to be produced 

from crushing 20 million tons of soybeans, 

thus locking in the crushing margin on 20 

million tons of soybeans. Because it has 

consistently operated its plant at full capacity 

over the last three years, it anticipates 

purchasing another 80 million tons of 

soybeans over the next year. It has not sold 

the crushed products forward. Processor A 

faces the risk that the difference in price 

between soybeans and the crushed products 

could change such that crush products (i.e., 

the crush spread) will be insufficient to cover 

its operating margins. To lock in the crush 

spread, Processor A purchases 80 million 

tons of CBOT Soybean Referenced Contracts 

and sells CBOT Soybean Meal and Soybean 

Oil Referenced Contracts, such that the total 

notional quantity of soybean meal and oil 

Referenced Contracts equals the expected 

production from crushing soybeans into 

soybean meal and oil respectively. 

Analysis: These hedging transactions meet 

the general requirements for bona fide 

hedging transactions (§§ 151.5(a)(1)(i)–(iii)) 

and the specific provisions for unfilled 

anticipated requirements and unsold 

anticipated agricultural production 

(§§ 151.5(a)(2)(i)–(ii)). Purchases of soybean 

Referenced Contracts qualify as bona fide 

hedging transaction provided they do not 

exceed the unfilled anticipated requirements 

of the cash commodity for one year (in this 

case 80 million tons). Such transactions are 

a substitute for purchases to be made at a 

later time in the physical marketing channel 

and are economically appropriate to the 

reduction of risk. The transactions in 

Referenced Contracts arise from a potential 

change in the value of soybeans that the 

processor anticipates owning. The size of the 

permissible hedge position in soybeans must 

be reduced by any inventories and fixedprice purchases because they are no longer 

unfilled requirements. As provided under 

§ 151.5(a)(2)(ii)(C), the risk reduction 

position that is not in excess of the 

anticipated requirements for soybeans for 

that month and the next succeeding month 

qualifies as a bona fide hedge during the last 

five trading days provided it is not in a 

physical-delivery Referenced Contract. 

Given that Soybean Processor A has 

purchased 80 million tons worth of CBOT 

Soybean Referenced Contracts, it can reduce 


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523Participant A could also choose to hedge on 

a gross basis. In that event, Participant A would sell 

the quantity equivalent of seven million bushels of 

March Chicago Board of Trade Corn Referenced 

Contracts, and separately purchase the quantity 

equivalent of five million bushels of May Chicago 

Board of Trade Corn Referenced Contracts. 

its processing risk by selling soybean meal 

and oil Referenced Contracts equivalent to 

the expected production. The sale of CBOT 

Soybean, Soybean Meal, and Soybean Oil 

contracts represents a substitute for 

transactions to be taken at a later time in the 

physical marketing channel by the soybean 

processor. Because the amount of soybean 

meal and oil Referenced Contracts sold 

forward by the soybean processor 

corresponds to expected production from 80 

million tons of soybeans, the hedging 

transactions are economically appropriate to 

the reduction of risk in the conduct and 

management of the commercial enterprise. 

These transactions arise from a potential 

change in the value of soybean meal and oil 

that is expected to be produced. The size of 

the permissible hedge position in the 

products must be reduced by any fixed-price 

sales because they are no longer unsold 

production. As provided under 

§ 151.5(a)(2)(i)(B), the risk reducing position 

does not qualify as a bona fide hedge in a 

physical-delivery Referenced Contract during 

the last five trading days in the event the 

anticipated crushed products have not been 

produced. 

6. Portfolio Hedging 

a. Fact Pattern: It is currently January and 

Participant A owns five million bushels of 

corn located in its warehouses. Participant A 

has entered into fixed-price forward sale 

contracts with several processors for a total 

of five million bushels of corn that will be 

delivered in May of this year. Participant A 

has separately entered into fixed-price 

purchase contracts with several 

merchandisers for a total of two million 

bushels of corn to be delivered in March of 

this year. Participant A’s gross long cash 

position is equal to seven million bushels of 

corn. Because Participant A has sold forward 

five million bushels of corn, its net cash 

position is equal to long two million bushels 

of corn. To reduce its price risk, Participant 

A chooses to sell the quantity equivalent of 

two million bushels of CBOT Corn 

Referenced Contracts. 

Analysis: The cash position and the fixedprice forward sale and purchases are all in 

the same crop year. Participant A currently 

owns five million bushels of corn and has 

effectively sold that amount forward. The 

firm is concerned that the remaining 

amount—two million bushels worth of fixedprice purchase contracts—will fall in value. 

Because the firm’s net cash position is equal 

to long two million bushels of corn, the firm 

is exposed to price risk. Selling the quantity 

equivalent of two million bushels of CBOT 

Corn Referenced Contracts satisfies the 

general requirements for bona fide hedging 

transactions (§§ 151.5(a)(1)(i)–(iii)) and the 

specific provisions associated with owning a 

commodity (§ 151.5(a)(2)(i)).523 Participant 

A’s hedge of the two million bushels 

represents a substitute to a fixed-price 

forward sale at a later time in the physical 

marketing channel. The transaction is 

economically appropriate to the reduction of 

risk because the amount of Referenced 

Contracts sold does not exceed the quantity 

equivalent risk exposure (on a net basis) in 

the cash commodity in the current crop year. 

Lastly, the hedge arises from a potential 

change in the value of corn owned by 

Participant A. 

7. Anticipated Merchandising 

a. Fact Pattern: Elevator A, a grain 

merchandiser, owns a 31 million bushel 

storage facility. The facility currently has 1 

million bushels of corn in storage. Based 

upon its historical purchasing and selling 

patterns for the last three years, Elevator A 

expects that in September it will enter into 

fixed-price forward purchase contracts for 30 

million bushels of corn that it expects to sell 

in December. Currently the December corn 

futures price is substantially higher than the 

September corn futures price. In order to 

reduce the risk that its unfilled storage 

capacity will not be utilized over this period 

and in turn reduce Elevator A’s profitability, 

Elevator A purchases the quantity equivalent 

of 30 million bushels of September CBOT 

Corn Referenced Contracts and sells 30 

million bushels of December CBOT Corn 

Referenced Contracts. 

Analysis: This hedging transaction meets 

the general requirements for bona fide 

hedging transactions (§§ 151.5(a)(1)(i)–(iii)) 

and specific provisions associated with 

anticipated merchandising (§ 151.5(a)(2)(v)). 

The hedging transaction is a substitute for 

transactions to be taken at a later time in the 

physical marketing channel. The hedge is 

economically appropriate to the reduction of 

risk associated with the firm’s unfilled 

storage capacity because: (1) The December 

CBOT Corn futures price is substantially 

above the September CBOT Corn futures 

price; and (2) Elevator A reasonably expects 

to engage in the anticipated merchandising 

activity based on a review of its historical 

purchasing and selling patterns at that time 

of the year. The risk arises from a change in 

the value of an asset that the firm owns. As 

provided by § 151.5(a)(2)(v), the size of the 

hedge is equal to the firm’s unfilled storage 

capacity relating to its anticipated 

merchandising activity. The purchase and 

sale of offsetting Referenced Contracts are in 

different months, which settle in not more 

than twelve months. As provided under 

§ 151.5(a)(2)(v), the risk reducing position 

will not qualify as a bona fide hedge in a 

physical-delivery Referenced Contract during 

the last 5 trading days of the September 

contract. 

8. Aggregation of Persons 

a. Fact Pattern: Company A owns 100 

percent of Company B. Company B buys and 

sells a variety of agricultural products, such 

as wheat and cotton. Company B currently 

owns 1 million bushels of wheat. To reduce 

some of its price risk, Company B decides to 

sell the quantity equivalent of 600,000 

bushels of CBOT Wheat Referenced 

Contracts. After communicating with 

Company B, Company A decides to sell the 

quantity equivalent of 400,000 bushels of 

CBOT Wheat Referenced Contracts. 

Analysis: Because Company A owns more 

than 10 percent of Company B, Company A 

and B are aggregated together as one person 

under § 151.7. Under § 151.5(b), entities 

required to aggregate accounts or positions 

under § 151.7 shall be considered the same 

person for the purpose of determining 

whether a person or persons are eligible for 

a bona fide hedge exemption under 

paragraph § 151.5(a). The sale of wheat 

Referenced Contracts by Company A and B 

meets the general requirements for bona fide 

hedging transactions (§§ 151.5(a)(1)(i)–(iii)) 

and the specific provisions for owning a cash 

commodity (§ 151.5(a)(2)(i)). The transactions 

in Referenced Contracts by Company A and 

B represent a substitute for transactions to be 

taken at a later time in the physical 

marketing channel. The transactions in 

Referenced Contracts by Company A and B 

are economically appropriate to the 

reduction of risk because the combined total 

of 1,000,000 bushels of CBOT Wheat 

Referenced Contracts sold by Company A 

and Company B does not exceed the 

1,000,000 bushels of wheat that is owned by 

Company A. The risk exposure for Company 

A and B results from a potential change in 

the value of wheat. 

9. Repurchase Agreements 

a. Fact Pattern: When Elevator A 

purchased 500,000 bushels of wheat in April 

it decided to reduce its price risk by selling 

the quantity equivalent of 500,000 bushels of 

CBOT Wheat Referenced Contracts. Because 

the price of wheat has steadily risen since 

April, Elevator A has had to make substantial 

maintenance margin payments. To alleviate 

its concern about further margin payments, 

Elevator A decides to enter into a repurchase 

agreement with Bank B. The repurchase 

agreement involves two separate contracts: A 

fixed-price sale from Elevator A to Bank B at 

today’s spot price; and an open-priced 

purchase agreement that will allow Elevator 

A to repurchase the wheat from Bank B at the 

prevailing spot price three months from now. 

Because Bank B obtains title to the wheat 

under the fixed-price purchase agreement, it 

is exposed to price risk should the price of 

wheat drop. It therefore decides to sell the 

quantity equivalent of 500,000 bushels of 

CBOT Wheat Referenced Contracts. 

Analysis: Bank B’s hedging transaction 

meets the general requirements for bona fide 

hedging transactions (§§ 151.5(a)(1)(i)–(iii)) 

and the specific provisions for owning the 

cash commodity (§ 151.5(a)(2)(i)). The sale of 

Referenced Contracts by Bank B is a 

substitute for a transaction to be taken at a 

later time in the physical marketing channel 

either to Elevator A or to another commercial 

party. The transaction is economically 

appropriate to the reduction of risk in the 

conduct and management of the commercial 

enterprise of Bank B because the notional 

quantity of Referenced Contracts sold by 

Bank B is not larger than the quantity of cash 

wheat purchased by Bank B. Finally, the 

purchase of CBOT Wheat Referenced 

Contracts reduces the risk associated with 

owning cash wheat. 

10. Inventory 

a. Fact Pattern: Copper Wire Fabricator A 

is concerned about possible reductions in the 


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price of copper. Currently it is November and 

it owns inventory of 100,000 pounds of 

copper and 50,000 pounds of finished copper 

wire. Currently, deferred futures prices are 

lower than the nearby futures price. Copper 

Wire Fabricator A expects to sell 150,000 

pounds of finished copper wire in February. 

To reduce its price risk, Copper Wire 

Fabricator A sells 150,000 pounds of 

February COMEX Copper Referenced 

Contracts. 

Analysis: The Copper Wire Fabricator A’s 

hedging transaction meets the general 

requirements for bona fide hedging 

transactions (§§ 151.5(a)(1)(i)–(iii)) and the 

provisions for owning a commodity 

(§ 151.5(a)(2)(i)(A)). The sale of Referenced 

Contracts represents a substitute for 

transactions to be taken at a later time. The 

transactions are economically appropriate to 

the reduction of risk in the conduct and 

management of the commercial enterprise 

because the price of copper could drop 

further. The transactions in Referenced 

Contracts arise from a possible reduction in 

the value of the inventory that it owns. 

Issued by the Commission this 18th day of 

October 2011, in Washington, DC. 

David Stawick, 

Secretary of the Commission. 

Appendices to Position Limits for 

Futures and Swaps—Commission 

Voting Summary and Statements of 

Commissioners 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Dunn and Chilton voted in 

the affirmative; Commissioners Sommers and 

O’Malia voted in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the final rulemaking to establish 

position limits for physical commodity 

derivatives. The CFTC does not set or 

regulate prices. Rather, the Commission is 

charged with a significant responsibility to 

ensure the fair, open and efficient 

functioning of derivatives markets. Our duty 

is to protect both market participants and the 

American public from fraud, manipulation 

and other abuses. 

Position limits have served since the 

Commodity Exchange Act passed in 1936 as 

a tool to curb or prevent excessive 

speculation that may burden interstate 

commerce. When the CFTC set position 

limits in the past, the agency sought to 

ensure that the markets were made up of a 

broad group of market participants with no 

one speculator having an outsize position. At 

the core of our obligations is promoting 

market integrity, which the agency has 

historically interpreted to include ensuring 

that markets do not become too concentrated. 

Position limits help to protect the markets 

both in times of clear skies and when there 

is a storm on the horizon. In 1981, the 

Commission said that ‘‘the capacity of any 

contract market to absorb the establishment 

and liquidation of large speculative positions 

in an orderly manner is related to the relative 

size of such positions, i.e., the capacity of the 

market is not unlimited.’’ 

In the Dodd-Frank Act, Congress mandated 

that the CFTC set aggregate position limits for 

certain physical commodity derivatives. The 

Dodd-Frank Act broadened the CFTC’s 

position limits authority to include aggregate 

position limits on certain swaps and certain 

linked contracts traded on foreign boards of 

trade in addition to U.S. futures and options 

on futures. Congress also narrowed the 

exemptions traditionally available from 

position limits by modifying the definition of 

bona fide hedge transaction, which 

particularly would affect swap dealers. 

Today’s final rule implements these 

important new provisions. The final rule 

fulfills the Congressional mandate that we set 

aggregate position limits that, for the first 

time, apply to both futures and economically 

equivalent swaps, as well as linked contracts 

on foreign boards of trade. The final rule 

establishes federal position limits in 28 

referenced commodities in agricultural, 

energy and metals markets. 

Per Congress’s direction, the rule 

implements one position limits regime for 

the spot month and another for single-month 

and all-months combined limits. It 

implements spot-month limits, which are 

currently set in agriculture, energy and 

metals markets, sooner than the single-month 

or all-months-combined limits. Spot-month 

limits are set for futures contracts that can by 

physically settled as well as those swaps and 

futures that can only be cash-settled. We are 

seeking additional comment as part of an 

interim final rule on these spot month limits 

with regard to cash-settled contracts. 

Single-month and all-months-combined 

limits, which currently are only set for 

certain agricultural contracts, will be reestablished in the energy and metals markets 

and be extended to certain swaps. These 

limits will be set using a formula that is 

consistent with that which the CFTC has 

used to set position limits for decades. The 

limits will be set by a Commission order 

based upon data on the total size of the 

swaps and futures market collected through 

the position reporting rule the Commission 

finalized in July. It is only with the passage 

and implementation of the Dodd-Frank Act 

that the Commission now has broad authority 

to collect data in the swaps market. 

The final rule also implements Congress’s 

direction to narrow exemptions while also 

ensuring that bona fide hedge exemptions are 

available for producers and merchants. The 

final position limits rulemaking builds on 

more than two years of significant public 

input. The Commission benefited from more 

than 15,100 comments received in response 

to the January 2011proposal. We first held 

three public meetings on this issue in the 

summer of 2009 and got a great deal of input 

from market participants and the broader 

public. We also benefited from the more than 

8,200 comments we received in response to 

the January 2010 proposed rulemaking to reestablish position limits in the energy 

markets. We further benefited from input 

received from the public after a March 2010 

meeting on the metals markets. 

Appendix 3—Statement of 

Commissioner Jill Sommers 

I respectfully dissent from the action taken 

today by the Commission to issue final rules 

establishing position limits for futures and 

swaps. 

It has been nearly two years since the 

Commission issued its January 2010 proposal 

to impose position limits on a small group of 

energy contracts. Since then, Commission 

staff and the Commission have spent an 

enormous amount of time and energy on the 

issue of imposing speculative position limits, 

time that could have been much better spent 

implementing the specific Dodd-Frank 

regulatory reforms that will actually reduce 

systemic risk and prevent another financial 

crisis. 

This vote today on position limits is no 

doubt the single most significant vote I have 

taken since becoming a Commissioner. It is 

not because imposing position limits will 

fundamentally change the way the U.S. 

markets operate, but because I believe this 

agency is setting itself up for an enormous 

failure. 

As I have said in the past, position limits 

can be an important tool for regulators. I have 

been clear that I am not philosophically 

opposed to limits. After all, this agency has 

set limits in certain markets for many years. 

However, I have had concerns all along about 

the particular application of the limits in this 

rule, compounded by the unnecessary 

narrowing of the bona-fide hedging 

exemptions, beyond what was required by 

the Dodd-Frank Act. 

Over the last four years, many have argued 

for position limits with such fervor and zeal, 

believing them to be a panacea for 

everything. Just this past week, the 

Commission has been bombarded by a letterwriting campaign suggesting that the five of 

us have the power to end world hunger by 

imposing position limits on agricultural 

commodities. This latest campaign 

exemplifies my ongoing concern and may 

result in damaging the credibility of this 

agency. I do not believe position limits will 

control prices or market volatility, and I fear 

that this Commission will be blamed when 

this final rule does not lower food and energy 

costs. I am disappointed at this unfortunate 

circumstance because, while the 

Commission’s mission is to protect market 

users and the public from fraud, 

manipulation, abusive practices and systemic 

risk related to derivatives that are subject to 

the Commodity Exchange Act, and to foster 

open, competitive, and financially sound 

markets, nowhere in our mission is the 

responsibility or mandate to control prices. 

When analyzing the potential impact this 

final rule will have on market participants, 

I am most concerned that rules designed to 

‘‘reign in speculators’’ have the real potential 

to inflict the greatest harm on bona fide 

hedgers—that is, the producers, processers, 

manufacturers, handlers and users of 

physical commodities. This rule will make 

hedging more difficult, more costly, and less 

efficient, all of which, ironically, can result 

in increased food and energy costs for 

consumers. 


jlentini on DSK4TPTVN1PROD with RULES2
71700 Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / Rules and Regulations 

524Position Limits for Futures and Swaps (to be 

codified at 17 CFR pts. 1, 150 and 151) at 11, 

available at http://www.cftc.gov/ucm/groups/

public/@newsroom/documents/file/federalregister

101811c.pdf (hereafter, ‘‘Position Limits for Futures 

and Swaps’’). 

Currently, the Commission sets and 

administers position limits and exemptions 

for contracts on nine agricultural 

commodities. For contracts of the remaining 

commodities, the exchanges set and 

administer position limits and exemptions. 

Pursuant to the final rule the Commission 

issued today, the Commission will set and 

administer position limits and exemptions 

for 28 reference contracts. This will amount 

to a substantial transfer of responsibility from 

the exchanges to the Commission. As a result 

of taking on this responsibility for 19 new 

reference contracts, the Commission is 

significantly increasing its front-line 

oversight of the granting and monitoring of 

bona-fide hedging exemptions for the 

transactions of massive, global corporate 

conglomerates that on a daily basis produce, 

process, handle, store, transport, and use 

physical commodities in their extremely 

complex logistical operations. 

At the very time the Commission is taking 

on this new responsibility, the Commission 

is eliminating a valuable source of flexibility 

that has been a part of regulation 1.3(z) for 

decades—that is, the ability to recognize nonenumerated hedge transactions and 

positions. This final rule abandons important 

and long-standing Commission precedent 

without justification or reasoned explanation, 

by merely stating ‘‘the Commission has 

* * * expanded the list of enumerated 

hedges.’’ The Commission also seems to be 

saying that we no longer need the flexibility 

to allow for non-enumerated hedge 

transactions and positions because one can 

seek interpretative guidance pursuant to 

Commission Regulation 140.99 on whether a 

transaction or class of transactions qualifies 

as a bona-fide hedge, or can petition the 

Commission to amend the list of enumerated 

transactions. The Commission also 

recognizes that CEA Section 4a(a)(7) grants it 

the broad exemptive authority is issue an 

order, rule, or regulation, but offers no 

guidance on when it may do so, and what 

factors it may consider or criteria it may use 

to make a determination. 

These processes are cold comfort. There is 

no way to tell how long interpretative 

guidance or a Commission Order will take. 

Moreover, if a market participant petitions 

the Commission to amend the list of 

enumerated transactions, if the Commission 

chooses to do so, it must formally propose 

the amendment pursuant to APA notice and 

comment. As we know all too well, issuing 

new rules and regulations is a time 

consuming process fraught with delay and 

uncertainty. In the end, none of these 

processes is flexible or useful to the needs of 

hedgers in a complex global marketplace. 

When the Commission first recognized the 

need to allow for non-enumerated hedges in 

1977, the Commission stated ‘‘The purpose of 

the proposed provision was to provide 

flexibility in application of the general 

definition and to avoid an extensive 

specialized listing of enumerated bona fide 

hedging transactions and positions. * * *’’ 

Today the global marketplace and 

commercial firms’ hedging strategies are 

much more complex than in 1977. Yet, we 

are content to abandon decades of precedent 

that provided flexibility in favor of specifying 

a specialized list of enumerated bona fide 

hedging transactions and positions. I am not 

comfortable with notion that a list of eight 

bona-fide hedging transactions in this rule is 

sufficiently extensive and specialized to 

cover the complex needs of today’s bona-fide 

hedgers. Repealing the ability to recognize 

non-enumerated hedge transactions and 

positions is a mistake and the statute does 

not require it. The Commission should have 

remained true to its precedent and utilized 

the broad authority contained in CEA Section 

4a(a)(7) to include within Regulation 

151.5(a)(2) a ninth enumerated hedging 

transaction and position, with the same 

conditions as the previous eight, as follows: 

‘‘Other risk-reducing practices commonly 

used in the market that are not enumerated 

above, upon specific request made in 

accordance with Regulation section 1.47.’’ 

In addition to abandoning decades of 

flexibility to recognize non-enumerated 

hedging transactions and positions, the final 

rules today do not fully effect the authority 

the Commission has had for decades to 

define bona-fide hedging transactions and 

positions ‘‘to permit producers, purchasers, 

sellers, middlemen, and users of a 

commodity or a product derived therefrom to 

hedge their legitimate anticipated business 

needs. * * *’’ This authority is found in CEA 

Section 4a(c)(1). In addition, Section 4a(c)(2) 

clearly recognizes the need for anticipatory 

hedging by using the word ‘‘anticipates’’ in 

three places. Nonetheless, without defining 

what constitutes ‘‘merchandising’’ the 

Commission has limited ‘‘Anticipated 

Merchandising Hedging’’ in Regulation 

151.5(a)(2)(v) to transactions not larger than 

‘‘current or anticipated unfilled storage 

capacity.’’ It appears then that merchandising 

does not include the varying activities of 

‘‘producers, purchasers, sellers, middlemen, 

and users of a commodity’’ as contemplated 

by Section 4a(c)(1), but merely consists of 

storing a commodity. This limited approach 

is needlessly at odds with the statute and 

with the legitimate needs of hedgers. 

I have always believed that there was a 

right way and a wrong way for us to move 

forward on position limits. Unfortunately I 

believe we have chosen to go way beyond 

what is in the statute and have created a very 

complicated regulation that has the potential 

to irreparably harm these vital markets. 

Appendix 4—Statement of 

Commissioner Scott O’Malia 

I respectfully dissent from the action taken 

today by the Commission to issue final rules 

relating to position limits for futures and 

swaps. While I have a number of serious 

concerns with this final rule, my principal 

disagreement is with the Commission’s 

restrictive interpretation of the statutory 

mandate under Section 4a of the Commodity 

Exchange Act (‘‘CEA’’ or ‘‘Act’’) to establish 

position limits without making a 

determination that such limits are necessary 

and effective in relation to the identifiable 

burdens of excessive speculation on 

interstate commerce. 

While I agree that the Commission has 

been directed to establish position limits 

applicable to futures, options, and swaps that 

are economically equivalent to such futures 

and options (for exempt and agricultural 

commodities as defined by the Act), I 

disagree that our mandate provides for so 

little discretion in the manner of its 

execution. Throughout the preamble, the 

Commission uses, ‘‘Congress did not give the 

Commission a choice’’ 524 as a rationale in 

adopting burdensome and unmanageable 

rules of questionable effectiveness. This 

statement, in all of its iterations in this rule, 

is nothing more than hyperbole used tactfully 

to support a politically-driven overstatement 

as to the threat of ‘‘excessive speculation’’ in 

our commodity markets. In aggrandizing a 

market condition that it has never defined 

through quantitative or qualitative criteria in 

order to justify draconian rules, the 

Commission not only fails to comply with 

Congressional intent, but misses an 

opportunity to determine and define the type 

and extent of speculation that is likely to 

cause sudden, unreasonable and/or 

unwarranted commodity price movements so 

that it can respond with rules that are 

reasonable and appropriate. 

In relevant part, section 4a(a)(1) of the Act 

states: ‘‘Excessive speculation in any 

commodity under contracts of sale of such 

commodity for future delivery * * * or 

swaps * * * causing sudden or unreasonable 

fluctuations or unwarranted changes in the 

price of such commodity, is an undue and 

unnecessary burden on interstate commerce 

in such commodity.’’ Section 4a(a)(1) further 

defines the Commission’s duties with regard 

to preventing such price fluctuations through 

position limits, clearly stating: ‘‘For the 

purpose of diminishing, eliminating, or 

preventing such burden, the Commission 

shall, from time to time, after due notice and 

opportunity for hearing, by rule, regulation, 

or order, proclaim and fix such limits * * * 

as the Commission finds are necessary to 

diminish, eliminate, or prevent such 

burden.’’ Congress could not be more clear in 

its directive to the Commission to utilize not 

only its expertise, but the public rulemaking 

process, each and every time it determines to 

establish position limits to ensure that such 

limits are essential and suitable to combat the 

actual or potential threats to commodity 

prices due to excessive speculation. 

An Ambiguously Worded Mandate Does Not 

Relieve the Commission of Its Duties Under 

the Act 

Historically, the Commission has taken a 

much more disciplined and fact-based 

approach in considering the question of 

position limits; a process that is lacking from 

the current proposal. The general authority 

for the Commission to establish ‘‘limits on 

the amounts of trading which may be done 

or positions which may be held * * * as the 

Commission finds are necessary to diminish, 

eliminate, or prevent’’ the ‘‘undue burdens’’ 

associated with excessive speculation found 

in section 4a of the Act has remained 

unchanged since its original enactment in 

1936 and through subsequent amendments, 


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525Position Limits for Futures and Swaps, supra 

note 1, at 5. 

526Speculative Position Limits, 45 FR 79831 

(proposed Dec. 2, 1980) (to be codified at 17 CFR 

pt. 1). 

527 Id. at 79832; Speculative Limits: a staff paper 

prepared for Commission discussion by the Office 

of the Chief Economist at 1, June 24, 1977. 

528The Staff Report ultimately made four general 

recommendations. First, the Commission ought to 

adopt a policy of establishing speculative limits 

only in those markets where the characteristics of 

the commodity, its marketing system, and the 

contract lend themselves to undue influence from 

large scale speculative positions. Second, that in 

markets where limits are deemed to be necessary, 

such limits should only be established to curtail 

extraordinary speculative positions which are not 

offset by comparable commercial positions. Third, 

there ought to be no limits on daily trading except 

to the extent that the limits would prevent the 

accumulation of large intraday positions. Fourth, in 

markets where limits are deemed necessary, the 

exchange should set and review the limits subject 

to Commission approval. Office of Chief Economist, 

supra note 4, at 5–6. 

529Office of Chief Economist, supra note 4, at 7. 

530 Id. at 7–8. 

531See, e.g., Comment letter from Futures 

Industry Association on Position Limits for 

Derivatives (RIN 2028–AD15 and 3038–AD16) at 6– 

7 (Mar. 25, 2011), available at http://comments.cftc.

gov/PublicComments/ViewComment.aspx?id=

34054&SearchText=futures%20industry%

20association; Comment letter from CME Group on 

Position Limits for Derivatives at 1–7 (Mar. 28, 

2011), available at http://comments.cftc.gov/Public

Comments/ViewComment.aspx?id=33920&Search

Text=cme; and Comment Letter of International 

Swaps and Derivatives Association, Inc. and 

Securities Industry and Financial Markets 

Association on Notice of Proposed Rulemaking— 

Position Limits for Derivatives (RIN 3038–AD15 

and 3038–AD16) at 3–6 (Mar. 28, 2011), available 

at http://comments.cftc.gov/PublicComments/View

Comment.aspx?id=33568&SearchText=isda. 

532Office of Chief Economist, supra note 7, at 5. 

533 46 FR at 50938, 50940. 

534 Id. 

535Position Limits for Futures and Swaps, supra 

note 1, at 10–11. 

536 Id. 

537See section 4a(a)(3)(B) of the CEA. 

538See, e.g., Comment letter from BG Americas & 

Global LNG on Proposed Rule Regarding Position 

Limits for Derivatives (RIN 2028–AD15 and 3038– 

AD16) at 4 (Mar. 28, 2011), available at http:// 

comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=965 (‘‘Notwithstanding the 

Commission’s argument that it has authority to use 

position limits absent a specific finding that an 

undue burden on interstate commerce had actually 

resulted, the language and intent of CEA Section 

4a(a)(1) remains unchanged by the Dodd-Frank Act. 

As a consequence, the Commission has not been 

relieved of the obligation under Section 4a(a)(1) to 

show that the proposed position limits for the 

Referenced Contracts are necessary to prevent 

excessive speculation.’’). 

539See La Union Del Pueblo Entero v. FEMA, No. 

B–08–487, slip op., 2009 WL 1346030 at *4 (S.D. 

Tex. May 13, 2009) (‘‘[W]hen ‘shall’ is modified by 

a discretionary phrase such as ‘as may be necessary’ 

or ‘as appropriate’ an agency has some discretion 

when complying with the mandate.’’ (citing 

Consumer Fed’n of America v. U.S. Dep’t of Health 

and Human Servs., 83 F.3d 1497, 1503 (DC Cir. 

1996) (indicating that where Congress in mandating 

administrative action modifies the word ‘‘shall’’ 

with the phrase ‘‘as appropriate’’ an agency has 

discretion to evaluate the circumstances and 

determine when and how to act)). 

including the Dodd-Frank Act.525 Over thirty 

years ago, on December 2, 1980, the 

Commission, pursuant in part to its authority 

under section 4a (1) of the Act, issued a 

proposal to implement rules requiring 

exchanges to impose position limits on 

contracts that were not currently subject to 

Commission imposed limits.526

In support of its proposal, the Commission 

relied on a June 1977 report on speculative 

limits prepared by the Office of the Chief 

Economist (the ‘‘Staff Report’’). The Staff 

Report addressed three major policy 

questions: (1) whether there should be limits 

and for what groups of commodities; (2) what 

guidelines are appropriate in setting the level 

of limits; and (3) whether the Commission or 

the exchange should set the limits.527 528 In 

considering these questions, the Staff Report 

noted, ‘‘Although the Commission is 

authorized to establish speculative limits, it 

is not required to do so.’’ 529 In its 

Interpretation of the above language in 

section 4a, the Staff Report at the outset 

provided the legal context for its study as 

follows: 

[T]he Commission need not establish 

speculative limits if it does not find that 

excessive speculation exists in the trading of 

a particular commodity. Furthermore, 

apparently, the Commission does not have to 

establish limits if it finds that such limits 

will not effectively curb excessive 

speculation.530

While not directly linked to the statutory 

language of section 4a or an interpretation of 

such language, the Staff Report utilized its 

findings to formulate a policy for the 

Commission to move forward, which, based 

on comments to the Commission’s January 

2011 proposal,531 is clearly embodied in the 

purpose and spirit of the Act: 

Perhaps the most important feature brought 

out in the study is that, prior to the adoption 

of speculative position limits for any 

commodity in which limits are not now 

imposed by CFTC, the Commission should 

carefully consider the need for and 

effectiveness of such limits for that 

commodity and the resources necessary to 

enforce such limits.532

In its final rule, published in the Federal 

Register on October 16, 1981—almost exactly 

thirty years ago today—the Commission 

chose to base its determination on 

Congressional findings embodied in section 

4a(1) of the Act that excessive speculation is 

harmful to the market, and a finding that 

speculative limits are an effective 

prophylactic measure. The Commission did 

not do so because it found that more specific 

determinations regarding the necessity and 

effectiveness of position limits were not 

required. Rather, the Commission was 

fashioning a rule ‘‘to assure that the 

exchanges would have an opportunity to 

employ their knowledge of their individual 

contract markets to propose the position 

limits they believe most appropriate.’’ 533

Moreover, none of the commenters opposing 

the adoption of limits for all markets 

demonstrated to the Commission that its 

findings as to the prophylactic nature of the 

proposal before them were 

unsubstantiated.534 Therefore, the 

Commission did not eschew a requirement to 

demonstrate whether position limits were 

necessary and would be effective—it 

delegated these determinations to the 

exchanges. 

Today, the Commission reaffirms its 

proposed interpretation of amended section 

4a that in setting position limits pursuant to 

directives in sections 4a(a)(2)(A), 4a(a)(3) and 

4a(a)(5), it need not first determine that 

position limits are necessary before imposing 

them or that it may set limits only after 

conducting a complete study of the swaps 

market.535 Relying on the various directives 

following ‘‘shall,’’ the Commission has 

bluntly stated that ‘‘Congress did not give the 

Commission a choice.’’ 536 This 

interpretation ignores the plain language in 

the statute that the ‘‘shalls’’ in sections 

4a(a)(2)(A), 4a(a)(3) and 4a(a)(5) are 

connected to the modifying phrase, ‘‘as 

appropriate.’’ Although the Commission 

correctly construes the ‘‘as appropriate’’ 

language in the context of the provisions as 

a whole to direct the Commission to exercise 

its discretion in determining the extent of the 

limits that Congress ‘‘required’’ it to impose, 

the Commission ignores the fact that in the 

context of the Act, such discretion is broad 

enough to permit the Commission to not 

impose limits if they are not appropriate. 

Though a permissible interpretation, the 

Commission’s narrow view of its authority 

permeates the final rules today and provides 

a convenient rationale for many otherwise 

unsustainable conclusions, especially with 

regard to the cost-benefit analysis of the rule. 

Section 4a(a)(2)(A), in relevant part, states 

that the Commission ‘‘shall by rule, 

regulation, or order establish limits on the 

amount of positions, as appropriate’’ that 

may be held by any person in physical 

commodity futures and options contracts 

traded on a designated contract market 

(DCM). In section 4a(a)(5), Congress directed 

that the Commission ‘‘shall establish limits 

on the amount of positions, including 

aggregate position limits, as appropriate’’ that 

may be held by any person with respect to 

swaps. Section 4a(a)(3) qualifies the 

Commission’s authority by directing it so set 

such limits ‘‘required’’ by section 4a(a)(2), 

‘‘as appropriate * * * [and] to the maximum 

extent practicable, in its discretion’’ (1) to 

diminish, eliminate, or prevent excessive 

speculation as described under this section 

(section 4a of the Act), (2) to deter and 

prevent market manipulation, squeezes, and 

corners, (3) to ensure sufficient market 

liquidity for bona fide hedgers, and (4) to 

ensure that the price discovery function of 

the underlying market is not disrupted.537

Congress, in repeatedly qualifying its 

mandates with the phrase ‘‘as appropriate’’ 

and by specifically referring back to the 

Commission’s authority to set position limits 

as proscribed in section 4a(a)(1), clearly did 

not relieve the Commission of any 

requirement to exercise its expertise and set 

position limits only to the extent that it can 

provide factual support that such limits will 

diminish, eliminate or prevent excessive 

speculation.538 Instead, by directing the 

Commission to establish limits ‘‘as 

appropriate,’’ 539 Congress intended to 


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540Section 4a(a)(6) mandates through an 

unqualified ‘‘shall,’’ that the Commission set 

aggregate limits across trading venues including 

foreign boards of trade. 

541See, e.g., Comment letter from Futures 

Industry Association on Position Limits for 

Derivatives (RIN 2028–AD15 and 3038–AD16) at 

6–8; Comment Letter of International Swaps and 

Derivatives Association, Inc. and Securities 

Industry and Financial Markets Association on 

Notice of Proposed Rulemaking—Position Limits 

for Derivatives (RIN 3038–AD15 and 3038–AD16) at 

3–4. 

542Position Limits for Derivatives, 76 FR 4752 

(proposed Jan. 26, 2011) (to be codified at 17 CFR 

pts. 1, 150 and 151). 

543See Am. Med. Ass’n v. Reno, 57 F.3d 1129, 

1132–3 (DC Cir. 1995) (‘‘Notice of a proposed rule 

must include sufficient detail on its content and 

basis in law and evidence to allow for meaningful 

and informed comment: ‘the Administrative 

Procedure Act requires the agency to make available 

to the public in a form that allows for meaningful 

comment, the data the agency used to develop the 

proposed rule.’’’) (quoting Engine Mfrs. Ass’n v. 

EPA, 20 F.3d 1177, 1181 (DC Cir. 1994)). 

544Position Limits for Futures and Swaps, supra 

note 1, at 4. 

545See, e.g., 76 FR at 4752, 4763 and 4775 (In its 

discussion of registered entity position limits, the 

preamble makes no mention of proposed 

§ 151.11(a)(2) which would remove a registered 

entity’s discretion under CEA § 5(d)(5)(A) for 

designated contract markets (DCMs) and under CEA 

§ 5h(f)(6)(A) for swap execution facilities (SEFs) 

that are trading facilities to set position 

accountability in lieu of position limits for physical 

commodity contracts for which the Commission has 

not set Federal limits.). 

546Today’s final rule does not hide the fact that 

the position limits regime is aimed at ‘‘prevent[ing] 

a large trader from acquiring excessively large 

positions and thereby would help prevent excessive 

speculation and deter and prevent market 

manipulations, squeezes, and corners.’’ See Position 

Limits for Futures and Swaps, supra note 1, at 47. 

See also Comment letter from Better Markets on 

Position Limits for Derivatives (RIN 2028–AD15 

and 3038–AD16) at 62 (Mar. 28, 2011) available at 

http://comments.cftc.gov/PublicComments/View

Comment.aspx?id=34010&SearchText=

better%20markets (‘‘[T]here are critical differences 

between a commodities market position limit 

regime focused just on manipulation, and one 

focusing on a very different concept of excessive 

speculation.’’). 

547Position Limits for Futures and Swaps, supra 

note 1, at 137 (‘‘In light of the congressional 

mandate to impose position limits, the Commission 

disagrees with comments asserting that the 

Commission must first determine that excessive 

speculation exists or prove that position limits are 

an effective tool.’’). 

548As defined in new § 151.1. 

provide the Commission with the discretion 

necessary to establish a position limit regime 

in a manner that will not only protect the 

markets from undue burdens due to 

excessive speculation and manipulation, but 

that will also provide for market liquidity 

and price discovery in a level playing field 

while preventing regulatory arbitrage.540

I agree with commenters who argued that 

the Commission is directed under its new 

authority to set position limits ‘‘as 

appropriate,’’ or in other words meaning that 

whatever limits the Commission sets are 

supported by empirical evidence 

demonstrating that those would diminish, 

eliminate, or prevent excessive 

speculation.541 In the absence of such 

evidence, I also agree with commenters that 

we are unable, at this time, to fulfill the 

mandate and assure Congress and market 

participants that any such limits we do 

establish will comply with the statutory 

objectives of section 4a(a)(3). And, to be 

clear, without empirical data, we cannot 

assure Congress that the limits we set will 

not adversely affect the liquidity and price 

discovery functions of affected markets. The 

Commission will have significant additional 

data about the over-the-counter (OTC) swaps 

markets in the next year, and at a minimum, 

I believe it would be appropriate for the 

Commission to defer any decisions about the 

nature and extent of position limits for 

months outside of the spot-month, including 

any determinations as to appropriate 

formulas, until such time as we have had a 

meaningful opportunity to review and assess 

the new data and its relevance to any 

determinations regarding excessive 

speculation. At a future date, when the 

Commission applies the second phase of the 

position limits regime and sets the non-spotmonth limits (single and all-months 

combined limits), I will work to ensure that 

the position formulas and applicable limits 

are validated by Commission data to be both 

appropriate and effective so that those limits 

truly ‘‘diminish, eliminate, or prevent 

excessive speculation.’’ 

An Absence of Justification 

Today the Commission voted to move 

forward on a rule that (1) establishes hard 

federal position limits and position limit 

formulas for 28 physical commodity futures 

and options contracts and physical 

commodity swaps that are economically 

equivalent to such contracts in the spotmonth, for single months, and for all-months 

combined; (2) establishes aggregate position 

limits that apply across different trading 

venues to contracts based on the same 

underlying commodity; (3) implements a 

new, more limited statutory definition of 

bona fide hedging transactions; (4) revises 

account aggregation standards; (5) establishes 

federal position visibility reporting 

requirements; and (6) establishes standards 

for position limits and position 

accountability rules for registered entities. 

The Commission voted on this multifaceted 

rule package without the benefit of 

performing an objective factual analysis 

based on the necessary data to determine 

whether these particular limits and limit 

formulas will effectively prevent or deter 

excessive speculation. The Commission did 

not even provide for public comment a 

determination as to what criteria it utilized 

to determine whether or not excessive 

speculation is present or will potentially 

threaten prices in any of the commodity 

markets affected by the new position limits. 

Moreover, while it engaged in a public 

rulemaking, the Commission’s Notice of 

Proposed Rulemaking,542 in its complexity 

and lack of empirical data and legal rationale 

for several new mandates and changes to 

existing policies—in spite of the fact that we 

largely rely on our historical experiences in 

setting such limits—tainted the entire 

process. By failing to put forward data 

evidencing that commodity prices are 

threatened by the negative influence of a 

defined level of speculation that we can 

define as ‘‘excessive speculation,’’ and that 

today’s measures are appropriate (i.e. 

necessary and effective) in light of such 

findings, I believe that we have failed under 

the Administrative Procedure Act to provide 

a meaningful and informed opportunity for 

public comment.543

Substantive comment letters, of which 

there were approximately 100,544 devoted at 

times substantial text to expressions of 

confusion and requests for clarification of 

vague descriptions and processes. In more 

than one instance, preamble text did not 

reflect proposed rule text and vice versa.545

Indeed, the entire rulemaking process has 

been plagued by internal and public debates 

as to what the Commission’s motives are and 

to what extent they are based on empirical 

evidence, in policy, or are simply without 

reason. 

Implementing an Appropriate Program for 

Position Management 

This rule, like several proposed before it, 

fails to make a compelling argument that the 

proposed position limits, which only target 

large concentrated positions,546 will dampen 

price distortions or curb excessive 

speculation—especially when those position 

limits are identified by the overall 

participation of speculators as an increased 

percentage of the market. What the rule 

argues is that there is a Congressional 

mandate to set position limits, and therefore, 

there is no duty on the Commission to 

determine that excessive speculation exists 

(and is causing price distortions), or to 

‘‘prove that position limits are an effective 

regulatory tool.’’ 547 This argument is 

incredibly convenient given that the 

proposed position limits are modeled on the 

agricultural commodities position limits, and 

despite those federal position limits, 

contracts such as wheat, corn, soybeans, and 

cotton contracts were not spared recordsetting price increases in 2007 and 2008. 

Indeed, the cotton No. 2 futures contract has 

hit sixteen ‘‘record-setting’’ prices since 

December 1, 2010. The most recent high was 

set on March 4, 2011 when the March 2011 

future traded at a price of $215.15. 

To be clear, I am not opposed to position 

or other trading limits in all circumstances. 

I remain convinced that position limits, 

whether enforced at the exchange level or by 

the Commission, are effective only to the 

extent that they mitigate potential congestion 

during delivery periods and trigger reporting 

obligations that provide regulators with the 

complete picture of an entity’s trading. I 

therefore believe that accountability levels 

and visibility levels provide a more refined 

regulatory tool to identify, deter, and respond 

in advance to threats of manipulation and 

other non-legitimate price movements and 

distortions. I would have supported a rule 

that would impose position limits in the 

spot-month for physical commodities, i.e. the 

referenced contracts,548 and would establish 

an accountability level. The Commission’s 

ability to monitor such accountability levels 


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549See section 4a(a)(1) of the CEA. 

550See Establishment of Speculative Position 

Limits, 46 FR 50938, 50939 (Oct. 16, 1981) (to be 

codified at 17 CFR pt. 1) (‘‘The Commission wishes 

to emphasize, that while Congress gave the 

Commission discretionary authority to impose 

federal speculative limits in section 4a(1), the 

development of an alternate procedure was not 

foreclosed, and section 4a(1) should not be read in 

a vacuum.’’). 

551To the contrary, Congress specifically 

indicated that in defining bona fide hedging 

transactions or positions, the Commission may do 

so in such a manner as ‘‘to permit producers, 

sellers, middlemen, and users of a commodity or a 

product derived therefrom to hedge their legitimate 

anticipated business needs for that period of time 

into the future for which an appropriate futures 

contract is open and available on an exchange.’’ See 

section 4a(c)(1) of the CEA. 

552See, e.g., Comment letter from BG Americas & 

Global LNG on Proposed Rule Regarding Position 

Limits for Derivatives (RIN 2028–AD15 and 3038– 

AD16) at 13. 

553Position Limits for Futures and Swaps, supra 

note 1, at 75. 

would rely on a technology based, real-time 

surveillance program that the Commission 

must be committed to deploying if it is to 

take its market oversight mission seriously. 

And to be absolutely clear, ‘‘speculation’’ 

in the world of commodities is a technical 

term ascribed to any trading that does not 

qualify as ‘‘bona fide hedging.’’ Congress has 

not outlawed speculation, even when that 

speculation reaches some unspecified tipping 

point where it becomes ‘‘excessive.’’ What 

Congress has stated, for over seventy years 

until the passage of the Dodd-Frank Act, is 

that excessive speculation that causes sudden 

or unreasonable fluctuations or unwarranted 

changes in the price of a commodity is a 

burden on interstate commerce, and the 

Commission has authority to utilize its 

expertise to establish limits on trading or 

positions that will be effective in 

diminishing, eliminating, or preventing such 

burden.549 The Commission, however, is not, 

and has never been, without other tools to 

detect and deter those who engage in abusive 

practices.550 What the Dodd-Frank Act did 

do is direct the Commission to exercise its 

authority at a time when there is simply a 

lack of empirical data to support doing so, in 

a universe of legal uncertainty. However, the 

Dodd-Frank Act did not leave us without a 

choice, as contended by today’s rule. Rather, 

against the current backdrop of market 

uncertainty, and Congress’s longstanding 

deference to the expertise of the Commission, 

the most reasonable interpretation of DoddFrank’s mandate is that while we must take 

action and establish position limits, we must 

only do so to the extent they are appropriate. 

Today I write to not only reiterate my 

concerns with regard to the effectiveness of 

position limits generally, but to highlight 

some of the regulatory provisions that I 

believe pose the greatest fundamental 

problems and/or challenges to the 

implementation of the rule passed today. In 

addition to disagreeing with the 

Commission’s interpretation of its statutory 

mandate, I believe the Commission has so 

severely restricted the permitted activities 

allowed under the bona fide hedging rules 

that the pursuit by industry of legitimate and 

appropriate risk management is now made 

unduly onerous. These limitations, including 

a veritable ban on anticipatory hedging for 

merchandisers, are inconsistent with the 

statutory directive and the very purpose of 

the markets to, among other things, provide 

for a means for managing and assuming price 

risks. I also believe that the rules put into 

place overly broad aggregation standards, fail 

to substantiate claims that they adequately 

protect against international regulatory 

arbitrage, and do not include an adequate 

cost-benefit analysis. 

Bona Fide Hedging: Guilty Until Proven 

Innocent 

The Commission’s regulatory definition of 

bona fide hedging transactions in § 151.5 of 

the rules, as directed by new section 4a(c)(1) 

of the Act, generally restricts bona fide hedge 

exemptions from the application of federallyset position limits to those transactions or 

positions which represent a substitute for an 

actual cash market transaction taken or to be 

taken later, or those trading as the 

counterparty to an entity that it engaged in 

such transaction. This definition is narrower 

than current Commission regulation 1.3(z)(1), 

which allows for an exemption for 

transactions or positions that normally 

represent a substitute for a physical market 

transaction. 

When combined with the remaining 

provisions of § 151.5, which provide for a 

closed universe of enumerated hedges and 

ultimately re-characterize longstanding 

acceptable bona fide hedging practices as 

speculative, it is evident that the Commission 

has used its authority to further narrow the 

availability of bona fide hedging transactions 

in a manner that will negatively impact the 

cash commodity markets and the physical 

commodity marketplace by eliminating 

certain legitimate derivatives risk 

management strategies, most notably 

anticipatory hedging. Among other things, I 

believe the Commission should have defined 

bona fide hedging transactions and positions 

more broadly so that they encompass longstanding risk management practices and 

should have preserved a process by which 

bona fide hedgers could expeditiously seek 

exemptions for non-enumerated hedging 

transactions. 

In this instance, Congress was particularly 

clear in its mandate under section 4a(c)(2) 

that the Commission must limit the 

definition of bona fide hedging transactions/ 

positions to those that represent actual 

substitutes for cash market transactions, but 

Congress did not so limit the Commission in 

any other manner with regard to the new 

regulatory provisions addressing anticipatory 

hedging and the availability of nonenumerated hedges.551 Moreover, inasmuch 

as the bona fide hedging definition is 

restrictive, section 4a(a)(7) provides the 

Commission broad exemptive authority 

which it could have utilized to create a 

process for expeditious adjudication of 

petitions from entities relying on a broader 

set of legitimate trading strategies than those 

that fit the confines of section 4a(c)(1). In 

addition, given the complex, multi-faceted 

nature of hedging for commodity-related 

risks, the Commission could have, as 

suggested by one commenter, engaged in a 

separate and distinct informal rulemaking 

process to develop a workable, commercially 

practicable definition of bona fide 

hedging.552 Given the commercial interests at 

stake, this would have been a welcome 

approach. Instead, the Commission chose 

form over function so that it could ‘‘check the 

box’’ on its mandate. 

In order to qualify as a bona fide hedging 

transaction or position, a transaction must 

meet both the requirements under 

§ 151.5(a)(1) and qualify as one of eight 

specific and enumerated hedging 

transactions described in § 151.5(a)(2). While 

the list of enumerated hedging transactions is 

an improvement from the proposed rules, 

and responds to several comments, especially 

with regard to the addition of an Appendix 

B to the final rule describing examples of 

bona fide hedging transactions, it remains 

inflexible. In response to commenters, the 

Commission has decided—at the last 

minute—to permit entities engaging in 

practices that reduce risk but that may not 

qualify as one of the enumerated hedging 

transactions under § 151.5(a)(2) to seek relief 

from Commission staff under § 140.99 or the 

Commission under section 4a(a)(7) of the 

CEA. Whereas this change to the preamble 

and the rule text is helpful, neither of these 

alternatives provides for an expeditious 

determination, nor do they provide for a 

predictable or certain outcome. In its refusal 

to accommodate traders seeking legitimate 

bona fide hedging exemptions in compliance 

with the Act with an expeditious and 

straightforward process, the Commission is 

being short-sighted in light of the dynamic 

(and in the case of the OTC markets, 

uncertain) nature of the commodity markets 

and with respect to the appropriate use of 

Commission resources. 

One particularly glaring example of the 

Commission’s decision to pursue form over 

function is found in the enumerated 

exemption for anticipated merchandising 

found at § 151.5(2)(v). The new statutory 

provision in section 4a(c)(d)(A)(ii) is 

included to assuage unsubstantiated 

concerns about unintended consequences 

such as creating a potential loophole for 

clearly speculative activity.553 The 

Commission has so narrowly defined the 

anticipated merchandising that only the most 

elementary operations will be able to utilize 

it. 

For example, in order to qualify an 

anticipatory merchandising transaction as a 

bona fide hedge, a hedger must (i) own or 

lease storage capacity and demonstrate that 

the hedge is no greater than the amount of 

current or anticipated unfilled storage 

capacity owned or leased by the same person 

during the period of anticipated 

merchandising activity, which may not 

exceed one year, (ii) execute the hedge in the 

form of a calendar spread that meets the 

‘‘appropriateness’’ test found in § 151.5(a)(1), 

and (iii) exit the position prior to the last five 

days of trading if the Core Referenced 

Futures Contract is for agricultural or metal 

contracts or the spot month for other 

physical-delivery commodities. In addition, 


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554Testimony of Todd Thul, Risk Manager, 

Cargill AgHorizons before the House Committee on 

Agriculture, Oct. 12, 2011, available at http:// 

agriculture.house.gov/pdf/hearings/ 

Thul111012.pdf. 

555 Id. 

556Though I rely upon the example of agricultural 

operations to illustrate my point, the limitations on 

the anticipated merchandising hedge are equally 

harmful to other industries that operate in relatively 

volatile environments that are subject to 

unpredictable supply and demand swings due to 

economic factors, most notably energy. See, e.g., 

Comment letter from ISDA on Notice of Proposed 

Rulemaking—Position Limits for Derivatives at 3– 

5 (Oct. 3, 2011). 

557See 76 FR at 4752, 4762 and 4774. 

558See 76 FR at 4752, 4762. 

559Position Limits for Futures and Swaps, supra 

note 1, at 83–84. 

560Comment letter from Barclays Capital on 

Position Limits for Derivatives (RIN 3038–AD15 

and 3038–AD16) at 3 (Mar. 28, 2011), available at 

http://comments.cftc.gov/PublicComments/ 

CommentList.aspx?id=965. 

561 76 FR at 4752, 4762. 

562 Id. 

(iv) an anticipatory merchandiser must meet 

specific filing requirements under § 151.5(d), 

which among other things, (v) requires that 

the person who intends on exceeding 

position limits complete the filing at least ten 

days prior to the date of expected overage. 

Putting the burdens associated with the 

§ 151.5(d) filings aside, the anticipatory 

merchandising exemption and its limitations 

on capacity, the requirement to ‘‘own or 

lease’’ such capacity, and one-year limitation 

for agricultural commodities does not 

comport with the economic realities of 

commercial operations. In recent testimony, 

Todd Thul, Risk Manager for Cargill 

AgHorizons, commented on its 

understanding of this provision. He said that 

by limiting the exemption to unfilled storage 

capacities through calendar spread positions 

for one year, the CFTC will reduce the 

industry’s ability to continue offering the 

same suite of marketing tools to farmers that 

they are accustomed to using.554 Mr. Thul 

offered a more reasonable and appropriate 

limitation on anticipatory hedging based on 

annual throughput actually handled on a 

historic basis by the company in question. It 

is unclear from today’s rule as to whether the 

Commission considered such an alternative, 

but according to Mr. Thul, by going forward 

with the exemption as-is, we will ‘‘severely 

limit the ability of grain handlers to 

participate in the market and impede the 

ability to offer competitive bids to farmers, 

manage risk, provide liquidity and move 

agriculture products from origin to 

destination.’’ 555 556 Limiting commercial 

participation, Mr. Thul points out, increases 

volatility—and that is clearly not what 

Congress intended. I agree. I cannot help but 

think that the Commission is waging war on 

commercial hedging by employing a 

‘‘government knows best’’ mandate to direct 

companies to employ only those hedging 

strategies that we give our blessing to and can 

conceive of at this point in time. Imagine the 

absurdity that we could prevent a company 

such as a cotton merchandiser from hedging 

forward a portion of his expected cotton 

purchase. Or, if they meet the complicated 

prerequisites, the commercial firm must get 

approval from the Commission before 

deploying a legitimate commercial strategy 

that exchanges have allowed for years. 

Aggregation Disparity 

In another attack on commercial hedging 

the Commission has developed a flawed 

aggregation rule that singles out owned-non 

financial firms for unique and unfair 

treatment under the rule. These commercial 

firms, which, among others, could be energy 

producers or merchandisers, are not provided 

the same protections under the independent 

controller rules as financial entities such as 

hedge funds or index funds. I believe that the 

aggregation provisions of the final rule would 

have benefited from a more thorough 

consideration of additional options and 

possible re-proposal of at least two 

provisions: the general aggregation provision 

found in § 151.7(b) and the proposed 

aggregation for exemption found in § 151.7(f) 

of the proposed rule,557 now commonly 

referred to at the Commission as the owned 

non-financial exemption or ‘‘ONF.’’ 

Under § 151.7(b), absent the applicability 

of a specific exemption found elsewhere in 

§ 151.7, a direct or indirect ownership 

interest of ten percent or greater by any entity 

in another entity triggers a 100% aggregation 

of the ‘‘owned’’ entity’s positions with that 

of the owner. While commenters agreed that 

an ownership interest of ten percent or 

greater has been the historical basis for 

requiring aggregation of positions under 

Commission regulation § 150.5(b), absent 

applicable exemptions, historically, 

aggregation has not been required in the 

absence of indicia of control over the 

‘‘owned’’ entity’s trading activities, 

consistent with the independent account 

controller exemption (the ‘‘IAC’’) under 

Commission regulation § 150.3(a)(4). While 

the final rule preserves the IAC exemption, 

it only does so in response to overwhelming 

comments arguing against its proposed 

elimination, which was without any legal 

rationale.558 And, to be clear, the IAC is only 

available to ‘‘eligible entities’’ defined in 

§ 151.1, namely financial entities, and only 

with respect to client positions. 

The practical effect of this requirement is 

that non-eligible entities, such as holding 

companies who do not meet any of the other 

limited specified exemptions will be forced 

to aggregate on a 100% basis the positions of 

any operating company in which it holds a 

ten percent or greater equity interest in order 

to determine compliance with position 

limits. While the Commission concedes that 

the holding company could conceivably 

enter into bona fide hedging transactions 

relating to the operating company’s cash 

market activities, provided that the operating 

company itself has not entered into such 

hedges,559 this is an inadequate, 

operationally-impracticable solution to the 

problem of imparting ownership absent 

control. Moreover, by requiring 100% 

aggregation based on a ten percent ownership 

interest, the Commission has determined that 

it would prefer to risk double-counting of 

positions over a rational disaggregation 

provision based on a concept of ownership 

that does not clearly attach to actual control 

of trading of the positions in question. 

Exemptions like those found in §§ 151.7(g) 

and (i) that provide for disaggregation when 

ownership above the ten percent threshold is 

specifically associated with the underwriting 

of securities or where aggregation across 

commonly-owned affiliates would require 

information sharing that would result in a 

violation of federal law, are useful and no 

doubt appreciated. However, the Commission 

has failed to apply a consistent standard 

supporting the principles of ownership and 

control across all entities in this rulemaking. 

Tiered Aggregation—A Viable and Fair 

Solution 

Also, the Commission did not address in 

the final rules a proposal put forth by 

Barclays Capital for the Commission to 

clarify that when aggregation is triggered, and 

no exemption is available, only an entity’s 

pro rata share of the position that is actually 

controlled by it, or in which it has an 

ownership interest will be aggregated. This 

proposal included a suggestion that the 

Commission consider positions in tiers of 

ownership, attributing a percentage of the 

positions to each tier. While Barclays 

acknowledged that the monitoring would 

still be imperfect, the measures would be 

more accurate than an attribution of a full 

100% ownership and would decrease the 

percentage of duplicative counting of 

positions.560

I believe that a tiered approach to 

aggregation should have been considered in 

these rules, and not be entirely removed from 

consideration as we move forward with these 

final rules. Barclays (and perhaps others) has 

made a compelling case and staff has not 

persuaded me that there is any legal rationale 

for not further exploring this option. While 

I understand that it may be more 

administratively burdensome for the 

Commission to monitor tiered aggregation, I 

would presume that we could engage in a 

cost-benefit analysis to more fully explore 

such burdens in light of the potential costs 

to industry associated with the 

implementation of 100% aggregation. 

Owned Non-Financial—No Justification 

The best example of the Commission’s 

imbalanced treatment of market participants 

is manifest in the aggregation rules applied 

to owned non-financial firms. The 

Commission has shifted its aggregation 

proposal from the draft proposal to this final 

version. The final rule does not ultimately 

adopt the proposed owned-non-financial 

entity exemption which was proposed in lieu 

of the IAC to allow disaggregation primarily 

in the case of a conglomerate or holding 

company that ‘‘merely has a passive 

ownership interest in one or more nonfinancial companies.’’ 561 The rationale was 

that, in such cases, operating companies 

would likely have complete trading and 

management independence and operate at 

such a distance that is would simply be 

inappropriate to aggregate positions.562

While several commenters argued that the 

ONF was too narrow and discriminated 

against financial entities without a proper 

basis, the Commission provided no 


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563See Comment letter from CME Group on 

Position Limits for Derivatives at 16 (Mar. 28, 2011), 

available at http://comments.cftc.gov/ 

PublicComments/ 

ViewComment.aspx?id=33920&SearchText=CME 

(‘‘Where agencies do not articulate a basis for 

treating similarly situated entities differently, as the 

Commission fails to do here, courts will strike 

down their actions as arbitrary and capricious. See, 

e.g., Indep. Petroleum Ass’n of America v. Babbitt, 

92 F.3d 1248 (D.D. Cir. 1996) (‘‘An Agency must 

treat similar cases in a similar manner unless it can 

provide a legitimate reason for failing to do so.’’ 

(citing Nat’l Ass’n of Broadcasters v. FCC, 740 F.2d 

1190, 1201 (DC Cir. 1984))). 

564Principles for Regulation and Supervision of 

Commodity Derivatives Markets, IOSCO Technical 

Committee (Sept. 2011), available at http:// 

www.iosco.org/library/pubdocs/pdf/ 

IOSCOPD358.pdf. 

565Position Limits for Futures and Swaps, supra 

note 1, at 137. 

566 Id. 

567 Id. at 144. 

568 Id. 

substantive rationale for its decision to fully 

drop the ONF exemption from consideration. 

Instead, the Commission relied upon its 

determination to retain the IAC exemption 

and add the additional exemptions under 

§§ 151.7(g) and (i) described above to find 

that it ‘‘may not be appropriate, at this time, 

to expand further the scope of disaggregation 

exemptions to owned-non financial entities.’’ 

In failing to articulate a basis for its 

decision to drop outright from consideration 

the ONF exemption, the Commission places 

itself in the same improvident position it was 

in when it proposed eliminating the IAC 

exemption, and now has given no reasoned 

explanation for discriminating against nonfinancial entities. This is especially 

disconcerting since at least one commenter 

has pointed out that baseless decisionmaking of this kind creates a risk that a court 

will strike down our action as arbitrary and 

capricious.563

Since I first learned of the Commission’s 

change of course, I have requested that the 

Commission re-propose the ONF exemption 

in a manner that establishes an appropriate 

legal basis and provides for additional public 

comment pursuant to the Administrative 

Procedure Act. The Commission has outright 

refused to entertain my request to even 

include in the preamble of the final rules a 

commitment to further consider a version of 

the ONF exemption that would be more 

appropriate in terms of its breadth. The 

Commission’s decision puts the rule at risk 

of being overturned by the courts and 

exemplifies the pains at which this rule has 

been drafted to put form over function. 

The Great Unknown: International 

Regulatory Arbitrage 

In addressing concerns relating to the 

opportunities for regulatory arbitrage that 

may arise as a result of the Commission 

imposing these position limits, the 

Commission points out that is has worked to 

achieve the goal of avoiding such regulatory 

arbitrage through participation in the 

International Organization of Securities 

Commissions (‘‘IOSCO’’) and summarily 

rejects commenters who believe it is a 

foregone conclusion that the existence of 

international differences in position limit 

policies will result in such arbitrage in 

reliance on prior experience. While I don’t 

disagree that the Commission’s work within 

IOSCO is beneficial in that it increases the 

likelihood that we will reach international 

consensus with regard to the use of position 

limits, the Commission ought to be more 

forthcoming as to principles as a whole. 

In particular, while the IOSCO Final 

Report on Principles for the Regulation and 

Supervision of Commodity Derivatives 

Markets 564 does, for the first time, call on 

market authorities to make use of 

intervention powers, including the power to 

set ex-ante position limits, this is only one 

of many such recommendations that 

international market authorities are not 

required to implement. The IOSCO Report 

includes the power to set position limits, 

including less restrictive measures under the 

more general term ‘‘position management.’’ 

Position Management encompasses the 

retention of various discretionary powers to 

respond to identified large concentrations. It 

would have been preferable for the 

Commission to have explored some of these 

other discretionary powers as options in this 

rulemaking, thereby putting us in the right 

place to put our findings into more of a 

practice. 

As to the Commission’s stance that today’s 

rules will not, by their very passage, drive 

trading abroad, I am concerned that the 

Commission’s prior experience in 

determining the competitive effects of 

regulatory policies is inadequate. Today’s 

rules by far represent the most expansive 

exercise of the Commission’s authority both 

with regard to the setting of position limits 

and with regard to its jurisdiction in the OTC 

markets. The Commission’s past studies 

regarding the effects of having a different 

regulatory regime than our international 

counterparts, conducted in 1994 and 1999, 

cannot possibly provide even a baseline 

comparison. Since 2000, the volume of 

actively traded futures and option contracts 

on U.S. exchanges alone has increased almost 

tenfold. Electronic trading now represents 

83% of that volume, and it is not too difficult 

to imagine how easy it would be to take that 

volume global. 

I recognize that we cannot dictate how our 

fellow market authorities choose to structure 

their rules and that in any action we take, we 

must do so with the knowledge that as with 

any rules, we risk triggering a regulatory race 

to the bottom. However, I believe that we 

ought not to deliver to Congress, or the 

public, an unsubstantiated sense of security 

in these rules. 

Cost-Benefit Analysis: Hedgers Bear the 

Brunt of an Undue and Unknown Burden 

With every final rule, the Commission has 

attempted to conduct a more rigorous costbenefit analysis. There is most certainly an 

uncertainty as to what the Commission must 

do in order to justify proposals aimed at 

regulating the heretofore unregulated. These 

analyses demonstrate that the Commission is 

taking great pains to provide quantifiable 

justifications for its actions, but only when 

reasonably feasible. The baseline for 

reasonability was especially low in this case 

because, in spite of the availability of enough 

data to determine that this rule will have an 

annual effect on the economy of more than 

$100 million, and the citation of at least fiftytwo empirical studies in the official comment 

record debating all sides of the excessive 

speculation debate, the Commission is not 

convinced that it must ‘‘determine that 

excessive speculation exists or prove that 

position limits are an effective regulatory 

tool.’’ 565 I suppose this also means that the 

Commission did not have to consider the 

costs of alternative means by which it could 

have complied with the statutory mandates. 

It is utterly astounding that the Commission 

has designed a rule to combat the unknown 

threat of ‘‘excessive speculation’’ that will 

likely cost market participants $100 million 

dollars annually and yet, ‘‘[T]he Commission 

need not prove that such limits will in fact 

prevent such burdens.’’ 566 A flip remark 

such as this undermines the entire rule, and 

invites legal challenge. 

I respect that the Commission has been 

forthcoming in that the overall costs of this 

final rule will be widespread throughout the 

markets and that swap dealers and traditional 

hedgers alike will be forced to change their 

trading strategies in order to comply with the 

position limits. However, I am unimpressed 

by the Commission’s glib rationale for not 

fully quantifying them. The Commission 

does not believe it is reasonably feasible to 

quantify or even estimate the costs from 

changes in trading strategies because doing 

so would necessitate having access to and an 

understanding of entities’ business models, 

operating models, hedging strategies, and 

evaluations of potential alternative hedging 

or business strategies that would be adopted 

in light of such position limits.567 The 

Commission believed it impractical to 

develop a generic or representative 

calculation of the economic consequences of 

a firm altering its trading strategies.568 It 

seems that the numerous swap dealers and 

commercial entities who provided comments 

as to what kind of choices they would be 

forced to make if they were to find 

themselves faced with hard position limits, 

the loss of exchange-granted bona fide hedge 

exemptions for risk management and 

anticipatory hedging, and forced aggregation 

of trading accounts over which they may not 

even have current access to trading strategies 

or position information, more likely than not 

thought they were being pretty clear as to the 

economic costs. 

In choosing to make hardline judgments 

with regard to setting position limits, limiting 

bona fide hedging, and picking clear winners 

and losers with regard to account 

aggregation, the Commission was perhaps 

attempting to limit the universe of trading 

strategies. Indeed, as one runs through the 

examples in the preamble and the new 

Appendix B to the final rules, one cannot 

help but conclude that how you choose to get 

your exposure will affect the application of 

position limits. And the Commission will 

help you make that choice even if you aren’t 

asking for it. 

I have numerous lingering questions and 

concerns with the cost-benefit analysis, but I 

will focus on the impact of these rules on the 

costs of claiming a bona fide hedge 

exemption. 


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71706 Federal Register / Vol. 76, No. 223 / Friday, November 18, 2011 / Rules and Regulations 

569Position Limits for Futures and Swaps, supra 

note 1, at 166. 570 Id. at 171. 571 Id. 

572Comment letter from Futures Industry 

Association on Position Limits for Derivatives (RIN 

2028–AD15 and 3038–AD16) at 3 (Mar. 25, 2011), 

available at http://comments.cftc.gov/Public

Comments/ViewComment.aspx?id=34054&Search

Text=futures%20industry%20association. 

In addition to incorporating the new, 

narrower statutory definition of bona fide 

hedging for futures contracts into the final 

rules, the Commission also extended the 

definition of bona fide hedging transactions 

to swaps and established a reporting and 

recordkeeping regime for bona fide hedging 

exemptions. In the section of the cost-benefit 

analysis dedicated to a discussion of the bona 

fide hedging exemptions, the Commission 

‘‘estimates that there may be significant costs 

(or foregone benefits)’’ and that firms ‘‘may 

need to adjust their trading and hedging 

strategies’’ (emphasis added).569 Based on the 

comments of record and public contention 

over these rules, that may be the 

understatement of the year. To be clear, 

however, there is no quantification or even 

qualification of this potentially tectonic shift 

in how commercial firms and liquidity 

providers conduct their business because the 

Commission is unable to estimate these kinds 

of costs, and the commenters did not provide 

any quantitative data for them to work 

with.570 I think this part of the cost-benefit 

analysis may be susceptible to legal 

challenge. 

The Commission does attempt a strong 

comeback in estimating the costs of bona fide 

hedging-related reporting requirements. The 

Commission estimates that these 

requirements, even after all of the 

commenter-friendly changes to the final rule, 

will affect approximately 200 entities 

annually and result in a total burden of 

approximately $29.8 million. These costs, it 

argues, are necessary in that they provide the 

benefit of ensuring that the Commission has 

access to information to determine whether 

positions in excess of a position limit relate 

to bona fide hedging or speculative 

activity.571 This $29.8 million represents 

almost thirty percent of the overall estimated 

costs at this time, and it only covers reporting 

for entities seeking to hedge their legitimate 

commercial risk. I find it difficult to believe 

that the Commission cannot come up with a 

more cost-effective and less burdensome 

alternative, especially in light of the current 

reporting regimes and development of 

universal entity, commodity, and transaction 

identifiers. I was not presented with any 

other options. I will, however, continue to 

encourage the rulemaking teams to 

communicate with one another in regard to 

progress in these areas and ensure that the 

Commission’s new Office of Data and 

Technology is tasked with the permanent 

objective of exploring better, less 

burdensome, and more cost-efficient ways of 

ensuring that the Commission receives the 

data it needs. 

We Have Done What Congress Asked—But, 

What Have We Actually Done? 

The consequence is that in its final 

iteration, the position limits rule represents 

the Commission’s desire to ‘‘check the box’’ 

as to position limits. Unfortunately, in its 

exuberance and attempt to justify doing so, 

the Commission has overreached in 

interpreting its statutory mandate to set 

position limits. While I do not disagree that 

the Commission has been directed to impose 

position limits, as appropriate, this rule fails 

to provide a legally sound, comprehensible 

rationale based on empirical evidence. I 

cannot support passing our responsibilities 

on to the judicial system to pick apart this 

rule in a multitude of legal challenges, 

especially when our action could negatively 

affect the liquidity and price discovery 

function of our markets, or cause them to 

shift to foreign markets. I also have serious 

reservations regarding the excessive 

regulatory burden imposed on commercial 

firms seeking completely legitimate and 

historically provided relief under the bona 

fide hedge exemption. These firms will 

spend excessive amounts to remain within 

the strict limitations set by this rule. 

Congress clearly conceived of a much more 

workable and flexible solution that this 

Commission has ignored. 

In its comment letter of March 25, 2011, 

the Futures Industry Association (FIA) stated, 

‘‘The price discovery and risk-shifting 

functions of the U.S. derivatives markets are 

too important to U.S. and international 

commerce to be the subject of a position 

limits experiment based on unsupported 

claims about price volatility caused by 

excessive speculative positions.’’ 572 Their 

summation of our proposal as an experiment 

is apt. Today’s final rule is based on a 

hypothesis that historical practice and 

approach, which has not been proven 

effective in recognized markets, will be 

appropriate for this new integrated futures 

and swaps market that is facing uncertainty 

from all directions largely due to the other 

rules we are in the process of promulgating. 

I do not believe the Commission has done its 

research and assessed the impacts of testing 

this hypothesis, and that is why I cannot 

support the rule. As the Commission begins 

to analyze the results of its experiment, it 

remains my sincerest hope that our 

miscalculations ultimately do not lead to 

more harm than good. I will take no comfort 

if being proven correct means that the agency 

has failed in its mission. 

[FR Doc. 2011–28809 Filed 11–10–11; 11:15 am] 

BILLING CODE P 


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