Vol. 78 Thursday, 

No. 239 December 12, 2013 

Part II 

Commodity Futures Trading Commission 

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

Position Limits for Derivatives; Proposed Rule 


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75680 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 15, 17, 19, 32, 37, 38, 

140, and 150 

RIN 3038–AD99 

Position Limits for Derivatives 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commission proposes to 

amend regulations concerning 

speculative position limits to conform to 

the Wall Street Transparency and 

Accountability Act of 2010 (‘‘DoddFrank Act’’) amendments to the 

Commodity Exchange Act (‘‘CEA’’ or 

‘‘Act’’). The Commission proposes to 

establish speculative position limits for 

28 exempt and agricultural commodity 

futures and option contracts, and 

physical commodity swaps that are 

‘‘economically equivalent’’ to such 

contracts. In connection with 

establishing these limits, the 

Commission proposes to update some 

relevant definitions; revise the 

exemptions from speculative position 

limits, including for bona fide hedging; 

and extend and update reporting 

requirements for persons claiming 

exemption from these limits. The 

Commission proposes appendices that 

would provide guidance on risk 

management exemptions for commodity 

derivative contracts in excluded 

commodities permitted under the 

proposed definition of bona fide 

hedging position; list core referenced 

futures contracts and commodities that 

would be substantially the same as a 

commodity underlying a core referenced 

futures contract for purposes of the 

proposed definition of basis contract; 

describe and analyze fourteen fact 

patterns that would satisfy the proposed 

definition of bona fide hedging position; 

and present the proposed speculative 

position limit levels in tabular form. In 

addition, the Commission proposes to 

update certain of its rules, guidance and 

acceptable practices for compliance 

with Designated Contract Market 

(‘‘DCM’’) core principle 5 and Swap 

Execution Facility (‘‘SEF’’) core 

principle 6 in respect of exchange-set 

speculative position limits and position 

accountability levels. 

DATES: Comments must be received on 

or before February 10, 2014. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD99 

by any of the following methods: 

• Agency Web site: http://

comments.cftc.gov. 

• Mail: Secretary of the Commission, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

• Hand Delivery/Courier: Same as 

mail above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow 

instructions for submitting comments. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to www.cftc.gov. You 

should submit only information that 

you wish to make available publicly. If 

you wish the Commission to consider 

information that is exempt from 

disclosure under the Freedom of 

Information Act, a petition for 

confidential treatment of the exempt 

information may be submitted according 

to the procedure established in § 145.9 

of the Commission’s regulations (17 CFR 

145.9). 

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse, or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed that contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Stephen Sherrod, Senior Economist, 

Division of Market Oversight, at (202) 

418–5452, ssherrod@cftc.gov; Riva 

Spear Adriance, Senior Special Counsel, 

Division of Market Oversight, at (202) 

418–5494, radriance@cftc.gov; David N. 

Pepper, Attorney-Advisor, Division of 

Market Oversight, at (202) 418–5565, 

dpepper@cftc.gov, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Position Limits for Physical Commodity 

Futures and Swaps 

A. Background 

1. CEA Section 4a 

2. The Commission Construes CEA Section 

4a(a) To Mandate That the Commission 

Impose Position Limits 

3. Necessity Finding 

B. Proposed Rules 

1. Section 150.1—Definitions 

i. Various Definitions Found in § 150.1 

ii. Bona Fide Hedging Definition 

2. Section 150.2—Position Limits 

i. Current § 150.2 

ii. Proposed § 150.2 

3. Section 150.3—Exemptions 

i. Current § 150.3 

ii. Proposed § 150.3 

4. Part 19—Reports by Persons Holding 

Bona Fide Hedge Positions Pursuant to 

§ 150.1 of This Chapter and by 

Merchants and Dealers in Cotton 

i. Current Part 19 

ii. Proposed Amendments to Part 19 

5. § 150.7—Reporting Requirements for 

Anticipatory Hedging Positions 

i. Current § 1.48 

ii. Proposed § 150.7 

6. Miscellaneous Regulatory Amendments 

i. Proposed § 150.6—Ongoing 

Responsibility of DCMs and SEFs 

ii. Proposed § 150.8—Severability 

iii. Part 15—Reports—General Provisions 

iv. Part 17—Reports by Reporting Markets, 

Futures Commission Merchants, Clearing 

Members, and Foreign Brokers 

II. Revision of Rules, Guidance, and 

Acceptable Practices Applicable to 

Exchange-Set Speculative Position 

Limits—§ 150.5 

A. Background 

B. The Current Regulatory Framework for 

Exchange-Set Position Limits 

1. Section 150.5 

2. The Commodity Futures Modernization 

Act of 2000 Caused Commission § 150.5 

To Become Guidance on and Acceptable 

Practices for Compliance with DCM Core 

Principle 5 

3. The CFTC Reauthorization Act of 2008 

4. The Dodd-Frank Act Amendments to 

CEA Section 5 

i. The Dodd-Frank Act Added Provisions 

That Permit the Commission To Override 

the Discretion of DCMs in Determining 

How To Comply With the Core 

Principles 

ii. The Dodd-Frank Act Established a 

Comprehensive New Statutory 

Framework for Swaps 

iii. The Dodd-Frank Act Added the 

Regulation of Swaps, Added Core 

Principles for SEFs, Including SEF Core 

Principle 6, and Amended DCM Core 

Principle 5 

5. Dodd-Frank Rulemaking 

i. Amended Part 38 

ii. Amended Part 37 

iii. Vacated Part 151 

C. Proposed Amendments to § 150.5 

1. Proposed Amendments to § 150.5 To 

Add References to Swaps and Swap 

Execution Facilities 

2. Proposed § 150.5(a)—Requirements and 

Acceptable Practices for Commodity 

Derivative Contracts That Are Subject to 

Federal Position Limits 

3. Proposed § 150.5(b)—Requirements and 

Acceptable Practices for Commodity 

Derivative Contracts That Are Not 

Subject to Federal Position Limits 

III. Related Matters 

A. Considerations of Costs and Benefits 

1. Background 

i. Statutory Mandate To Consider Costs and 

Benefits 

2. Section 150.1—Definitions 

i. Bona Fide Hedging 

ii. Rule Summary 

iii. Benefits and Costs 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75681 

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

2See, e.g., H.R. Rep. No. 421, 74th Cong., 1st Sess. 

1 (1935); H.R. Rep. No. 624, 99th Cong., 2d Sess. 

44 (1986). 

3See Commodity Futures Modernization Act of 

2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21, 

2000). 

4See Food, Conservation and Energy Act of 2008, 

Public Law 110–246, 122 Stat. 1624 (June 18, 2008). 

5See infra discussion of economically equivalent. 

6CEA section 4a(a)(1) (as amended 2010) ; 7 

U.S.C. 6a(a)(1). 

7 Id. 

8CEA section 4a(a)(2); 7 U.S.C. 6a(a)(2). 

9CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). 

10CEA section 4a(a)(3); 7 U.S.C. 6a(a)(3). 

11CEA section 4a(a)(5); 7 U.S.C. 6a(a)(5). 

12See id. 

13CEA section 4a(a)(6); 7 U.S.C. 6a(a)(6). 

14CEA section 4a(a)(7); 7 U.S.C. 6a(a)(7). 

3. Section 150.2—Limits 

i. Rule Summary 

ii. Benefits 

iii. Costs 

iv. Consideration of Alternatives 

4. Section 150.3—Exemptions 

i. Rule Summary 

ii. Benefits 

iii. Costs 

iv. Consideration of Alternatives 

5. Section 150.5—Exchange-Set 

Speculative Position Limits 

i. Rule Summary 

ii. Benefits 

iii. Costs 

iv. Consideration of Alternatives 

6. Section 150.7—Reporting Requirements 

for Anticipatory Hedging Positions 

i. Benefits and Costs 

7. Part 19—Reports 

i. Rule Summary 

ii. Benefits 

iii. Costs 

iv. Consideration of Alternatives 

8. CEA Section 15(a) 

i. Protection of Market Participants and the 

Public 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Markets 

iii. Price Discovery 

iv. Sound Risk Management 

v. Other Public Interest Considerations 

B. Paperwork Reduction Act 

1. Overview 

2. Methodology and Assumptions 

3. Information Provided by Reporting 

Entities/Persons and Recordkeeping 

Duties 

4. Comments on Information Collection 

C. Regulatory Flexibility Act 

IV. Appendices 

A. Appendix A—Studies Relating to 

Position Limits Reviewed and Evaluated 

by the Commission 

I. Position Limits for Physical 

Commodity Futures and Swaps 

A. Background 

1. CEA Section 4a 

Speculative position limits have been 

used as a tool to regulate futures 

markets for over seventy years. Since 

the Commodity Exchange Act of 1936,1

Congress has repeatedly expressed 

confidence in the use of speculative 

position limits as an effective means of 

preventing unreasonable and 

unwarranted price fluctuations.2

CEA section 4a, as amended by the 

Dodd-Frank Act, provides the 

Commission with broad authority to set 

position limits. When Congress created 

the Commission in 1974, it reiterated 

that the purpose of the CEA was to 

prevent fraud and manipulation and to 

control speculation. Later, the 

Commodity Futures Modernization Act 

of 2000 (‘‘CFMA’’) provided a statutory 

basis for exchanges to use pre-existing 

position accountability levels as an 

alternative means to limit the burdens of 

excessive speculative positions. 

Nevertheless, the CFMA did not weaken 

the Commission’s authority in CEA 

section 4a to establish position limits to 

prevent such undue burdens on 

interstate commerce.3 More recently, in 

the CFTC Reauthorization Act of 2008, 

Congress gave the Commission 

expanded authority to set position 

limits for significant price discovery 

contracts on exempt commercial 

markets.4

In 2010, the Dodd-Frank Act 

expanded the Commission’s authority to 

set position limits by amending CEA 

section 4a(a)(1) to authorize the 

Commission to establish position limits 

not just for futures and option contracts, 

but also for swaps that are economically 

equivalent to covered futures and 

options contracts,5 swaps traded on a 

DCM or SEF, swaps that are traded on 

or subject to the rules of a DCM or SEF, 

and swaps not traded on a DCM or SEF 

that perform or affect a significant price 

discovery function with respect to 

regulated entities (‘‘SPDF Swaps’’).6

CEA section 4a(a)(1) further declares the 

Congressional determination that: 

‘‘[e]xcessive speculation in any 

commodity under contracts of sale of 

such commodity for future delivery 

made on or subject to the rules of 

contract markets or derivatives 

transaction execution facilities, or 

swaps that perform or affect a 

significant price discovery function 

with respect to registered entities 

causing sudden or unreasonable 

fluctuations or unwarranted changes in 

the price of such commodity, is an 

undue and unnecessary burden on 

interstate commerce in such 

commodity.’’ 7

As described below, amended CEA 

section 4a(a)(2), Congress directed, i.e., 

mandated, that the Commission ‘‘shall’’ 

establish limits on the amount of 

positions, as appropriate, that may be 

held by any person in agricultural and 

exempt commodity futures and options 

contracts traded on a DCM.8 Similarly, 

as described below, in amended CEA 

section 4a(a)(5),9 Congress mandated 

that the Commission impose position 

limits on swaps that are economically 

equivalent to the agricultural and 

exempt commodity derivatives for 

which it mandated position limits in 

CEA section 4a(a)(2). 

With respect to the position limits 

that the Commission is required to set, 

CEA section 4a(a)(3) guides the 

Commission in setting the level of those 

limits by providing several criteria for 

the Commission to address, namely: (i) 

To diminish, eliminate, or prevent 

excessive speculation as described 

under this section; (ii) to deter and 

prevent market manipulation, squeezes, 

and corners; (iii) to ensure sufficient 

market liquidity for bona fide hedgers; 

and (iv) to ensure that the price 

discovery function of the underlying 

market is not disrupted.10

CEA section 4a(a)(5) requires the 

Commission to establish, at an 

appropriate level, position limits for 

swaps that are economically equivalent 

to those futures and options that are 

subject to mandatory position limits 

pursuant to CEA section 4a(a)(2).11 CEA 

section 4a(a)(5) also requires that the 

position limits on economically 

equivalent swaps be imposed at the 

same time as mandatory limits are 

imposed on futures and options.12

CEA section 4a(a)(6) requires the 

Commission to apply position limits on 

an aggregate basis to contracts based on 

the same underlying commodity across: 

(1) Contracts listed by DCMs; (2) with 

respect to foreign boards of trade 

(‘‘FBOTs’’), contracts that are pricelinked to a contract listed for trading on 

a registered entity and made available 

from within the United States via direct 

access; and (3) SPDF Swaps.13

Furthermore, under new CEA section 

4a(a)(7), Congress gave the Commission 

authority to exempt persons or 

transactions from any position limits it 

establishes.14

2. The Commission Construes CEA 

Section 4a(a) To Mandate That the 

Commission Impose Position Limits 

The Commission concludes that, 

based on its experience and expertise, 

when section 4a(a) of the Act is 

considered as an integrated whole, it is 

reasonable to construe that section to 

mandate that the Commission impose 

position limits. This mandate requires 

the Commission to impose limits on 

futures contracts, options, and certain 

swaps for agricultural and exempt 

commodities. The Commission also 


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15 International Swaps and Derivatives 

Association v. United States Commodity Futures 

Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 

2012). 16 Id. at 270. 17 Id. at 281. 18 Id. at 280–82, quoting Peter Pan Bus Lines, Inc. 

v. Fed. Motor Carrier Safety Admin., 471 F.3d 1350, 

1354 (D.C. Cir. 2006). 19 887 F. Supp. 2d at 282. 20 Id. at n.7, quoting PDK Labs. Inc. v. DEA, 362 

F.3d 786, 797 (D.C. Cir. 2004). 

21CEA section 4a(a)(2)(A); 7 U.S.C. 6a(a)(2)(A). 

22CEA section 4a(a)(2)(B); 7 U.S.C. 6a(a)(2)(B). 

23 887 F. Supp. 2d at 274–76. 

24 ‘‘The Role of Market Speculation in Rising Oil 

and Gas Prices: A Need to Put the Cop Back on the 

Beat,’’ Staff Report, Permanent Subcommittee on 

Investigations of the Senate Committee on 

Homeland Security and Governmental Affairs, U.S. 

Senate, S. Prt. No. 109–65 at 1 (June 27, 2006). 25 Id. at 12; see also ‘‘Excessive Speculation in the 

Natural Gas Market,’’ Staff Report, Permanent 

Subcommittee on Investigations of the Senate 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate at 1 (June 25, 

2007) available at http://www.levin.senate.gov/imo/ 

media/doc/supporting/2007/

PSI.Amaranth.062507.pdf (last visited Mar. 18, 

2013) (‘‘Gas Report’’). 

26 Gas Report at 1–2. 

concludes that the mandate requires it 

to impose such limits without first 

finding that any such limit is necessary 

to prevent excessive speculation in a 

particular market. 

In ISDA v. CFTC,15 the district court 

concluded that section 4a(a)(1) of the 

Act ‘‘unambiguously requires that, prior 

to imposing position limits, the 

Commission find that position limits are 

necessary to ‘diminish, eliminate, or 

prevent’ the burden described in 

[section 4a(a)(1) of the Act].’’ 16 But the 

court further concluded that, even if 

CEA section 4a(a)(1) standing alone 

required the Commission to make a 

necessity determination as a 

prerequisite to imposing position limits, 

it was plausible to conclude that 

sections 4a(a)(2), (3), and (5) of the Act, 

which were added by Dodd-Frank, 

constituted a mandate, requiring the 

Commission to impose position limits 

without making any findings of 

necessity. The court ultimately 

determined that the Dodd-Frank 

amendments, and their relationship to 

section 4a(a)(1) of the Act, are 

‘‘ambiguous and lend themselves to 

more than one plausible 

interpretation.’’ 17 Thus, the court 

rejected the Commission’s contention 

that section 4a(a) of the Act 

unambiguously mandated the 

imposition of position limits without 

any finding of necessity. 

Having concluded that section 4a(a) of 

the Act is ambiguous, the court could 

not rely on the Commission’s 

interpretation to resolve the section’s 

ambiguity. As the court observed, the 

D.C. Circuit has held that ‘‘ ‘deference to 

an agency’s interpretation of a statute is 

not appropriate when the agency 

wrongly believes that interpretation is 

compelled by Congress.’ ’’ 18 The court 

further held that, pursuant to the law of 

the D.C. Circuit, it was required to 

remand the matter to the Commission so 

that it could ‘‘fill in the gaps and resolve 

the ambiguities.’’ 19 The court cautioned 

the Commission that, in resolving the 

ambiguity of section 4a(a) of the Act, 

‘‘ ‘it is incumbent upon the agency not 

to rest simply on its parsing of the 

statutory language.’ ’’ 20

The Commission now undertakes the 

task assigned by the court: using its 

experience and expertise to resolve the 

ambiguity the district court perceived in 

section 4a(a) of the Act. The most 

important guidepost for the Commission 

in resolving the ambiguity is section 

4a(a)(2) of the Act. That section, which 

is captioned ‘‘Establishment of 

Limitations,’’ includes two sections that 

are critical to understanding 

congressional intent. Subsection 

4a(a)(2)(A) provides that the 

Commission, in accordance with the 

standards set forth in section 4a(a)(1) of 

the Act, shall establish limits on the 

amount of positions, as appropriate, 

other than bona fide hedge positions 

that may be held by any person with 

respect to physical commodities other 

than excluded commodities.21

Subsection 4a(a)(2)(B) provides that for 

exempt commodities, the limits 

‘‘required’’ under subsection 4a(a)(2)(A) 

be established within 180 days of the 

enactment of section 4a(a)(2)(B) and that 

for agricultural commodities, the limits 

‘‘required’’ under subsection 4a(a)(2)(A) 

be established within 270 days of the 

enactment of section 4a(a)(2)(B).22

The court concluded that this section 

was ambiguous as to whether the 

Commission had a mandate to impose 

position limits. The court focused on 

the opening phrase of subsection (A)— 

‘‘[i]n accordance with the standards set 

forth in [section 4a(a)(1) of the Act].’’ 

The court held that the term 

‘‘standards’’ in section 4a(a)(2) of the 

Act was ambiguous and could refer to 

the requirement in section 4a(a)(1) of 

the Act that the Commission impose 

position limits ‘‘as [it] finds are 

necessary to diminish, eliminate, or 

prevent’’ an unnecessary burden on 

interstate commerce.23 Thus, the court 

held that it was plausible that section 

4a(a)(2) of the Act required the 

Commission to make a finding of 

necessity as a precondition to imposing 

any position limit. But the court held 

that it was also plausible that the 

reference to ‘‘standards’’ did not 

incorporate such a requirement. 

The Commission believes that it is 

reasonable to conclude from the DoddFrank amendments that Congress 

mandated limits and did not intend for 

the Commission to make a necessity 

finding as a prerequisite to the 

imposition of limits. The Commission’s 

interpretation of its mandate is also 

based on congressional concerns that 

arose, and congressional actions taken, 

before the passage of the Dodd-Frank 

amendments. During the years leading 

up to the enactment, Congress 

conducted several investigations that 

concluded that excessive speculation 

accounted for significant volatility and 

price increases in physical commodity 

markets. A congressional investigation 

determined that prices of crude oil had 

risen precipitously and that ‘‘[t]he 

traditional forces of supply and demand 

cannot fully account for these 

increases.’’ 24 The investigation found 

evidence suggesting that speculation 

was responsible for an increase of as 

much as $20–25 per barrel of crude oil, 

which was then at $70.25 Subsequently, 

Congress found similar price volatility 

stemming from excessive speculation in 

the natural gas market.26 Thus, these 

investigations had already gathered 

evidence regarding the impact of 

excessive speculation, and had 

concluded that such speculation 

imposed an undue burden on the 

economy. In light of these investigations 

and conclusions, it is reasonable for the 

Commission to conclude that Congress 

did not intend for it to duplicate 

investigations Congress had already 

conducted, and did not intend to leave 

it up to the Commission whether there 

should be federal limits. Instead, 

Congress set short deadlines for the 

limits it ‘‘required,’’ and directed the 

Commission to conduct a study of the 

limits after their imposition and to 

report to Congress promptly on their 

effects. Accordingly, the Commission 

believes that the better reading of the 

Dodd-Frank amendments, in light of the 

congressional investigations and 

findings made, is the Dodd-Frank 

amendments require the Commission to 

impose position limits on physical 

commodity derivatives as opposed to 

merely reaffirming the preexisting, 

discretionary authority the Commission 

has long had to impose limits as it finds 

necessary. Congress made the decision 

to impose limits, and it is for the 

Commission to carry that decision out, 

subject to close congressional oversight. 

Based on its experience, the 

Commission concludes that Congress 

could not have contemplated that, as a 

prerequisite to imposing limits, the 

Commission would first make the sort of 


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27See 887 F. Supp. 2d at 273. 

28 Id. at 269. 

29See 3 FR 3145, Dec. 24, 1938. 

30See 2 FR 2460, Nov. 12, 1937. 

31See 4 FR 3903, Sep. 14, 1939; 5 FR 3198, Aug. 

28, 1940. 

32See 16 FR 321, Jan. 12, 1951; 16 FR 8106, Aug. 

16, 1951; see also 17 FR 6055, Jul. 4, 1952 (notice 

of hearing regarding proposed position limits for 

cottonseed oil, soybean oil, and lard); 18 FR 443, 

Jan. 22, 1953 (orders setting limits for cottonseed 

oil, soybean oil, and lard); 21 FR 1838, Mar. 24, 

1956 (notice of hearing regarding proposed position 

limits for onions), 21 FR 5575, Jul. 25, 1956 (order 

setting position limits for onions). 

33Although the Commission did not meet these 

deadlines in its first position limits rulemaking, it 

completed the task (in which the Commission 

received and addressed more than 15,000 

comments) as expeditiously as possible under the 

circumstances. 

34Even if there were no mandate, the Commission 

would not need to make the sort of particularized 

necessity findings advocated by the plaintiffs in 

ISDA v. CFTC, and discussed by the district court. 

When the Commission imposed limits pre-DoddFrank, it only had to determine that excessive 

speculation is harmful to the market and that limits 

on speculative positions are a reasonable means of 

preventing price disruptions in the marketplace that 

place an undue burden on interstate commerce. 

That is the determination that the Commission 

made in 1981 when it required the exchanges to 

establish position limits on all futures contracts, 

regardless of the characteristics of a particular 

contract market. See 46 FR 50940 (‘‘[I]t is the 

Commission’s view that this objective [‘‘the 

prevention of large and/or abrupt price movements 

which are attributable to extraordinarily large 

speculative positions’’] is enhanced by speculative 

position limits since it appears that the capacity of 

any contract market to absorb the establishment and 

liquidation of large speculative positions in an 

orderly manner is related to the relative size of such 

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

unlimited.’’). In the immediate wake of that 

decision, Congress enacted legislation to give the 

Commission the specific authority to enforce those 

omnibus limits. See CEA section 4a(e); 7 U.S.C. 

6a(e). 

35 46 FR 50938, 50944–45, Oct. 16, 1981. The rule 

adopted in 1981 tracked, in significant part, the 

language of Section 4a(1). Compare 17 CFR 

1.61(a)(1) (1982) with 7 U.S.C. 6a(1) (1976). 

36 46 FR 50945. 

37 Id. 50939; see also id. 50938 (‘‘to ensure that 

each futures and options contract traded on a 

designated contract market will be subject to 

speculative position limits’’). 

38Compare id. at 50941–42, 50945 with 7 U.S.C. 

6a(a)(2)(A). 

39 46 FR 50941–42, 50945. 

40 Id. at 50941. 

42 Id. at 50942. 

43 Id. at 50945 (§ 1.61(a)). Compare 7 U.S.C. 6a(1) 

(1976). 

necessity determination that the 

plaintiffs in ISDA v. CFTC argue section 

4a(a)(2) of the Act requires—i.e., a 

finding that, before imposing any limit 

in any particular market, there is a 

reasonable likelihood that excessive 

speculation will pose a problem in that 

market, and that position limits are 

likely to curtail that excessive 

speculation without imposing undue 

costs.27 As the district court noted, for 

45 years after passage of the CEA, the 

Commission’s predecessor agency made 

findings of necessity in its rulemakings 

establishing position limits.28 During 

that period, the Commission had 

jurisdiction over only a limited number 

of agricultural commodities. The court 

cited several orders issued by the 

Commodity Exchange Commission 

(‘‘CEC’’) between 1940 and 1956 

establishing position limits, and in each 

of those orders, the CEC stated that the 

limits it was imposing were necessary. 

Each of those orders involved no more 

than a small number of commodities. 

But it took the CEC many months to 

make those findings. For example, in 

1938, the CEC imposed position limits 

on six grain products.29 Proceedings 

leading up to the establishment of the 

limits commenced more than 13 months 

earlier, when the CEC issued a notice of 

hearings regarding the limits.30

Similarly, in September 1939, the CEC 

issued a Notice of Hearing with respect 

to position limits for cotton, but it was 

not until August 1940 that the CEC 

finally promulgated such limits.31 And 

the CEC began the process of imposing 

limits on soybeans and eggs in January 

1951, but did not complete the process 

until more than seven months later.32

In the Commission’s experience (i.e., 

in the experience of its predecessor 

agency), it took at least four months to 

make a necessity finding with respect to 

one commodity. The process of making 

the sort of necessity findings that 

plaintiffs urged upon the court with 

respect to all agricultural commodities 

and all exempt commodities would be 

far more lengthy than the time allowed 

by section 4a(a)(3) of the Act, i.e., 180 

or 270 days. 

Dodd-Frank requires the Commission 

to impose position limits on all exempt 

commodities within 180 days after 

enactment, and on all agricultural 

commodities within 270 days.33

Because of these stringent time limits, 

the Commission concludes that 

Congress did not intend for the 

Commission to delay the imposition of 

limits until it has first made antecedent, 

contract-by-contract necessity 

findings.34

Additional experience of the 

Commission confirms this 

interpretation. The Commission has 

found, historically, that speculative 

position limits are a beneficial tool to 

prevent, among other things, 

manipulation of prices. Limits do so by 

restricting the size of positions held by 

noncommercial entities that do not have 

hedging needs in the underlying 

physical markets. In other words, 

markets that have underlying physical 

commodities with finite supplies benefit 

from the protections offered by position 

limits. This will be discussed further, 

below. 

For example, in 1981, the 

Commission, acting expressly pursuant 

to, inter alia, what was then CEA 

Section 4a(1) (predecessor to CEA 

section 4a(a)(1)), adopted what was then 

§ 1.61.35 This rule required speculative 

position limits for ‘‘for each separate 

type of contract for which delivery 

months are listed to trade’’ on any DCM, 

including ‘‘contracts for future delivery 

of any commodity subject to the rules of 

such contract market.’’ 36 The 

Commission explained that this action 

was necessary in order to ‘‘close the 

existing regulatory gap whereby some 

but not all contract markets [we]re 

subject to a specified speculative 

position limit.’’ 37 Like the Dodd-Frank 

Act, the 1981 final rule established (and 

the rule release described) that such 

limits ‘‘shall’’ be established according 

to what the Commission termed 

‘‘standards.’’ 38 As used in the 1981 final 

rule and release, ‘‘standards’’ meant the 

criteria for determining how the 

required limits would be set.39

‘‘Standards’’ did not include the 

antecedent judgment of whether to order 

limits at all. The Commission had 

already made the antecedent judgment 

in the rule that ‘‘speculative limits are 

appropriate for all contract markets 

irrespective of the characteristics of the 

underlying market.’’ 40 It further 

concluded that, with respect to any 

particular market, the ‘‘existence of 

historical trading data’’ showing 

excessive speculation or other burdens 

on that market is not ‘‘an essential 

prerequisite to the establishment of a 

speculative limit.’’ 41 The Commission 

thus directed the exchanges to set limits 

for all futures contracts ‘‘pursuant to the 

. . . standards of rule 1.61[.]’’ 42 And 

§ 1.61 incorporated the standards from 

then-CEA-section 4a(1)—an 

‘‘Aggregation Standard’’ (46 FR at 

50943) for applying the limits to 

positions both held and controlled by a 

trader and a flexibility standard, 

allowing the exchanges to set ‘‘different 

and separate position limits for different 

types of futures contracts, or for 

different delivery months, or from 

exempting positions which are normally 

known in the trade as ‘spreads, 

straddles or arbitrage’ or from fixing 

limits which apply to such positions 

which are different from limits fixed for 

other positions.’’ 43

The language that ultimately became 

section 737 of the Dodd-Frank Act, 

amending CEA section 4a(a), originated 

in substantially final form in H.R. 977, 

introduced by Representative Peterson, 


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44H.R. 977, 11th Cong. (2009). 45 7 U.S.C. 6. 46Compare H.R. 977, 11th Cong. (2009) with 46 

FR 50944. 47H.Rept. 111–385, at 15, 19 (Dec. 19, 2009). 48See Union Carbide Corp. & Subsidiaries v. 

Comm’r of Internal Revenue, 697 F.3d 104, (2d Cir. 

2012) (explaining that when an agency must resolve 

a statutory ambiguity, to do so ‘‘ ‘with the aid of 

reliable legislative history is rational and prudent’ ’’ 

(quoting Robert A. Katzman, Madison Lecture: 

Statutes, 87 N.Y.U. L. Rev. 637, 659 (2012)). 

49 In its 1981 rulemaking in which the 

Commission required exchanges to impose position 

limits, the Commission interpreted the term 

‘‘standards,’’ to not require exchanges to make any 

finding of necessity with respect to imposing 

position limits. See 46 FR. 50941–42 (preamble), 

50945 (text of § 1.61(a)(2)). 

50The District Court expressed concern that, 

unless CEA section 4a(a)(2) incorporated a necessity 

finding, then the language referring to such a 

finding in CEA section 4a(a)(1) might be rendered 

surplusage. 887 F. Supp. 2d at 274–75. That is, the 

court believed that, unless a necessity finding were 

incorporated into any limits required by CEA 

section 4a(a)(2), then the ‘‘finds as necessary’’ 

language would serve no purpose in the CEA. But 

there is no surplusage because CEA section 4a(a) 

only mandates position limits with respect to 

physical commodity derivatives (i.e., agricultural 

commodities and exempt commodities). The 

mandate does not apply to excluded commodities 

(i.e., intangible commodities such as interest rates, 

exchange rates, or indexes, see CEA section 1a(19) 

(defining the term ‘‘excluded commodity’’). As a 

result, although a necessity finding does not apply 

with respect to physical commodities as to which 

the Dodd-Frank Congress mandated position limits, 

it still applies to any limits the Commission may 

choose to impose with respect to excluded 

commodities. Thus, the mandate of CEA section 

4a(a) does not render the necessity language 

surplusage. 

51When Congress requires an agency to 

promulgate a rule, it frequently requires the agency 

to provide it with a report regarding the impact of 

that rule. See, e.g., 15 U.S.C. 6502, 6506 (provisions 

of the Children’s Online Privacy Protection Act, 

requiring the FTC to promulgate implementing 

rules, and to report as to the impact thereof); 47 

U.S.C. 227(b), (h) (requiring the FCC to implement 

rules restricting unsolicited fax advertising, and to 

report on enforcement); 15 U.S.C. 78m(p) (requiring 

the SEC to issue rules requiring disclosures 

regarding the use of certain ‘‘conflict minerals’’ 

obtained from the Democratic Republic of Congo), 

and section 1502(d) of the Dodd-Frank Act 

(requiring the Comptroller General to report 

regarding the effectiveness of the conflict minerals 

rule). 

52 Initially, the House used the word ‘‘may’’ to 

permit the Commission to impose aggregate 

positions on contracts based upon the same 

underlying commodity. See H.R. 4173, 11th Cong. 

section 3113(a)(2) (as introduced in the House, Dec. 

2, 2009) (‘‘Introduced Bill’’); see also Brief of 

Senator Levin et al as Amicus Curiae at 10–11, 

ISDA v. CFTC, no. 12–5362 (D.C. Cir. Apr. 22, 

2013), Document No. 1432046 (hereafter ‘‘Levin 

Br.’’). 

who was then Chairman of the House 

Agriculture Committee and who would 

ultimately be a member of the DoddFrank conference committee.44 H.R. 977 

appears influenced by the Commission’s 

1981 rulemaking, establishing that there 

‘‘shall’’ be position limits in accordance 

with the ‘‘standards’’ identified in CEA 

section 4a(a).45 Like the 1981 rule, H.R. 

977 established (and the Dodd-Frank 

Act ultimately adopted) a ‘‘good faith’’ 

exception for positions acquired prior to 

the effective date of the mandated 

limits.46 The committee report 

accompanying H.R. 977 described it as 

‘‘Mandat[ing] the CFTC to set 

speculative position limits’’ and the 

section-by-section analysis stated that 

the legislation ‘‘requires the CFTC to set 

appropriate position limits for all 

physical commodities other than 

excluded commodities.’’ 47 This closely 

resembles the omnibus prophylactic 

approach the Commission took in 1981, 

when the Commission required the 

establishment of position limits on all 

futures contracts according to 

‘‘standards’’ it borrowed from CEA 

section 4a(1), and the Commission finds 

the history and interplay of the 1981 

rule and Dodd-Frank section 737 to be 

further evidence that Congress intended 

to follow much the same approach as 

the Commission did in 1981, mandating 

position limits as to all physical 

commodities.48

Consistent with this interpretation, 

which is based on the Commission’s 

experience, CEA section 4a(a)(2)(A)’s 

phrase ‘‘[i]n accordance with the 

standards set forth in [CEA section 

4a(a)(1)]’’ does not require a finding of 

necessity as a prerequisite to the 

imposition of position limits, but rather 

has a different meaning. Section 4a(a)(1) 

of the Act lists ‘‘standards’’ that the 

Commission must consider, and has 

historically considered, when it imposes 

position limits. It contains an 

aggregation standard, which provides 

that, if one person controls the positions 

of another, or if those persons 

coordinate their trading, then those 

positions must be aggregated. And it 

contains a flexibility standard, 

providing the Commission with the 

flexibility to impose different position 

limits for different commodities, 

markets, delivery months, etc.49

Because the Commission concludes 

that, when Congress amended section 

4a(a) of the Act and directed the 

Commission to establish the ‘‘required’’ 

limits, it did not want, much less 

require the Commission to make an 

antecedent finding of necessity for every 

position limit it imposes, the 

‘‘standards’’ the Commission must 

apply in imposing the limits required by 

section 4a(a)(2) of the Act consist of the 

aggregation standard and the flexibility 

standard of CEA section 4a(a)(1), the 

same standards the Commission 

required the exchanges to apply the last 

time there was a mandatory, 

prophylactic position limits regime.50

In addition, section 719 of the DoddFrank Act (codified at 15 U.S.C. 8307) 

provides that the Commission ‘‘shall 

conduct a study of the effects (if any) of 

the position limits imposed’’ pursuant 

to CEA section 4a(a)(2), that ‘‘[w]ithin 

12 months after the imposition of 

position limits,’’ the Commission 

‘‘shall’’ submit a report of the results of 

that study to Congress, and that, within 

30 days of the receipt of that report, 

Congress ‘‘shall’’ hold hearings 

regarding the findings of that report. As 

explained above, if, as a precondition to 

imposing position limits, the 

Commission were required to make the 

sort of necessity determinations 

apparently contemplated by the district 

court, the Commission would have to 

conduct time-consuming studies and 

then determine as a matter of discretion 

whether a limit was necessary. The 

Commission believes that, to comply 

with section 719 of the Dodd-Frank Act, 

the Commission would then, within one 

year, have to conduct another round of 

studies with respect to each contract as 

to which it had imposed limits. The 

Commission does not believe that 

Congress would have imposed such 

burdensome and duplicative 

requirements on the Commission. 

Moreover, Congress would not have 

required the Commission to conduct a 

study of the effects, ‘‘if any,’’ of position 

limits, and would not have imposed a 

hearing requirement on itself, if the 

Commission had the discretion to not 

impose any position limits at all.51

Further, Congress was careful to make 

clear that its mandate only extends to 

agricultural and exempt commodities. If 

there were no mandate, then the same 

standards that apply to position limits 

for excluded commodities would also 

apply to agricultural and exempt 

commodities and, basically, the 

Commission would have only 

permissive authority to promulgate 

position limits for any commodity—the 

same permissive authority that existed 

prior to the Dodd-Frank Act. Finding 

that a mandate exists is the only way to 

give effect to the distinction that 

Congress drew. 

The legislative history of the DoddFrank amendments to CEA section 4a(a) 

confirms that Congress intended to 

make position limits mandatory for 

agricultural and exempt commodities. 

As initially introduced, the House 

version of the bill that became DoddFrank provided the Commission with 

discretionary authority to issue position 

limits by stating that the Commission 

‘‘may’’ impose them.52 However, by the 

time the bill passed the House, it 

dispensed with the permissive approach 

in favor of a mandate, stating that the 

Commission ‘‘shall’’ impose limits, and 


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53Levin Br. at 11 (citing H.R. 4173, 111th Cong. 

section 3113(a)(5)(2), (7) (as passed by the House 

Dec. 11, 2009) (‘‘Engrossed Bill’’)). 

54 Id. at 12. (citing Engrossed Bill at section 

3113(a)(5)(3)). 

55 15 U.S.C. 8307. 

56See Levin Br. at 13–17; see also DVD: October 

21, 2009 Business Meeting (House Agriculture 

Committee 2009), ISDA v. CFTC, Dkt. 37–2 Exh. B 

(Apr. 13, 2012) at 59:55–1:02:18. 

57Levin Br. at 23 (citing H.R. Rep. No. 111–373 

at 11 (2009)). 

58Levin Br. at 17–18. 

59The district court noted that CEA sections 

4a(a)(2), (3), and (5)(A) contain the words ‘‘as 

appropriate.’’ The court held that it was ambiguous 

whether those words referred to the Commission’s 

obligation to impose limits (i.e., the Commission 

shall, ‘‘as appropriate,’’ impose limits), or to the 

level of the limits the Commission is to impose. 

Because, as explained above, the Commission 

believes it is reasonable to interpret CEA section 

4a(a) to mandate the imposition of limits, the words 

‘‘as appropriate’’ must refer to the level of limits, 

i.e., the Commission must set limits at an 

appropriate level. Thus, while Congress made the 

threshold decision to impose position limits on 

physical commodity futures and options and 

economically equivalent swaps, Congress at the 

same time delegated to the Commission the task of 

setting the limits at levels that would maximize 

Congress’ objectives. See CEA sections 4a(a)(3)(A)– 

(B). 

60The CEA does not define ‘‘excessive 

speculation.’’ But the Commission has historically 

associated it with extraordinarily large speculative 

positions. 76 FR at 71629 (referring to 

‘‘extraordinarily large speculative positions’’). 

61Since the 1920’s, Congressional and other 

official governmental investigations and reports 

have identified other instances of sudden or 

unreasonable fluctuations or unwarranted changes 

in the price of commodities. See discussion below. 

62See CFTC Glossary, A Guide to the Language 

of the Futures Industry (‘‘CFTC Glossary’’), 

available at http://www.cftc.gov/

ConsumerProtection/EducationCenter/

CFTCGlossary/glossary, which defines a corner as 

‘‘(1) [s]ecuring such relative control of a commodity 

that its price can be manipulated, that is, can be 

controlled by the creator of the corner; or (2) in the 

extreme situation, obtaining contracts requiring the 

delivery of more commodities than are available for 

delivery.’’ 

63See CFTC Glossary, which defines a ‘‘short’’ as 

‘‘(1) [t]he selling side of an open futures contract; 

(2) a trader whose net position in the futures market 

shows an excess of open sales over open 

purchases.’’ 

64See CFTC Glossary, which defines ‘‘cover’’ as 

‘‘(1) [p]urchasing futures to offset a short position 

(same as Short Covering); . . . (2) to have in hand 

the physical commodity when a short futures sale 

is made, or to acquire the commodity that might be 

deliverable on a short sale’’ and offset as 

‘‘[l]iquidating a purchase of futures contracts 

through the sale of an equal number of contracts of 

the same delivery month, or liquidating a short sale 

of futures through the purchase of an equal number 

of contracts of the same delivery month.’’ 

65See CFTC Glossary, which defines a ‘‘squeeze’’ 

as ‘‘[a] market situation in which the lack of 

supplies tends to force shorts to cover their 

positions by offset at higher prices.’’ 

66The primary silver traders in the Hunt family 

were Nelson Bunker Hunt, William Herbert Hunt, 

and Lamar Hunt. 

67A group of individuals and firms trading 

through ContiCommodity Services, Inc. and ACLI 

International Commodity Services, Inc., both of 

which were FCMs. 

in addition, the House added two new 

subsections, mandating the imposition 

of limits for agricultural and exempt 

commodities with the tight deadlines 

described above.53 Similarly, it was only 

after the initial bill was amended to 

make position limits mandatory that the 

House bill referred to the limits for 

agricultural and exempt commodities as 

‘‘required’’ in one instance.54

Furthermore, Congress decided to 

include the requirement that the 

Commission conduct studies on the 

‘‘effects (if any) of position limits 

imposed’’ 55 to determine if the required 

position limits were harming US 

markets only after position limits went 

from discretionary to mandatory.56 To 

remove all doubt, the House Report 

accompanying the House Bill also made 

clear that the House amendments to the 

position limits bill ‘‘required’’ the 

Commission to impose limits.57 The 

Conference Committee adopted the 

provisions of the House bill with regard 

to position limits and then strengthened 

them by referring to the position limits 

as ‘‘required’’ an additional three times 

so that CEA section 4a(a), as enacted 

referred, to position limits as ‘‘required’’ 

a total of four times.58

Considering the text, purpose and 

legislative history of section 4a(a) as a 

whole, along with its own experience 

and expertise, the Commission believes 

that it is reasonable to conclude that 

Congress—notwithstanding the 

ambiguity the district court found to 

arise from some of the words in the 

statute—decided that position limits 

were necessary with respect to physical 

commodities, mandated the 

Commission to impose them on 

physical commodities, and required that 

the Commission do so expeditiously.59

3. Necessity Finding 

As explained above, the Commission 

concludes that the CEA mandates the 

imposition of speculative position 

limits. Because of this mandate, the 

Commission need not make a 

prerequisite finding that such limits are 

necessary ‘‘to diminish, eliminate or 

prevent excessive speculation causing 

sudden or unreasonable fluctuations or 

unwarranted changes in the prices of’’ 

commodities under pre-Dodd-Frank 

CEA section 4a(a)(1). Nonetheless, out 

of an abundance of caution in light of 

the district court decision in ISDA v. 

CFTC, and without prejudice to any 

argument the Commission may advance 

in any forum, the Commission proposes, 

as a separate and independent basis for 

the proposed Rule, a preliminary 

finding herein that such limits are 

necessary to achieve their statutory 

purposes.60

Historically, speculative position 

limits have been one of the tools used 

by the Commission to prevent, among 

other things, manipulation of prices. 

Limits do so by restricting the size of 

positions held by noncommercial 

entities that do not have hedging needs 

in the underlying physical markets. By 

capping the size of speculative 

positions, limits lessen the likelihood 

that a trader can obtain a large enough 

position to potentially manipulate 

prices, engage in corners or squeezes or 

other forms of price manipulation. The 

position limits in this proposal are 

necessary as a prophylactic measure to 

lessen the likelihood that a trader will 

accumulate excessively large 

speculative positions that can result in 

corners, squeezes, or other forms of 

manipulation that cause unwarranted or 

unreasonable price fluctuations. In the 

Commission’s experience, position 

limits are also necessary as a 

prophylactic measure because 

excessively large speculative positions 

may cause sudden or unreasonable price 

fluctuations even if not accompanied by 

manipulative conduct. Two examples 

that inform the Commission’s 

determinations are the silver crisis of 

1979–80 and events in the natural gas 

markets in 2006.61

Position limits would help to deter 

and prevent manipulative corners and 

squeezes, such as the silver price spike 

caused by the Hunt brothers and their 

cohorts in 1979–80. 

A market is ‘‘cornered’’ when an 

individual or group of individuals 

acting in concert acquire a controlling or 

ownership interest in a commodity that 

is so dominant that the individual or 

group of individuals can set or 

manipulate the price of that 

commodity.62 In a short squeeze, an 

excess of demand for a commodity 

together with a lack of supply for that 

commodity forces the price of that 

commodity upward. During a short 

squeeze, individuals holding short 

positions, i.e., sales for future delivery 

of a commodity,63 are typically forced to 

purchase that commodity in situations 

where the price increases rapidly, in 

order to exit their short position and/or 

cover,64 i.e., be able to deliver the 

commodity in accordance with the 

terms of the sale.65

A rapid rise and subsequent sharp 

decline in silver prices occurred from 

the second half of 1979 to the first half 

of 1980 when the Hunt brothers 66 and 

colluding syndicates 67 attempted to 

corner the silver market by hoarding 

silver and executing a short squeeze. 

Prices deflated only after the 

Commodity Exchange, Inc. (‘‘COMEX’’) 


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68Commodity Futures Trading Commission, 

Report To The Congress In Response To Section 21 

Of The Commodity Exchange Act, May 29, 1981, 

Part Two, A Study of the Silver Market, at 173 

(‘‘Interagency Silver Study’’). 69Speculative Position Limits, 45 FR 79831, 

79833, Dec. 2, 1980. 70Speculators seek to profit by anticipating the 

price movement of a commodity in which a futures 

position has been established. See CFTC Glossary, 

which defines a speculator as, ‘‘[i]n commodity 

futures, a trader who does not hedge, but who 

trades with the objective of achieving profits 

through the successful anticipation of price 

movements.’’ In contrast, a hedger is ‘‘[a] trader 

who enters into positions in a futures market 

opposite to positions held in the cash market to 

minimize the risk of financial loss from an adverse 

price change; or who purchases or sells futures as 

a temporary substitute for a cash transaction that 

will occur later. One can hedge either a long cash 

market position (e.g., one owns the cash 

commodity) or a short cash market position (e.g., 

one plans on buying the cash commodity in the 

future).’’ The Hunts had no apparent industrial use 

for silver, although some attribute their early 

activities in the silver market to an attempt to hedge 

against Carter-era inflation and a defense against 

potential confiscation of precious metals in the 

event of a national crisis. 

71Typically, delivery occurs in only a small 

percentage of futures transactions. The vast majority 

of contracts are liquidated by offsetting 

transactions. 

72See, e.g., Matonis, Jon, Hunt Brothers 

Demanded Physical Silver Delivery Too, available 

at http://www.rapidtrends.com/hunt-brothersdemanded-physical-silver-delivery-too/. To provide 

context, at this time COMEX and CBOT warehouses 

held 120 million ounces of silver. 

73 Interagency Silver Study at 18. 

74 It has been reported that they moved vast 

quantities of silver to warehouses in Switzerland to 

prevent this possibility. 

75 Interagency Silver Study at 77. 

76 Interagency Silver Study at 133. 

77See CFTC Glossary, which defines ‘‘spot price’’ 

as ‘‘[t]he price at which a physical commodity for 

immediate delivery is selling at a given time and 

place.’’ The prompt month is the nearest month to 

the expiration date of a futures contract. 

78 Interagency Silver Study at 35–36. 

and the Chicago Board of Trade 

(‘‘CBOT’’) imposed a series of 

emergency rules imposing at various 

times position limits, increased margin 

requirements, and trading for 

liquidation only on U.S. silver futures. 

It was the consensus view of staffs of the 

Commission, the Board of Governors of 

the Federal Reserve System, the 

Department of the Treasury and the 

Securities and Exchange Commission 

articulated in an interagency task force 

study of events in the silver market 

during that period that ‘‘[r]easonable 

speculative position limits, if they had 

been in place before the buildup of large 

positions occurred, would have helped 

prevent the accumulation of such large 

positions and the resultant dislocations 

created when the holders of those 

positions stood for delivery.’’ 68 That is, 

speculative position limits would have 

helped to prevent the buildup of the 

silver price spike of 1979–80. The 

Commission believes that this 

conclusion remains correct. ‘‘Moreover, 

by limiting the ability of one person or 

group to obtain extraordinarily large 

positions, speculative limits diminish 

the possibility of accentuating price 

swings if large positions must be 

liquidated abruptly in the face of 

adverse price movements or for other 

reasons.’’ 69

The Hunt brothers were speculators 70

who neither produced, distributed, 

processed nor consumed silver. The 

corner began in early 1979, when the 

Hunt brothers accumulated large 

physical holdings of silver by 

purchasing silver futures and taking 

physical delivery of silver.71 By the fall 

of 1979, they had accumulated over 43 

million ounces of physical silver.72 In 

addition to their physical holdings, in 

the fall of 1979 the Hunts and their 

cohorts held over 12 thousand contracts 

for March delivery, representing a 

potential future delivery to the hoard of 

another 60 million ounces of silver.73 In 

general, the larger a position held by a 

trader, the greater is the potential that 

the position may affect the price of the 

contract. Throughout late 1979, the 

Hunts continued to stand for delivery 

and took care to ensure that their own 

holdings were not re-delivered back to 

them when outstanding futures 

contracts settled.74 Thus, through this 

period, silver prices climbed as the 

Hunts accumulated more financial and 

physical positions and the available 

supply of silver decreased. As the 

interagency working group observed, 

‘‘[t]he biggest single source of the 

change in demand for silver bullion 

during the last half of 1979 and the first 

quarter of 1980 came from the silver 

acquisitions of Hunt family members 

and other large traders.’’ 75

The exchanges and regulators were 

slow to react to events in the silver 

market. However, to correct by then 

evident market imbalances, in late 1979 

the CBOT introduced position limits of 

3 million ounces of silver (i.e., 600 

contracts) per trader and raised margin 

requirements. Contracts over 3 million 

ounces were to be liquidated by 

February of 1980. On January 7, 1980, 

the larger COMEX instituted position 

limits of 10 million ounces of silver (i.e., 

2,000 contracts) per trader, with 

contracts over that amount to be 

liquidated by February 18. Then, on 

January 21, COMEX suspended trading 

in silver and announced that it would 

only accept liquidation orders. The 

price of silver began to decline. When 

the price of a commodity starts to move 

against the cornerer, attempts by the 

cornerer to sell would tend to fuel a 

further price move against the cornerer 

resulting in a vicious cycle of price 

decline. The Hunts were eventually 

unable to meet their margin calls and 

took a huge loss on their positions. The 

interagency working group concluded 

that the data relating to the episode 

‘‘support the hypothesis that the 

deliveries and potential deliveries to 

large long participants in the silver 

futures markets contributed to the rise 

and fall in silver prices in both the cash 

and futures markets. The rise appears to 

have been caused in part by the 

conversion of silver futures contracts to 

actual physical silver. The subsequent 

fall in prices was then exacerbated by 

the anticipated selling of some of the 

Hunt’s physical silver by FCMs as well 

as the liquidation of Hunt group and 

possibly . . . [other large traders’] 

futures positions.’’ 76

Figure 1 illustrates the rapid rise and 

sharp decline in the price of silver 

during the period in question.77 In 

January of 1979, the settlement price of 

silver was approximately $6.00 per troy 

ounce. By August, the price had risen to 

over $9.00, an increase of over 50 

percent. Through most of October and 

November 1979, silver traded within a 

range of $15.00–$17.50 per troy ounce. 

On November 28, the closing price rose 

above $18.00. In December of 1979, the 

price rose above $30.00 and continued 

to climb until mid-January. On January 

17, 1980, the closing price of silver 

reached its apex at $48.70 per troy 

ounce, more than five times the August 

price. On January 21, the price declined 

to $44.00; on January 22 the closing 

price slid to $34.00 per troy ounce. 

Through March 7, 1980, silver traded in 

an approximate range of $30.00–$40.00 

per troy ounce. On March 10, silver 

closed below $30.00. On March 17 and 

18, silver closed below $20.00. After a 

brief rebound above $22.00, by March 

26 the price dropped to $15.80. On 

March 27, the price of silver hit a low 

of $10.80 per troy ounce, less than a 

quarter of the high of $48.70 two 

months earlier. ‘‘After March 28, silver 

prices stabilized for a while in the $12– 

$15 range. . . . During April through 

December 1980, silver prices moved 

generally in a range between $12 and 

$20 per ounce.’’ 78


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Figure 2 shows the distortion in the 

price of silver futures contracts due to 

the short squeeze during the run-up to 

the January 17 high and the effect of 

‘‘burying the corpse’’ after the squeeze 

ended. In January 1980, due to the 

hoarding of the Hunts and their cohorts, 

physical supplies of silver were tight 

and the physical commodity was 

expensive to deliver. Scarcity in the 

physical market for silver distorted 

prices in the silver futures markets. The 

degree to which the value of the front 

month contract exceeded the value of 

other contracts was exaggerated. By 

April of 1980, because the Hunts and 

their cohorts were forced to sell, 

physical supply had increased and 

silver was comparatively cheaper to 

deliver. The front month contract was 

then worth substantially less than other 

contracts. In contrast, assuming 

equilibrium in production, use, and 

storage of silver, one would expect the 

charted price spreads to look 

comparatively much flatter. That is, 

there should not be that much 

difference between the price of the front 

month contract and other contracts 

because silver should not be subject to 

seasonality such as would affect crops. 

Moreover, because silver is relatively 

cheap to store, the difference in the 

price of the front month and other 

contracts should also be less sensitive to 

the cost of carry. 


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79 7 U.S.C. 6a(a)(1). 80The Interagency Silver Study identified three 

main factors contributing to the price increases in 

silver at the time. 

First, the state of the economy during the period 

in question affected all precious metals including 

silver. . . . 

Second, changes in the supply and demand of 

physical silver affected the price of silver. . . . 

Third, the accumulation of large amounts of both 

physical silver and silver futures by individuals 

such as the Hunt family of Dallas, Texas, had an 

effect on the price of silver directly and on the 

expectations of others who became aware of these 

actions. 

Interagency Silver Study at 2. 

81 In a commodity derivative contract, the two 

parties to the contract have opposite positions. That 

is, for every long position in a commodity 

derivative contract held by one trader, there is a 

short position that another trader must hold. 

82Regarding cash-settled commodity derivative 

contracts, there are a variety of methods for 

determining the final cash settlement price, such as 

by reference to (i) a survey price of cash market 

transactions, or (ii) the final (or daily) settlement 

price of a physical-delivery futures contract. For 

example, in the case of a trader who holds an 

extraordinarily large position in a cash-settled 

contract based on a survey of prices of cash market 

transactions, where the price of the spot month 

cash-settled contract is used by cash market 

participants in determining or setting their cash 

market transaction prices, then an unwarranted 

price fluctuation in that cash-settled commodity 

derivative contract could result in distorted prices 

in cash market transactions and, thus, an artificial 

In section 4a(a)(1) of the Act, Congress 

identifies ‘‘sudden or unreasonable 

fluctuations or unwarranted changes in 

the price of such commodity’’ 79 as an 

indication that excessive speculation 

may be present in a market for a 

commodity. The rapid rise and sharp 

decline in the price of silver that 

commenced in August 1979 and was 

spent by the end of March 1980 

certainly fits the description advanced 

by Congress. Nevertheless, the 

Commission, based on its experience 

and expertise, does not believe that the 

burdens on interstate commerce are 

limited solely to the temporary and 

unwarranted changes in price such as 

those exhibited during the silver price 

spike that resulted, at least in part, from 

the deliberate behavior of the Hunt 

brothers and their cohorts.80 Indirect 

burdens on interstate commerce may 

arise as a result of unwarranted changes 

in price such as occurred in this case. 

Such burdens arise due to manipulation 

or attempted manipulation, or they may 

result from the excessive size and 

disorderly trading of a speculative, i.e., 

non-hedging, position. 

Sudden or unreasonable fluctuations 

or unwarranted changes in the price of 

a commodity derivative contract may be 

caused by a trader establishing, 

maintaining or liquidating an 

extraordinarily large position whether 

in a physical-delivery or cash-settled 

contract. Prices for commodity 

derivative contracts reflect expectations 

about the price of the underlying 

commodity at a future date and, thus, 

reflect expectations about supply and 

demand for that underlying commodity. 

In contrast, the supply of a commodity 

derivative contract itself is not limited 

to the supply of the underlying 

commodity. Rather, the supply of a 

commodity derivative contract is a 

function of the ability of a trader to 

induce a counterparty to take the 

opposite side of the transaction.81 Thus, 

the capacity of the market (i.e., all 

participants) to absorb purchase or sale 

orders for commodity derivative 

contracts is limited by the number of 

participants that are willing to provide 

liquidity, i.e., take the other side of the 

order at a given price. For example, a 

trader that demands immediacy in 

establishing a long position larger than 

the amount of pending offers to sell by 

market participants may cause the 

commodity derivative contract price to 

increase, as market participants may 

demand a higher price when entering 

new offers to sell. It follows that an 

extraordinarily large position, relative to 

the size of other participants’ positions, 

may cause an unwarranted price 

fluctuation. 

In the spot month for a physicaldelivery commodity derivative contract, 

concerns regarding sudden or 

unreasonable fluctuations or 

unwarranted changes in the price of that 

contract are heighted because open 

positions in such a contract either: Must 

be satisfied by delivery of the 

underlying commodity (which is of 

limited supply and, thus, susceptible to 

corners or squeezes); or must be offset 

before delivery obligations attach (that 

requires trading with another 

participant to offset the open 

position).82 For example, a trader 


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final cash settlement price from a survey of such 

distorted cash market transaction prices. 

Alternatively, for example, in the case of a trader 

who holds an extraordinarily large position in a 

cash-settled contract based on the final settlement 

price of a physical-delivery futures contract, then a 

trader has an incentive to mark the close of that 

physical-delivery futures contract to benefit her 

position in the cash-settled contract. 

83 Id. at 150. 

84 Id. (footnotes omitted). James M. Stone, 

formerly Chairman of the Commission, maintained 

that the negative effects of the price spike on 

commercials were borne out in employment figures: 

‘‘In the case of silver, the employment impacts fell 

hardest upon the makers of consumer products. 

According to the Department of Labor’s Bureau of 

Labor Statistics some 6000 jobs in the jewelry, 

silverware and plateware industries were lost 

between November of 1979 and February of 1980.’’ 

Additional Comments on the Interagency Silver 

Study at 9 (‘‘Stone Comments’’). 

85 Id. at 135. 

86 Id. at 140. 

87 Id. at 135–6 (footnote omitted). 

88See id. at 140–41. ‘‘Although the 

clearinghouses have contingency plans to deal with 

insolvent members, to date these plans have 

covered only the collapse of small FCMs. 

Conceivably, a major default could result in 

assessments of members that might, in turn, result 

in the insolvency of some members and the collapse 

of the exchange.’’ 

89 Interagency Silver Study at 145. ‘‘Bank loans to 

major silver traders were made both directly and 

indirectly through FCMs. . . . Default on a major 

portion of these loans could have had a significant 

effect on the overall banking industry, but 

particularly on those banks where the loan 

concentration was the greatest.’’ Testimony of 

Philip McBride Johnson, Chairman, Commodity 

Futures Trading Commission, Before the 

Subcommittee on Conservation, Credit and Rural 

Development, Committee on Agriculture, U.S. 

House of Representatives, Oct. 1, 1981, at 19 

(‘‘Johnson Testimony’’). 

90See Interagency Silver Study at 147–8. See also 

Johnson Testimony at 18–21. 

91 Interagency Silver Study at 148. 

92See Stone Comments at 9; Johnson Testimony 

at 20. Contra Philip Cagan, ‘‘Financial Futures 

Continued 

holding an extraordinarily large long 

position, absent position limits, could 

maintain a long position (requiring 

delivery beyond the limited supply of 

the physical commodity) deep into the 

spot month. By maintaining such an 

extraordinarily large position, such a 

trader may cause an unwarranted 

increase in the price of the commodity 

derivative contract, as holders of short 

positions attempt to induce a 

counterparty to offset their position. 

Prices that deviate from the natural 

forces of supply and demand, i.e., 

artificial prices, may occur when there 

is hoarding of a physical commodity in 

an attempted or perfected manipulative 

activity (such as a corner). If a price of 

a commodity is artificial, resources will 

be inefficiently allocated during the 

time that the artificial price exists. 

Similarly, prices that are unduly 

influenced by the size of a very large 

speculative position, or trading that 

increases or reduces the size of such 

very large speculative position, may 

lead to an inefficient allocation of 

resources to the extent that such prices 

do not allocate resources to their highest 

and best use. These burdens were 

present during the Hunt brothers 

episode. The Interagency Silver Study 

concluded that ‘‘the volatile conditions 

in silver markets and the much higher 

price levels . . . affected the industrial 

and commercial sectors of the economy 

to a greater extent than would have been 

the case if silver price changes had been 

less turbulent.’’ 83 The Interagency 

Silver Study described several negative 

consequences of resource misallocations 

that occurred during the silver price 

spike. 

Significant changes took place in the 

use of silver as an industrial input 

during silver’s price oscillation in 1979– 

80. In the photography industry, the 

consumption of silver from the first 

quarter of 1979 to the first quarter of 

1980 fell by nearly one third. Similarly, 

the use of silver in the production of 

silverware declined by over one half in 

this period. In addition, numerous other 

uses of silver exhibited sharp usage 

declines equivalent to or in excess of 

these examples. These sharp reductions 

in silver use are indicative of the general 

disruption caused by the sharp rise in 

silver prices. Since the demand for 

silver in many of these uses is relatively 

price inelastic, the substantial decline 

registered in the use of silver for 

industrial purposes underscores the 

sizable magnitude of silver price 

increases and the consequent disruption 

experienced by the industry. 

Individual commercial operations 

using silver were also disrupted. To 

illustrate, a major producer of X-ray film 

discontinued production purportedly as 

a result of the sharply increased and 

erratic behavior of the price of silver. In 

addition, there were reports that trading 

firms failed financially in early 1980 

due to losses incurred in silver markets. 

Finally, the financial condition of small 

firms dependent on silver products 

(hearing aid batteries, printing supplies, 

etc.) deteriorated as a result of high 

silver prices and limited supplies.84

Moreover, after the settlement price of 

silver peaked in mid-January 1980, the 

ensuing ‘‘rapid decline of silver prices 

subjected several FCMs and their parent 

companies to considerable financial 

stress.’’ 85 In the view of the 

Commission and other regulators, 

‘‘[w]hile all FCMs carrying silver 

positions appear to have remained 

solvent during the period in question, 

the potential for insolvency was 

significant.’’ 86 The Interagency Silver 

Study described a cascade of 

undesirable events; 

Falling prices reduced the equity in the 

accounts of some large, net long silver futures 

positions, necessitating margin calls. 

Responsibility for the financial obligations of 

some of these positions had to be assumed 

by FCMs when large margin calls went 

unmet. A significant proportion of the loans 

to major silver longs, collateralized by silver, 

had been made by some FCMs acting for their 

parent companies. A major portion of this 

collateral was rehypothecated for bank loans 

by these companies. The FCMs and their 

parent companies were thus exposed to two 

related problems that threatened them with 

insolvency—the losses on customer accounts 

and the possibility that silver prices would 

fall to a point which would cause the banks 

to demand payment on the hypothecated 

loans. . . . The FCM was not only vulnerable 

because of its customers’ losses on the 

futures contracts, but also because of the 

potential for a decline in the value of loan 

collateral.87

The failure of an FCM with large 

silver exposures could have adversely 

affected clients without positions in 

silver and potentially other participants 

in the futures markets. The failure of a 

large FCM could have negatively 

affected the various exchanges and 

potentially the clearinghouses.88 The 

solvency of FCMs and other 

Commission registrants crucial to 

properly functioning futures markets is 

clearly within the Commission’s 

regulatory ambit. The failure of a 

commission registrant in the context of 

unwarranted price spikes would be a 

burden on interstate commerce. 

Fallout from the silver price spike in 

late 1979-early 1980 extended beyond 

the silver markets. ‘‘Banks, by extending 

credit for futures market activity while 

accepting silver as collateral, exposed 

themselves to higher than normal 

risks.’’ 89 Unusual activity was also 

observed in other futures markets, such 

as precious metals and commodities 

other than silver in which the Hunts 

were thought to have had positions.90

‘‘On March 27, 1980, the date on which 

the price of silver dropped to its lowest 

point, $10.80 an ounce, a combination 

of factors, including news of the Hunts’ 

problems in meeting margin calls, the 

efforts of the Hunts to sell positions in 

various exchange-listed securities in 

order to meet those calls, and the 

actions of the SEC in suspending trading 

in Bache Group stock, appeared to have 

a direct impact on the securities 

markets.’’ 91 Commenters noted the 

marked changes in the rate of inflation 

concomitant with the rapid rise and fall 

of the price of silver.92 Potential bank 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75690 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

Markets: Is More Regulation Needed?,’’ I J. Futures 

Markets 169, 181–82 (1981). 

93See also Speculative Position Limits, 45 FR 

79831, 79833, Dec. 2, 1980 (‘‘Had limits on the 

amount of total open commitments which any 

trader or group can own been in effect, such 

occurrences may have been prevented.’’). 

94The formula for the non-spot-month position 

limits is based on total open interest for all 

Referenced Contracts in a commodity. The actual 

position limit level will be set based on a formula: 

10 percent of the open interest for the first 25,000 

contracts and 2.5 percent of the open interest 

thereafter. The 10, 2.5 percent formula is identified 

in 17 CFR 150.5(c)(2). 95 Interagency Silver Study at 117. 

96 During the time of the events discussed, silver 

bullion futures contracts traded in the United States 

on the COMEX in New York, the CBOT in Chicago, 

and the MidAmerica Commodity Exchange 

(‘‘MCE’’) in Chicago. At this time, the COMEX and 

CBOT contracts were each 5,000 troy ounces of 

silver, and MCE’s contract was 1,000 troy ounces. 

Month-end open interest numbers were not 

available for MCE. 

97See discussion below. 

98 Interagency Silver Study at 104. 

99 Id. at 117. 

failures, disruptions in other futures 

markets, disruptions in the securities 

markets and volatile inflation rates 

would be additional burdens on 

interstate commerce. In highlighting the 

ability of market participants to 

accumulate extraordinarily large 

speculative positions, thereby 

demoralizing the silver markets to the 

injury of producers and consumers, the 

entirety of the Hunt brothers silver 

episode called into question the 

adequacy of futures regulation generally 

and the integrity of the futures markets. 

The Commission believes that if 

Federal speculative position limits had 

been in effect that correspond to the 

limits that the Commission proposes 

now, across markets now subject to 

Commission jurisdiction, such limits 

would have prevented the Hunt brothers 

and their cohorts from accumulating 

such large futures positions.93 Such 

large positions were associated with the 

sudden fluctuations in price shown in 

Figures 1 and 2. These unwarranted 

changes in price imposed an undue and 

unnecessary burden on interstate 

commerce, as described in greater detail 

on the preceding pages. If the Hunt 

brothers had been prevented from 

accumulating such large futures 

positions, they would not have been 

able to demand delivery on such large 

futures positions. The Hunts therefore 

would have been unable to hoard as 

much physical silver. The Commission’s 

belief is based on the following 

assessment: 

In order to approximate a singlemonth and all-months-combined limit 

calculated using a methodology similar 

to that proposed in this release 94 for 

silver during this time period, the 

Commission used data regarding monthend open contracts from the Interagency 

Silver Study.95 These month-end open 

interest reports are for all silver futures 

combined for the Chicago Board of 

Trade and the Commodity Exchange in 

New York.96 Table 1 shows the monthend open interest for all silver futures 

combined from August 1979 to April 

1980. Using these numbers, the average 

month-end open interest for this period 

is 190,545 contracts, and applying the 

10, 2.5 percent formula to this average 

would result in single-month and allmonths-combined limits of 6,700 

contracts. The Hunts would have 

exceeded this single-month limit in the 

fall of 1979 when they and their cohorts 

held over 12,000 contracts for March 

delivery.97 In addition, the Hunts and 

their cohorts held net positions in silver 

futures on COMEX and CBOT that 

exceeded the calculated all-monthscombined limits on multiple occasions 

between September 1975 and February 

1980 as is shown in Table 2. Hence, if 

the proposed rule had been in place, it 

could have limited the size of the 

positions held by the Hunts and their 

cohorts as early as the autumn of 1975. 

There are two limitations to the data 

used in this analysis. First, the monthend open interest data do not include 

open interest from the MidAmerica 

Commodity Exchange. Second, the 

month-end open interest numbers are 

for a short time-period starting at the 

end of August 1979. If the proposed rule 

had been in place at the time of the 

Hunt brothers price spike, the limits 

would have been calculated using data 

from two years and would likely have 

used data from an earlier period which 

could have caused the limit levels to be 

different. However, the Commission 

believes that the calculated limits are a 

fair approximation of the limits that 

would have applied during this time 

period. Moreover, for speculative 

position limits not to have constrained 

the Hunts at the end of 1975 when their 

net position was reported as 15,876 

contracts, the average total open interest 

for the time period would have had to 

be over 500,000 contracts (of 5,000 troy 

ounces). Moreover, the average total 

open interest would have had to be over 

900,000 contracts (of 5,000 troy ounces) 

before the all-months-combined limit 

would have exceeded the maximum net 

position reported by the Interagency 

Silver Study (24,722 for September 30, 

1979). According to the Interagency 

Silver Study, it was at this point that the 

Hunts began acquiring large quantities 

of physical silver.98

TABLE 1—MONTH-END OPEN INTEREST FOR CHICAGO BOARD OF TRADE (CBOT) AND THE COMMODITY EXCHANGE

(COMEX), AUGUST 1979 THROUGH APRIL 1980, ALL SILVER FUTURES COMBINED 99

Date CBOT open 

interest 

COMEX open 

interest 

Total open 

interest 

8/31/1979 ..................................................................................................................................... 185,031 157,952 342,983 

9/30/1979 ..................................................................................................................................... 161,154 167,723 328,877 

10/31/1979 ................................................................................................................................... 105,709 145,611 251,320 

11/30/1979 ................................................................................................................................... 98,009 134,207 232,216 

12/31/1979 ................................................................................................................................... 93,748 127,225 220,973 

1/31/1980 ..................................................................................................................................... 49,675 77,778 127,453 

2/29/1980 ..................................................................................................................................... 28,211 63,672 91,884 

3/31/1980 ..................................................................................................................................... 24,336 48,688 73,024 

4/30/1980 ..................................................................................................................................... 19,008 27,166 46,174 


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100 Id. at 103. 

101For purposes of discussion, the following 

section recounts certain findings about the 2006 

natural gas markets by the staff of the Permanent 

Subcommittee on Investigations of the United 

States Senate (the ‘‘Permanent Subcommittee’’). See 

generally Excessive Speculation in the Natural Gas 

Market, Staff Report with Additional Minority Staff 

Views, Permanent Subcommittee on Investigations, 

United States Senate, Released in Conjunction with 

the Permanent Subcommittee on Investigations, 

June 25 & July 9, 2007 Hearings (‘‘Subcommittee 

Report’’). Separately, the Commission, on July 25, 

2007, charged Amaranth Advisors LLC, Amaranth 

Advisors (Calgary) ULC and its former head energy 

trader, Brian Hunter, with attempted manipulation 

in violation of the Commodity Exchange Act. The 

charges against the Amaranth entities were later 

settled, with a fine of $7.5 million levied against 

them in August of 2009. See U.S. Commodity 

Futures Trading Commission Charges Hedge Fund 

Amaranth and its Former Head Energy Trader, 

Brian Hunter, with Attempted Manipulation of the 

Price of Natural Gas Futures, July 25, 2007, 

available at http://www.cftc.gov/PressRoom/ 

PressReleases/pr5359-07; Amaranth Entities 

Ordered to Pay a $7.5 Million Civil Fine in CFTC 

Action Alleging Attempted Manipulation of Natural 

Gas Futures Prices, August 12, 2009, available at 

http://www.cftc.gov/PressRoom/PressReleases/ 

pr5692-09. The Commission enforcement action is 

still pending against Brian Hunter. The discussion 

herein of the natural gas events and Subcommittee 

Report shall not be construed to alter any 

statements by or positions of the Commission and 

its staff in the pending enforcement matter. 

102Subcommittee Report at 67. 103Amaranth was a pure speculator that, for 

example, could neither make nor take delivery of 

physical natural gas. 

104Subcommittee Report at 51–52. 

105Subcommittee Report at 17. 

TABLE 2—ESTIMATED OWNERSHIP OF SILVER BY HUNT RELATED ACCOUNTS

[Contracts of 5,000 troy ounces] 100

Date Net futures 

COMEX 

Net futures 

CBOT 

Futures total 

(from table) 

9/30/1975 ..................................................................................................................................... 6,917 4,560 11,077 

12/31/1975 ................................................................................................................................... 6,865 9,011 15,876 

3/31/1976 ..................................................................................................................................... 6,092 5,324 11,416 

6/30/1976 ..................................................................................................................................... 4,061 (920) 3,141 

9/30/1976 ..................................................................................................................................... 3,890 578 4,468 

12/31/1976 ................................................................................................................................... 3,910 571 4,481 

3/31/1977 ..................................................................................................................................... 3,288 259 3,547 

6/30/1977 ..................................................................................................................................... 4,540 816 5,356 

9/30/1977 ..................................................................................................................................... 5,277 1,518 6,795 

12/31/1977 ................................................................................................................................... 5,826 2,016 7,344 

3/31/1978 ..................................................................................................................................... 6,459 2,224 8,683 

6/30/1978 ..................................................................................................................................... 4,200 2,451 6,651 

9/30/1978 ..................................................................................................................................... 2,481 3,047 5,528 

12/31/1978 ................................................................................................................................... 4,076 1,317 5,393 

3/31/1979 ..................................................................................................................................... 6,655 1,699 8,354 

5/31/1979 ..................................................................................................................................... 8,712 4,765 13,477 

6/30/1979 ..................................................................................................................................... 9,442 3,846 13,288 

7/31/1979 ..................................................................................................................................... 10,407 4,336 14,743 

8/31/1979 ..................................................................................................................................... 14,941 8,700 23,641 

9/30/1979 ..................................................................................................................................... 15,392 9,330 24,722 

10/31/1979 ................................................................................................................................... 11,395 7,444 18,839 

11/30/1979 ................................................................................................................................... 12,379 5,693 18,072 

12/31/1979 ................................................................................................................................... 13,806 5,921 19,727 

1/31/1980 ..................................................................................................................................... 7,432 1,344 8,776 

2/29/1980 ..................................................................................................................................... 6,993 789 7,782 

4/2/1980 ....................................................................................................................................... 1,056 388 1,444 

The Commission finds that if the 

position limits suggested by this data 

were applied as early as 1975, the Hunts 

would not have been able to accumulate 

or hold their excessively large futures 

positions and thereby the limits would 

have restricted their ability to cause the 

price fluctuations and other harms 

described above. 

Position limits would help to 

diminish or prevent unreasonable 

fluctuations or unwarranted changes in 

the price of a commodity, such as the 

extreme price volatility in the 2006 

natural gas markets.101

Amaranth Advisors L.L.C. 

(‘‘Amaranth’’) was a hedge fund that, 

until its spectacular collapse in 

September 2006, held ‘‘by far the largest 

positions of any single trader in the 

2006 U.S. natural gas financial 

markets.’’ 102 Amaranth’s activities are a 

classic example of the market power 

that often typifies excessive speculation. 

‘‘Market power’’ in this context means 

the ability to move prices by exerting 

outsize influence on expectations of 

supply and/or demand for a commodity. 

Amaranth accumulated such large 

speculative natural gas futures positions 

that it affected expectations of demand 

for physical natural gas and prices rose 

to levels not warranted by the otherwise 

natural forces of supply and demand for 

the commodity.103

‘‘Prior to its collapse, Amaranth 

dominated trading in the U.S. natural 

gas market. . . . All but a few of the 

largest energy companies and hedge 

funds consider trades of a few hundred 

contracts to be large trades. Amaranth 

held as many as 100,000 natural gas 

futures contracts at once, representing 

one trillion cubic feet of natural gas, or 

5% of the natural gas used in the United 

States in a year. At times, Amaranth 

controlled up to 40% of all of the open 

interest on NYMEX for the winter 

months (October 2006 through March 

2007). Amaranth accumulated such 

large positions and traded such large 

volumes of natural gas futures that it 

distorted market prices, widened price 

spreads, and increased price 

volatility.’’ 104

Natural gas is one of the main sources 

of energy for the United States. The 

price of natural gas has a pervasive 

effect throughout the U.S. economy. In 

general, ‘‘[b]ecause one of the major 

uses of natural gas is for home heating, 

natural gas demand peaks in the winter 

month and ebbs during the summer 

months.’’ 105 During the summer 

months, when demand for physical 

natural gas falls, the spot price of 

natural gas tends to fall, with the excess 

physical supply being placed into 

underground storage reservoirs for 

future use. During the winter, when 

demand for natural gas exceeds 

production and the spot price tends to 

increase, natural gas is removed from 


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106See id. 

107Amaranth sought to benefit from changes in 

the price relationship between two linked contracts. 

For instance, if a trader is long the front month at 

10 and short the back month at 8, the spread is 2. 

If the price of the front month contract rises to 11, 

the spread is 3 and the position has a gain. If the 

price of the back month contract declines to 7, the 

spread is 3 and the position has a gain. If the price 

of the front month contract rises to 11 and the price 

of the back month contract declines to 7, the spread 

is 4 and the position has a gain. But if the front 

month contract falls to 8 and the back month 

contract falls to 6, the spread does not change. 

108 ‘‘Amaranth also held large positions in other 

winter and summer months spanning the five-year 

period from 2006–2010. In aggregate, Amaranth 

amassed an extraordinarily large share of the total 

open interest on NYMEX. During the spring and 

summer of 2006, Amaranth controlled between 25 

and 48% of the outstanding contracts (open 

interest) in all NYMEX natural gas futures contracts 

for 2006; about 30% of the outstanding contracts 

(open interest) in all NYMEX natural gas futures 

contracts for 2007; between 25 and 40% of the 

outstanding contracts (open interest) in all NYMEX 

natural gas futures contracts for 2008; between 20 

and 40% of the outstanding contracts (open 

interest) in all NYMEX natural gas futures contracts 

for 2009; and about 60% of the outstanding 

contracts (open interest) in all NYMEX natural gas 

futures contracts for 2010.’’ Subcommittee Report at 

52. 

109Subcommittee Report at 2. 

110 Id. at 68 (emphasis in original). 

111 Id. at 6. 

112 Id. at 4. 

113See id. at 114. 

114See id. at 71–77. 

115 7 U.S.C. 6a(a)(3)(B)(iv). 

116Subcommittee Report at 2. 

117This is because, among other things, the 

speculator’s influence on expectations of demand is 

reduced as the speculator is no longer willing and 

able to hold such a large net position in futures 

contracts. 

118Subcommittee Report at 119. 

119See 17 CFR 16.01. 

underground storage and is 

consumed.106

Amaranth believed that winter natural 

gas prices would be much higher than 

summer natural gas prices, 

notwithstanding an abundant supply of 

natural gas in 2006. Seeking to profit 

from this view, Amaranth engaged in 

spread trading: it bought contracts for 

future delivery of natural gas in months 

where it thought prices would be 

relatively higher and sold contracts for 

future delivery of natural gas in months 

were it thought prices would be 

relatively lower.107 Amaranth primarily 

traded the January/November spread 

and the March/April spread, although it 

took positions in other near months. 

When Amaranth bet that the spread 

between the two contracts would 

increase, it would make money by 

selling out of the position or the 

equivalent underlying legs at a higher 

price than it paid. Amaranth’s positions 

were extremely large.108 The Permanent 

Subcommittee found that ‘‘Amaranth’s 

large positions and trades caused 

significant price movements in key 

natural gas futures prices and price 

relationships.’’ 109 The Permanent 

Subcommittee also found that 

‘‘Amaranth’s trades were not the sole 

cause of the increasing price spreads 

between the summer and winter 

contracts; rather they were the 

predominant cause.’’ 110

Events in the 2006 natural gas markets 

demonstrate the burdens on interstate 

commerce of extreme price volatility. 

In section 4a(a)(1) of the CEA 

Congress causally links excessive 

speculative positions with ‘‘sudden or 

unreasonable fluctuations or 

unwarranted changes in the price of’’ 

such commodities. The precipitous 

decline in natural gas prices from lateAugust 2006 until Amaranth’s collapse 

in September 2006 demonstrates that 

link. The Permanent Subcommittee 

found that ‘‘[p]urchasers of natural gas 

during the summer of 2006 for delivery 

in the following winter months paid 

inflated prices due to Amaranth’s 

speculative trading’’ and that ‘‘[m]any of 

these inflated costs were passed on to 

consumers, including residential users 

who paid higher home heating bills.’’ 111

Such inflated costs are clearly a burden 

on interstate commerce. In the words of 

the Permanent Subcommittee, ‘‘[t]he 

Amaranth experience demonstrates how 

excessive speculation can distort prices 

of futures contracts that are many 

months from expiration, with serious 

consequences for other market 

participants.’’ 112 The Permanent 

Subcommittee findings support the 

imposition of speculative position limits 

outside the spot month. Commercial 

participants in the 2006 natural gas 

markets were reluctant or unable to 

hedge.113 Speculators withdrew 

liquidity from a market viewed as 

artificially expensive.114 To relieve the 

burdens on interstate commerce posed 

by positions as large as Amaranth’s, 

Congress directed the Commission to set 

position limits to, among other things, 

ensure sufficient market liquidity for 

bona fide hedgers.115

‘‘Amaranth held as many as 100,000 

natural gas contracts in a single month, 

representing 1 trillion cubic feet of 

natural gas, or 5% of the natural gas in 

the entire United States in a year. At 

times Amaranth controlled 40% of all of 

the outstanding contracts on NYMEX for 

natural gas in the winter season 

(October 2006 through March 2007), 

including as much as 75% of the 

outstanding contracts to deliver natural 

gas in November 2008.’’ 116 Position 

limits that would prevent the 

accumulation of such overly large 

speculative positions in deferred 

commodity contracts would help to 

prevent unreasonable fluctuations or 

unwarranted changes in the price of a 

commodity that may occur when a 

speculator must substantially reduce its 

position within a short period of time to 

the extent the price of such commodity 

during the unwind period does not 

reflect fundamental values.117

Moreover, position limits would help to 

prevent disruptions to market integrity 

caused by the corrosive perception that 

a market is unfair or prices in a market 

do not reflect the fundamental forces of 

supply and demand as occurred during 

2006 in the natural gas markets. 

Commodity markets where artificial 

volatility discourages participation are 

less likely to produce ‘‘a market 

consensus on correct pricing.’’ 118

Based on certain assumptions 

described below, the Commission 

believes that if Federal speculative 

position limits had been in effect that 

correspond to the limits that the 

Commission proposes now, across 

markets now subject to Commission 

jurisdiction, such limits would have 

prevented Amaranth from accumulating 

such large futures positions and thereby 

restrict its ability to cause unwarranted 

price effects. Using non-public data 

reported to the Commission under Part 

16 of the Commission’s regulations for 

open interest 119 for natural gas 

contracts, the Commission calculated 

the single-month and all-monthscombined limits using the same 

methodology as proposed in this release 

for the period January 1, 2004 to 

December 31, 2005. The results of this 

analysis are presented in Table 3 below, 

which shows that the resulting singlemonth and all-months combined limits 

would have each been 40,900 contracts. 


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120See 17 CFR 17.00. 

121Because the Commission’s calculations are 

based on non-public information, the results of this 

analysis may be different from calculations based 

on publicly available information, including 

information contained in the Subcommittee Report. 

122Since the main natural gas swap contracts on 

ICE are one quarter of the size of the NYMEX Henry 

Hub Natural Gas Futures contract, this would mean 

that the open interest for natural gas contracts on 

ICE would have to be four times the open interest 

for natural gas contracts on NYMEX. 

123See Subcommittee Report at 79. 

124According to the Subcommittee Report, 

Amaranth reduced its positions on NYMEX as 

directed by NYMEX in August 2006, and at the 

same time, increased its corresponding positions on 

ICE. See Subcommittee Report at 97–98. 

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

126 46 FR 50938, 50939, Oct. 16, 1981. 

127 75 FR 4144, 4145–46, Jan. 26, 2010. 

128Futures Trading Act of 1982: Hearings on S. 

2109 before the S. Subcomm. on Agricultural 

Research, 97th Cong. 44 (1982). 

129S. Rep. 97–384 at 45 (1982). 

TABLE 3—OPEN INTEREST AND CALCULATED LIMITS FOR NYMEX NATURAL GAS JANUARY 1, 2004, TO DECEMBER 31, 

2005 

Core referenced futures contract Year Open interest 

(daily average) 

Open interest 

(month end) 

Limit 

(daily average) 

Limit 

(month end) Limit 

NYMEX Natural Gas ................................ 2004 851,763 839,330 23,200 22,900 40,900 

2005 1,559,335 1,529,252 40,900 40,200 ........................

Using non-public data reported to the 

Commission under Part 17 of the 

Commission’s regulation for large trader 

positions,120 the Commission also 

calculated Amaranth’s positions 121 as 

they would be calculated under the 

proposed rule for the period January 1, 

2005 to September 30, 2006. During this 

time, Amaranth’s net position would 

have exceeded the limits for the single 

month and for all-months-combined on 

multiple days, starting as early as June 

2006. It is important to note that ICE did 

not report market open interest for its 

swap contracts or for large traders to the 

Commission during this time period, so 

the Commission cannot exactly replicate 

the calculations in the proposed rule. 

However, even if ICE had the same 

amount of open interest in futuresequivalent terms as all of the NYMEX 

natural gas contracts listed in 2005,122

the calculated limit would be 79,900 

contracts. According to the 

Subcommittee Report, Amaranth would 

have exceeded this limit at the end of 

July 2006 with its holding of 80,000 

long contracts in the January 2007 

delivery month.123 Moreover, the 

Subcommittee Report also shows that 

Amaranth tended to trade in the same 

direction for the same delivery month 

on ICE and NYMEX. Hence, the 

Commission believes that had the 

proposed rule been in effect in 2006, 

Amaranth would not have been able to 

build such large positions in natural gas 

futures and swaps and thereby limits 

would have restricted Amaranth’s 

ability to cause harmful price effects 

that limits are intended to prevent.124

Position limits would prevent the 

accumulation of extraordinarily large 

positions that could potentially cause 

unreasonable price fluctuations even in 

the absence of manipulative conduct. 

As the above examples illustrate, 

position limits are vital tools to prevent 

the accumulation of speculative 

positions that can enable market 

manipulation. But these examples also 

show that limits are necessary to 

achieve a broader statutory purpose — 

to prevent price distortions that can 

potentially occur due to excessively 

large speculative positions even in the 

absence of manipulative conduct. 

The text of section 4a(a)(1) of the Act 

itself establishes its broader purpose: It 

authorizes limits as the Commission 

finds are necessary to prevent price 

distortions that can potentially occur 

due to excessive speculation (i.e. 

excessively large speculative positions), 

without regard to whether it is 

manipulative.125 The Commission has 

long interpreted the provision as 

authorizing limits to achieve this 

broader purpose and it has long found 

that limits are necessary to do so. 

For example, in the 1981 Rule 

requiring exchanges to set limits for all 

commodities, noted above, the 

Commission found that ‘‘historical and 

current reason for imposing position 

limits on individual contracts is to 

prevent unreasonable fluctuations or 

unwarranted changes in the price of a 

commodity which may occur by 

allowing any one trader or group of 

traders acting in concert to hold 

extraordinarily large futures 

positions.’’ 126 In a 2010 rulemaking, the 

Commission stated that ‘‘[f]rom the 

earliest days of federal regulation of the 

futures markets, Congress made it clear 

that unchecked speculative positions, 

even without intent to manipulate the 

market, can cause price disturbances. To 

protect markets from the adverse 

consequences associated with large 

speculative positions, Congress 

expressly authorized the [Commission] 

to impose speculative position limits 

prophylactically.’’ 127

The Commission reiterated this view 

before Congress in 1982 in opposing 

industry amendments to the CEA that 

would have required that limits are 

necessary to prevent manipulation, 

corners or squeezes. Former 

Commission Chair Philip McBride 

Johnson told Congress that position 

limits were ‘‘predicated on several 

different sections of the Commodity 

Exchange Act which pertain to orderly 

markets and the terms ‘manipulation, 

corners or squeezes’ refer to only one 

class of market disruption which the 

limits established under this rule are 

intended to diminish or prevent. For 

instance, CEA section 4a contains the 

Congressional finding that excessive 

speculation in the futures markets can 

cause sudden or unreasonable 

fluctuations or unwarranted changes in 

the price of commodities. Accordingly, 

a requirement that the Commission 

make the suggested finding concerning 

‘manipulation, corners, or squeezes’ 

prior to requiring a contract market to 

establish speculative limits could 

significantly restrict the application of 

the current rule and undermine its more 

comprehensive regulatory purpose of 

preventing excessive speculation which 

arises from extraordinarily large 

positions.’’ 128

Congress effectively ratified the 

Commission’s interpretation in 1982. As 

it explained: ‘‘the Senate Committee 

decided to retain [CEA section] 4a 

language concerning the burden which 

excess speculation places on interstate 

commerce. This was due to the 

Committee’s belief that speculative 

limits, in addition to their role in 

preventing manipulations, corners, or 

squeezes, are also important regulatory 

tools for preventing unreasonable 

fluctuations or unwarranted changes in 

commodity prices that may arise even in 

the absence of manipulation.’’ 129

The Commission has long found and 

again finds, based on its experience, that 

unchecked speculative positions can 

potentially disrupt markets. In general, 

the larger a position held by a trader, the 

greater is the potential that the position 

may affect the price of the contract. The 

Commission reaffirms that, ‘‘the 

capacity of any contract to absorb the 


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130 46 FR 50938, Oct. 16, 1981 (adopting then 

§ 1.61 (now part of § 150.5)). 

131 45 FR at 79833. 

132Futures Trading Act of 1982: Hearings on S. 

2109 before the S. Subcomm. on Agricultural 

Research, 97th Cong. 44 (1982). 

133 76 FR at 71663. 

134 Id. at 71664. 

135See, e.g., Harris, Jeffrey and Buyuksahin, 

Bahattin, ‘‘The Role of Speculators in the Crude Oil 

Futures Market,’’ June 16, 2009, at 2, 19 (‘‘We find 

that the changing net positions of no specific trader 

groups lead to price changes . . . .’’ and ‘‘we fail 

to find the causality from these [speculative] 

traders’ positions to prices.’’); Byun, Sungje, 

‘‘Speculation in Commodity Futures Market, 

Inventories and the Price of Crude Oil,’’ January 17, 

2013, at 3, 33 (noting that ‘‘ . . . evidence among 

researchers is inconsistent’’ but that ‘‘we conclude 

there does not exist sufficient evidence on the 

potential contribution of financial investors in the 

crude oil market.’’); Irwin, Scott H.; Sanders, 

Dwight R.; and Merrin, Robert P., ‘‘Devil or Angel: 

The Role of Speculation in the Recent Commodity 

Price Boom,’’ August 1, 2009, at 17 (‘‘There is little 

evidence that the recent boom and bust in 

commodity prices was driven by a speculative 

bubble . . . Economic fundamentals, as usual, 

provide a better explanation for the movements in 

commodity prices.’’). 

136See, e.g., Singleton, Kenneth J., ‘‘Investor 

Flows and the 2008 Boom/Bust in Oil Prices,’’ 

March 23, 2011, at 2–3 (Singleton presents 

‘‘ . . . new evidence that . . . there were 

economically and statistically significant effects of 

investor flows on futures prices.’’); Tang, Ke and 

Xiong, Wei, ‘‘Index Investment and Financialization 

of Commodities,’’ November 1, 2012, at 72 (‘‘As a 

result of the financialization process, the price of 

an individual commodity is no longer determined 

solely by its supply and demand. Instead, prices are 

also determined by the aggregate risk appetite for 

financial assets and the investment behavior of 

diversified commodity index investors.’’); Manera, 

Matteo, Nicolini, Marcella, and Vignati, Ilaria, 

‘‘Futures Price Volatility in Commodities Markets: 

The Role of Short-Term vs Long-Term 

Speculation,’’ April 1, 2013, at 15 (‘‘We find that 

speculation significantly affects the volatility of 

returns, although in contrasting ways. The scalping 

index has a positive and significant coefficient in 

the variance equation, suggesting that short term 

speculation has a positive impact on volatility.’’). 

137Compare Technical Committee of the 

International Organization of Securities 

Commissions, Task for on Commodity Futures 

Markets Final Report, March 1, 2009, at 3 

(‘‘economic fundamentals, rather than speculative 

activity, are a plausible explanation for recent price 

changes in commodities’’) with id. at 8 (‘‘short term 

expectations can be influenced by sentiment and 

investor behavior, which can amplify short-term 

price fluctuations, as in other asset markets’’). 

Another study opining that speculative activity in 

general may reduce volatility nevertheless 

conceded that the authors could not rule out the 

possibility that a single trader might implement 

strategies that move prices and increase volatility. 

Brunetti, Celso and Buyuksahin, Bahattin, ‘‘Is 

Speculation Destabilizing?,’’ April 22, 2009, at 4, 

22–23; see also Irwin, et al., ‘‘The Performance of 

CBOT Corn, Soybean, and Wheat Futures Contracts 

after Recent Changes in Speculative Limits,’’ July 

29, 2007, at 1, 6 (concluding that there was ‘‘no 

large change in’’ price volatility after speculative 

limits were increased, but cautioning that ‘‘[w]ith 

limited observations available for the period 

following the change in speculative limits . . . , 

conclusions about the impact on volatility are 

tentative. Additional observations will be required 

across varying scenarios of supply, demand, and 

price level, to have full confidence in the 

conclusions.’’) (emphasis added); Parsons, John E., 

‘‘Black Gold & Fool’s Gold: Speculation in the Oil 

Futures Market,’’ September 1, 2009, at 108 

(position limits will not prevent asset bubbles from 

forming, but they are ‘‘necessary to insure the 

integrity of the market’’). 

138See, e.g., Hamilton, James D., ‘‘Causes and 

Consequences of the Oil Shock of 2007–08,’’ April 

1, 2009, at 258 (Hamilton raises ‘‘the possibility that 

miscalculation of the long-run price elasticity of oil 

demand . . . was one factor in the oil shock of 

2007–2008, and that speculative investing in oil 

futures may have contributed to that 

miscalculation.’’); Juvenal, Luciana and Petrella, 

Ivan, ‘‘Speculation in the Oil Market,’’ June 1, 2012, 

(‘‘While global demand shocks account for the 

largest share of oil price fluctuations, speculative 

shocks are the second most important driver.’’). 

139See, e.g., Greenberger, Michael, ‘‘The 

Relationship of Unregulated Excessive Speculation 

to Oil Market Price Volatility,’’ January 1, 2010, at 

11 (On position limits: ‘‘The damage price volatility 

causes the economy by needlessly inflating energy 

and food prices worldwide far outweighs the 

concerns about the precise application of what for 

over 70 years has been the historic regulatory 

technique for controlling excessive speculation in 

risk-shifting derivative markets.’’.); Khan, Mohsin 

S., ‘‘The 2008 Oil Price ‘‘Bubble’’,’’ August 2009, at 

8 (‘‘The policies being considered by the CFTC to 

put aggregate position limits on futures contracts 

and to increase the transparency of futures markets 

are moves in the right direction.’’); U.S. Senate 

Permanent Subcommittee on Investigations, 

‘‘Excessive Speculation in the Wheat Market,’’ June 

2009, at 12 (‘‘The activities of these index traders 

constitute the type of excessive speculation the 

CFTC should diminish or prevent through the 

imposition and enforcement of position limits as 

intended by the Commodity Exchange Act.’’); U.S. 

Senate Permanent Subcommittee on Investigations, 

‘‘Excessive Speculation in the Natural Gas Market,’’ 

June 25, 2007, at 8 (The Subcommittee 

recommended that Congress give the CFTC 

authority over ECMs, noting that ‘‘[to] ensure fair 

energy pricing, it is time to put the cop back on the 

beat in all U.S. energy commodity markets.’’); 

United Nations Conference on Trade and 

Development, ‘‘The Global Economic Crisis: 

Systemic Failures and Multilateral Remedies,’’ 

March 1, 2009, at 14, (The UNCTAD recommends 

that ‘‘ . . . regulators should be enabled to 

establishment and liquidation of large 

speculative positions in an orderly 

manner is related to the relative size of 

such positions, i.e., the capacity of the 

market is not unlimited.’’ 130 When 

positions exceed the capacity of markets 

to absorb and liquidate them, 

unreasonable price fluctuations and 

volatility can potentially occur. ‘‘[B]y 

limiting the ability of one person or 

group to obtain extraordinarily large 

positions, speculative limits diminish 

the possibility of accentuating price 

swings if large positions must be 

liquidated abruptly in the face of 

adverse price movements or for other 

reasons.’’ 131 As former Commission 

Chair McBride Johnson explained to 

Congress regarding the silver crisis: ‘‘It 

seems clear from the silver crisis that 

the orderly imposition of speculative 

limits before a crisis develops is one of 

the more promising means of solving 

such difficulties in the future . . . .’’ 132

This statement is equally true of the 

natural gas events of 2006. Had the Hunt 

brothers and Amaranth been prevented 

from amassing extraordinarily large 

speculative positions in the first place, 

their ability to cause unwarranted price 

fluctuations and volatility and other 

harmful market effects attributable to 

such positions would have been 

restricted. 

The Commission requests comment 

on all aspects of this section. 

Studies and Reports 

In addition to those cited previously, 

the Commission has reviewed and 

evaluated additional studies and reports 

(collectively, ‘‘studies’’) about various 

issues relating to position limits. A list 

of studies that the Commission has 

reviewed is in appendix A to this 

preamble. 

Some studies discuss whether or not 

excessive speculation exists, the 

definition of excessive speculation, and/ 

or whether excessive speculation has a 

negative impact on derivatives 

markets.133 Those studies that do 

generally discuss the impact of position 

limits do not address or provide 

analysis of how the Commission should 

specifically implement position limits 

under section 4a of the CEA.134 Some 

studies may be read to support the 

imposition of Federal speculative 

position limits; others suggest that 

speculative position limits will be 

ineffective; still others assert that 

imposing speculative position limits 

will be harmful. There is a demonstrable 

lack of consensus in the studies. 

Many of the studies were focused on 

the impact of speculative activity in 

futures markets, e.g., how the behavior 

of non-commercial traders affected price 

levels. Such studies did not provide a 

view on position limits in general or on 

the Commission’s implementation of 

position limits in particular. Some 

studies have found little or no evidence 

of excessive speculation unduly moving 

prices,135 while others conclude there is 

significant evidence of the impact of 

speculation in commodity markets.136

Even studies that questioned whether 

speculation affects prices were often 

equivocal.137 Still other studies have 

determined that while speculation may 

not cause a price movement, such 

activity may increase price pressures, 

thereby exacerbating the price 

movement.138

Several studies did generally address 

the concept of position limits as part of 

their discussion of speculative activity. 

The authors of some of these works 

expressed views that speculative 

position limits were an important 

regulatory tool and that the CFTC 

should implement limits to control 

excessive speculation.139 For example, 


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intervene when swap dealer positions exceed 

speculative position limits and may represent 

‘excessive speculation’.); United Nations 

Conference on Trade and Development, ‘‘The 

Financialization of Commodity Markets,’’ July 1, 

2009, at 26 (The report recommends tighter 

restrictions, notably closing loopholes that allow 

potentially harmful speculative activity to surpass 

position limits.). 

140de Schutter, Olivier, ‘‘Food Commodities 

Speculation and Food Price Crises,’’ September 1, 

2010, United Nations Special Report on the Right 

to Food, at 8. 

141Masters, Michael and White, Adam, ‘‘The 

Accidental Hunt Brothers: How Institutional 

Investors are Driving up Food and Energy Prices,’’ 

July 31, 2008, at 3. 

142Medlock, Kenneth and Myers Jaffe, Amy, 

‘‘Who is In the Oil Futures Market and How Has 

It Changed?,’’ August 26, 2009, Baker Institute for 

Public Policy, at 8. 

143Ebrahim, Muhammed and Rhys ap Gwilym, 

‘‘Can Position Limits Restrain Rogue Traders?,’’ 

March 1, 2013, Journal of Banking & Finance, at 27 

(‘‘. . . binding constraints have an unintentional 

effect. That is, they lead to a degradation of the 

equilibria and augmenting market power of 

Speculator in addition to other agents. We therefore 

conclude that position limits are not helpful in 

curbing market manipulation. Instead of curtailing 

price swings, they could exacerbate them.’’). 

144 Irwin, Scott H.; Garcia, Philip; and Good, 

Darrel L., ‘‘The Performance of CBOT Corn, 

Soybean, and Wheat Futures Contracts after Recent 

Changes in Speculative Limits,’’ July 29, 2007, at 16 

(‘‘The analysis of price volatility revealed no large 

change in measures of volatility after the change in 

speculative limits. A relatively small number of 

observations are available since the change was 

made, but there is little to suggest that the change 

in speculative limits has had a meaningful overall 

impact on price volatility to date.’’). 

145Parsons, John E., ‘‘Black Gold & Fool’s Gold: 

Speculation in the Oil Futures Market,’’ September 

1, 2009, at 30 (‘‘Restoring position limits on all 

nonhedgers, including swap dealers, is a useful 

reform that gives regulators the powers necessary to 

ensure the integrity of the market. Although this 

reform is useful, it will not prevent another 

speculative bubble in oil. The general purpose of 

speculative limits is to constrain manipulation . . . 

Position limits, while useful, will not be useful 

against an asset bubble. That is really more of a 

macroeconomic problem, and it is not readily 

managed with microeconomic levers at the 

individual exchange level.’’). 

146Wray, Randall, ‘‘The Commodities Market 

Bubble: Money Manager Capitalism and the 

Financialization of Commodities,’’ October 1, 2008, 

at 41, 43 (‘‘While the participation of traditional 

speculators offers clear benefits, position limits 

must be carefully administered to ensure that their 

activities do not ‘‘demoralize’’ markets. . . . The 

CFTC must re-establish and enforce position 

limits.’’). 

147CME Group, Inc., ‘‘Excessive Speculation and 

Position Limits in Energy Derivatives Markets,’’ 

CME Group White Paper, at 6 (‘‘Indeed, as the 

Commission has previously noted, the exchanges 

have the expertise and are in the best position to 

fix position limits for their contracts. In fact, this 

determination led the Commission to delegate to 

the exchanges authority to set position limits in 

non-enumerated commodities, in the first instances, 

almost 30 years ago.’’) (available at http://

www.cmegroup.com/company/files/

PositionLimitsWhitePaper.pdf). 

148Pirrong, Craig, ‘‘Squeezes, Corpses, and the 

Anti-Manipulation Provisions of the Commodity 

Exchange Act,’’ October 1, 1994, at 2 (‘‘The 

efficiency of futures markets would be improved, 

and perhaps substantially so, by eliminating 

position limits . . . and relying upon revitalized, 

harm-based sanctions to deter market 

manipulation.’’). 

149European Commission, ‘‘Review of the 

Markets in Financial Instruments Directive,’’ 

December 1, 2010, at 82 note 282 (‘‘European 

Parliament . . . calls on the Commission to develop 

measures to ensure that regulators are able to set 

position limits to counter disproportionate price 

movements and speculative bubbles, as well as to 

investigate the use of position limits as a dynamic 

tool to combat market manipulation, most 

particularly at the point when a contract is 

approaching expiry. It also requests the 

Commission to consider rules relating to the 

banning of purely speculative trading in 

commodities and agricultural products, and the 

imposition of strict position limits especially with 

regard to their possible impact on the price of 

essential food commodities in developing countries 

and greenhouse gas emission allowances.’’). 

150 7 U.S.C. 6a(a)(1)–(2). 

151Another study of actual market events 

analyzed position limits in the context of the ‘‘Flash 

Crash’’ of May 6, 2010. While this study concluded 

that position limits would not have prevented the 

crash, and that price limits were more effective, it 

measured the impacts of potential limits on certain 

financial contracts not implicated in the instant 

rulemaking. Lee, Bernard; Cheng, Shih-Fen; and 

Koh, Annie, ‘‘Would Position Limits Have Made 

any Difference to the ’Flash Crash’ on May 6, 2010,’’ 

November 1, 2010, at 37. 

152U.S Commodity Futures Trading Commission, 

‘‘Part Two, A Study of the Silver Market,’’ May 29, 

1981, Report to The Congress in Response to 

Section 21 of The Commodity Exchange Act. 

one author opined that ‘‘ . . . strict 

position limits should be placed on 

individual holdings, such that they are 

not manipulative.’’ 140 Another stated, 

‘‘[s]peculative position limits worked 

well for over 50 years and carry no 

unintended consequences. If Congress 

takes these actions, then the speculative 

money that flowed into these markets 

will be forced to flow out, and with that 

the price of commodities futures will 

come down substantially. Until 

speculative position limits are restored, 

investor money will continue to flow 

unimpeded into the commodities 

futures markets and the upward 

pressure on prices will remain.’’ 141 The 

authors of one study claimed that 

‘‘[r]ules for speculative position limits 

were historically much stricter than 

they are today. Moreover, despite 

rhetoric that imposing stricter limits 

would harm market liquidity, there is 

no evidence to support such claims, 

especially in light of the fact that the 

market was functioning very well prior 

to 2000, when speculative limits were 

tighter.’’ 142

Not all of the reviewed studies viewed 

position limits in a positive light. One 

study claimed that position limits will 

not restrain manipulation,143 while 

another argued that position limits in 

the agricultural commodities have not 

significantly affected volatility.144

Another study noted that while position 

limits are effective as an antimanipulation measure, they will not 

prevent asset bubbles from forming or 

stop them from bursting.145 A study 

cautioned that while limits may be 

effective in preventing manipulation, 

they should be set at an optimal level so 

as to not harm the affected markets.146

Another study claimed that position 

limits should be administered by DCMs, 

as those entities are closest to and most 

familiar with the intricacies of markets 

and thus can implement the most 

efficient position limits policy.147

Another study suggested eliminating 

position limits, arguing that increasing 

ex-post penalties for manipulation 

would be more effective at deterring 

manipulative behavior.148 One study 

noted the similar efforts under 

discussion in European markets.149

Studies that militate against imposing 

any speculative position limits appear 

to conflict with the Congressional 

mandate (discussed above) that the 

Commission impose limits on futures 

contracts, options, and certain swaps for 

agricultural and exempt commodities. 

Such studies also appear to conflict 

with Congress’ determination, codified 

in CEA section 4a(a)(1), that position 

limits are an effective tool to address 

excessive speculation as a cause of 

sudden or unreasonable fluctuations or 

unwarranted changes in the price of 

such commodities.150

In any case, these studies overall 

show a lack of consensus regarding the 

impact of speculation on commodity 

markets and the effectiveness of 

position limits. While there is not a 

consensus, the fact that there are studies 

on both sides, in the Commission’s 

view, warrants erring on the side of 

caution. In light of the Commission’s 

experience with position limits, and its 

interpretation of congressional intent, it 

is the Commission’s judgment that 

position limits should be implemented 

as a prophylactic measure, to protect 

against the potential for undue price 

fluctuations and other burdens on 

commerce that in some cases have been 

at least in part attributable to excessive 

speculation. 

In this regard, the Commission has 

found two studies of actual market 

events to be helpful and persuasive in 

making its alternative necessity 

finding.151 The first is the inter-agency 

report on the silver crisis.152 This 

report, by a joint task force of the staffs 

of the Commission, the Board of 

Governors of the Federal Reserve 

System, the Department of the Treasury 

and the Securities and Exchange 

Commission, provides an in-depth 

description and analysis of the silver 

crisis, the Hunt brothers’ build-up of 

massive positions, the manipulative 


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153U.S. Senate Permanent Subcommittee on 

Investigations, ‘‘Excessive Speculation in the 

Natural Gas Market,’’ June 25, 2007. 

154 In a separate proposal approved on the same 

date as this proposal, the Commission is proposing 

amendments to § 150.4—aggregation of positions 

(‘‘Aggregation NPRM’’) (Nov. 5, 2013), including 

amendments to the definitions of ‘‘eligible entity’’ 

and ‘‘independent account controller.’’ 

155 ‘‘Swaption’’ was defined in vacated part 151 

to mean ‘‘an option to enter into a swap or a 

physical commodity option.’’ ‘‘Trader’’ was defined 

in vacated part 151 to mean ‘‘a person that, for its 

own account or for an account that it controls, 

makes transactions in Referenced Contracts or has 

such transactions made.’’ The Commission notes 

that while vacated part 151 and several places in 

current part 150 use the term ‘‘trader,’’ the term 

‘‘person’’ is currently used in both § 1.3(z) and in 

other places in part 150. The amendments in both 

the Aggregation NPRM and this NPRM use the term 

‘‘person’’ in a manner consistent with its current 

use in part 150. 

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

157The expanded basis contract definition is not 

intended to include significant time differentials in 

prices of the two commodities (e.g., the expanded 

basis contract definition would not include 

calendar spreads for nearby vs. deferred contracts). 

conduct that those massive positions 

enabled, the resulting extreme price 

volatility, and consequent harms to the 

economy. The second is the PSI Report 

on Excessive Speculation in the Natural 

Gas market.153 As a Congressional 

report issued following hearings, it is 

more helpful and persuasive than 

academic and other studies in 

indicating how Congress views limits as 

necessary to prevent the adverse effects 

of excessively large speculative 

positions. The PSI Report is also more 

helpful because it thoroughly studied 

actual market events involving a vital 

energy commodity, natural gas, 

examined how Amaranth’s buildup of 

massive speculative positions by itself 

created a risk of market harms, 

documented how Amaranth sought to 

avoid existing limits, and analyzed how 

its ability to do so was a cause of the 

attendant extreme price volatility 

documented in the report. 

The Commission requests comment 

on its discussion of studies and reports. 

It also invites commenters to advise the 

Commission of any additional studies 

that the Commission should consider, 

and why. 

B. Proposed Rules 

1. Section 150.1—Definitions 

i. Various Definitions Found in § 150.1 

The Commission proposes to amend 

the definitions of ‘‘futures-equivalent,’’ 

‘‘independent account controller,’’ 

‘‘long position,’’ ‘‘short position,’’ and 

‘‘spot month’’ found in § 150.1 of its 

regulations to conform them to the 

concepts and terminology of the CEA, as 

amended by the Dodd-Frank Act.154 The 

Commission also is proposing to add to 

§ 150.1, definitions for ‘‘basis contract,’’ 

‘‘calendar spread contract,’’ 

‘‘commodity derivative contract,’’ 

‘‘commodity index contract,’’ ‘‘core 

referenced futures contract,’’ ‘‘eligible 

affiliate,’’ ‘‘entity,’’ ‘‘excluded 

commodity,’’ ‘‘intercommodity spread 

contract,’’ ‘‘intermarket spread 

positions,’’ ‘‘intramarket spread 

positions,’’ ‘‘physical commodity,’’ 

‘‘pre-enactment swap,’’ ‘‘pre-existing 

position,’’ ‘‘referenced contract,’’ 

‘‘spread contract,’’ ‘‘speculative position 

limit,’’ ‘‘swap,’’ ‘‘swap dealer’’ and 

‘‘transition period swap.’’ In addition, 

the Commission is proposing to move 

the definition of bona fide hedging from 

§ 1.3(z) into part 150, and to amend and 

update it. Moreover, the Commission 

proposes to delete the definition for 

‘‘the first delivery month of the ‘crop 

year.’ ’’ The Commission notes that 

several terms that are not currently in 

part 150 are not included in the current 

rulemaking proposal even though 

definitions for those terms were adopted 

in vacated part 151. The Commission 

does not view definition of these terms 

as necessary for clarity in light of other 

revisions proposed herein. The terms 

not currently proposed include 

‘‘swaption’’ and ‘‘trader.’’ 155 Separately, 

the Commission is making a nonsubstantive change to list the definitions 

in alphabetical order rather than by use 

of assigned letters. This last change will 

be helpful when looking for a particular 

definition, both in the near future, in 

light of the additional definitions 

proposed to be adopted, and in the 

expectation that future rulemakings may 

adopt additional definitions. 

a. Basis Contract 

While the term ‘‘basis contract’’ is not 

defined in current § 150.1, a definition 

was adopted in vacated § 151.1. The 

definition adopted in § 151.1 defined 

basis contract as ‘‘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.’’ When it adopted 

part 151, the Commission noted that a 

swap based on the difference in price of 

a commodity (or substantially the same 

commodity) at different delivery 

locations was a ‘‘basis contract and 

therefore not subject to the limits 

adopted therein.156

Under the proposal, the definition for 

‘‘basis contract’’ adopted in § 150.1 

would expand upon the definition of 

basis contract adopted in vacated part 

151, by defining basis contract to mean 

‘‘a commodity derivative contract that is 

cash-settled based on the difference in: 

(1) The price, directly or indirectly, of: 

(a) A particular core referenced futures 

contract; or (b) a commodity deliverable 

on a particular core referenced futures 

contract, whether at par, a fixed 

discount to par, or a premium to par; 

and (2) the price, at a different delivery 

location or pricing point than that of the 

same particular core referenced futures 

contract, directly or indirectly, of: (a) A 

commodity deliverable on the same 

particular core referenced futures 

contract, whether at par, a fixed 

discount to par, or a premium to par; or 

(b) a commodity that is listed in 

appendix B to this part as substantially 

the same as a commodity underlying the 

same core referenced futures contract.’’ 

The Commission notes that the 

proposal excludes intercommodity 

spread contracts, calendar spread 

contracts, and basis contracts from the 

definition of ‘‘commodity index 

contract.’’ 

The Commission is proposing 

appendix B to this part, Commodities 

Listed as Substantially the Same for 

Purposes of the Definition of Basis 

Contract. The Commission proposes to 

expand the definition of basis contract 

to include contracts cash-settled on the 

difference in prices of two different, but 

economically closely related 

commodities. The basis contract 

definition in vacated part 151 targeted 

the location differential. Now the 

Commission is proposing a basis 

contract definition that would expand to 

include certain quality differentials 

(e.g., RBOB vs. 87 unleaded).157 The 

intent of the expanded definition is to 

reduce the potential for excessive 

speculation in referenced contracts 

where, for example, a speculator 

establishes a large outright directional 

position in referenced contracts and 

nets down that directional position with 

a contract based on the difference in 

price of the commodity underlying the 

referenced contracts and a close 

economic substitute that was not 

deliverable on the core referenced 

futures contract. In the absence of this 

expanded definition, the speculator 

could then increase further the large 

position in the referenced contracts. By 

way of comparison, the Commission 

preliminarily believes there is greater 

concern that (i) someone may 

manipulate the markets by disguise of a 

directional exposure through netting 

down the directional exposure using 

one of the legs of a quality differential 

(if that quality differential contract were 

not exempted) than (ii) that someone 

may use certain quality differential 

contracts that were exempted from 

position limits to manipulate the 


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158See, e.g., proposed amendments to § 150.1 (the 

definitions of: ‘‘basis contract,’’ the definition of 

‘‘bona fide hedging position,’’ ‘‘inter-market spread 

position,’’ ‘‘intra-market spread position,’’ ‘‘preexisting position,’’ ‘‘speculative position limits,’’ 

and ‘‘spot month’’), §§ 150.2(f)(2), 150.3(d), 

150.3(h), 150.5(a), 150.5(b), 150.5(e), 150.7(d), 

150.7(f), appendix A to part 150, and appendix C 

to part 150. 

159 76 FR at 71685. 

160See id. 

161 Id. at 71656. 

162 Id. at 71631 n.49. 

163 Id. The Commission clarifies here, that, as was 

noted in the vacated part 151 Rulemaking, if a swap 

is based on the difference between two prices of 

two different commodities, with one linked to a 

core referenced futures contract price (and the other 

either not linked to the price of a core referenced 

futures contract or linked to the price of a different 

core referenced futures contract), then the swap is 

an ‘‘intercommodity spread contract,’’ is not a 

commodity index contract, and is a Referenced 

Contract subject to the position limits specified in 

§ 150.2. The Commission further clarifies that, again 

as was noted in the vacated part 151 Rulemaking, 

a contract based on the prices of a referenced 

contract and the same or substantially the same 

commodity (and not based on the difference 

between such prices) is not a commodity index 

contract and is a referenced contract subject to 

position limits specified in § 150.2. See id. 

164See discussion below. 

165 76 FR at 71632. 

166The Commission clarified in adopting § 151.2, 

that core referenced futures contracts included 

options that expire into outright positions in such 

contracts. See 76 FR at 71631. 

167The selection of the core referenced futures 

contracts is explained in the discussion of proposed 

§ 150.2. See discussion below. 

outright price of a referenced contract. 

Historically, manipulation has occurred 

though use of outright positions (as in 

the case of the Hunt brothers) or time 

spreads (Amaranth, for example, used 

calendar month spreads), rather than 

quality or locational differentials. 

The Commission seeks comment on 

alternatives to the specification of 

quality standards for substantially the 

same commodity, such as a 

methodology to identify and define 

which differential contracts should be 

excluded from position limits. (i) 

Should the Commission expand the 

definition of basis contract to include 

any commodity priced at a differential 

to any of its products and by-products? 

For example, should a basis contract 

include a soybean crush spread contract 

or a crude oil crack spread contract, 

regardless of the number of 

components? (ii) Should the 

Commission expand the definition of 

basis contract to include a product or 

by-product of a particular commodity, 

priced at a differential to another 

product or by-product of that same 

commodity? For example, should the 

basis contract definition include a 

contract based on jet fuel priced at a 

differential to heating oil? Jet fuel and 

heating oil are both products of the 

same commodity, namely crude oil. (iii) 

Should the Commission expand the 

definition of basis contract for a 

particular commodity to include other 

similar commodities? For example, 

should the basis contract definition 

include a contract based on the 

difference in prices of light sweet crude 

oil and a sour crude oil that is not 

deliverable on the WTI contract? 

b. Commodity Derivative Contract 

The Commission proposes in 

§ 150.1(l) to define the term 

‘‘commodity derivative contract’’ for 

position limits purposes as shorthand 

for any futures, option, or swap contract 

in a commodity (other than a security 

futures product as defined in CEA 

section 1a(45)). Part 150 refers only to 

futures and options, while vacated part 

151 was drafted without the use of any 

similar concise phrase. It was 

determined during the process of 

updating part 150 that the use of such 

a generic term would be a useful way to 

streamline and simplify references in 

part 150 to the various kinds of 

contracts to which the position limits 

regime applies. As such, this new 

definition can be found frequently 

throughout the Commission’s proposed 

amendments to part 150.158

c. Commodity Index Contract 

The term ‘‘commodity index contract’’ 

is not currently defined in § 150.1; a 

definition for the term was adopted in 

vacated part 151.159 Under the 

definition adopted in § 151.1, 

commodity index contract means ‘‘an 

agreement, contract, or transaction that 

is not a basis or any type of spread 

contract, based on an index comprised 

of prices of commodities that are not the 

same or substantially the same; 

provided that, a commodity index 

contract used to circumvent speculative 

position limits shall be considered to be 

a Referenced Contract for the purpose of 

applying the position limits of 

§ 151.4.’’ 160

The Commission noted in the vacated 

part 151 final rulemaking that the 

definition of ‘‘Referenced Contract’’ in 

§ 151.1 expressly excluded commodity 

index contracts.161 The Commission 

also noted that ‘‘if a swap is based on 

prices of multiple different commodities 

comprising an index, it is a ‘commodity 

index contract.’ ’’ 162 As the preamble 

pointed out, it would not, therefore, be 

subject to position limits.163

The Commission proposes in the 

current rulemaking to add into § 150.1 

substantially the same definition for 

‘‘commodity index contract’’ as was 

adopted in vacated § 151.1, with one 

change. The proviso included in § 151.1, 

which required treatment of a position 

in a commodity index contract as a 

Referenced Contract if the contract was 

used to circumvent speculative position 

limits, acted in the § 151.1 definition as 

an anti-evasion provision, a substantive 

regulatory requirement. Consequently, 

to provide greater clarity as to the effect 

of the provision, the definition of 

‘‘commodity index contract’’ proposed 

in 150.1 mirrors that of the definition in 

151.1, but with no anti-evasion proviso. 

Instead, an anti-evasion provision, 

while similar to that contained in 

§ 151.1, is included in proposed 

§ 150.2(h).164

As in vacated part 151, and as noted 

above, the definition of ‘‘referenced 

contract’’ proposed in the current 

rulemaking also expressly excludes 

commodity index contracts. However, 

as the Commission noted in the final 

part 151 Rulemaking, part 20 of the 

Commission’s regulations requires 

reporting entities to report commodity 

reference price data sufficient to 

distinguish between commodity index 

contract and non-commodity index 

contract positions in covered 

contracts.165 Therefore, for commodity 

index contracts, the Commission 

intends to rely on the data elements in 

§ 20.4(b) to distinguish data records 

subject to § 150.2 position limits from 

those contracts that are excluded from 

§ 150.2. This will enable the 

Commission to set position limits using 

the narrower data set (i.e., referenced 

contracts subject to § 150.2 position 

limits) as well as conduct surveillance 

using the broader data set. 

d. Core Referenced Futures Contract 

While current part 150 does not 

contain a definition of the term ‘‘core 

referenced futures contracts,’’ a 

definition for the term was adopted in 

vacated § 151.1 as a simple short-hand 

phrase to denote certain futures 

contracts, regarding which several 

position limit rules were then applied. 

The definition adopted in § 151.1 

provided that a core referenced futures 

contract was ‘‘a futures contract defined 

in § 151.2’’; section 151.2 provided a list 

of 28 physical commodity futures and 

option contracts.166

The Commission proposes to include 

in § 150.1 the same definition as was 

adopted in vacated § 151.1—such that 

the definition would cite to futures 

contracts listed in § 151.2.167

e. Eligible Affiliate 

The term ‘‘eligible affiliate,’’ used in 

proposed § 150.2(c)(2), is not defined in 

current § 150.1. The Commission 

proposes to amend § 150.1 to define an 


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75698 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

168See proposed § 150.1. 

169See Clearing Exemption for Swaps Between 

Certain Affiliated Entities, 78 FR 21749, 21783, Apr. 

11, 2013. Section 50.52(a) addresses eligible affiliate 

counterparty status, allowing a person not to clear 

a swap subject to the clearing requirement of 

section 2(h)(1)(A) of the Act and part 50 if the 

person meets the requirements of the conditions 

contained in paragraphs (a) and (b) of § 50.52. The 

conditions in paragraph (a) of § 50.52 specify either 

one counterparty holds a majority ownership 

interest in, and reports its financial statements on 

a consolidated basis with, the other counterparty, 

or both counterparties are majority owned by a 

third party who reports its financial statements on 

a consolidated basis with the counterparties. 

The conditions in paragraph (b) of § 50.52 address 

factors such as the decision of the parties not to 

clear, the associated documentation, audit, and 

recordkeeping requirements, the policies and 

procedures that must be established, maintained, 

and followed by a dealer and major swap 

participant, and the requirement to have an 

appropriate centralized risk management program, 

rather than the nature of the affiliation. As such, 

those conditions are less pertinent to the definition 

of eligible affiliate. 

170See proposed amendments to the definition of 

‘‘eligible affiliate’’ in proposed § 150.1. 

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

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

173See 17 CFR 1.3(z) as amended by the vacated 

part 151 Rulemaking. 

174See e.g., proposed § 150.1 definitions for bona 

fide hedging and proposed amendments to 

§ 150.5(b). 

175See 76 FR at 71685. 

176 17 CFR 150.1(f). 

177Amendments to CEA section 4a(1) authorize 

the Commission to extend position limits beyond 

futures and option contracts to swaps traded on a 

DCM or SEF and swaps not traded on a DCM or SEF 

that perform or affect a significant price discovery 

function with respect to regulated entities (‘‘SPDF 

swaps’’). 7 U.S.C. 6a(a)(1). In addition, under new 

CEA sections 4a(a)(2) and 4a(a)(5), speculative 

position limits apply to agricultural and exempt 

commodity swaps that are ‘‘economically 

equivalent’’ to DCM futures and option contracts. 7 

U.S.C. 6a(a)(2) and (5). 

‘‘eligible affiliate’’ as ‘‘an entity with 

respect to which another person: (1) 

Directly or indirectly holds either: (i) A 

majority of the equity securities of such 

entity, or (ii) the right to receive upon 

dissolution of, or the contribution of, a 

majority of the capital of such entity; (2) 

reports its financial statements on a 

consolidated basis under Generally 

Accepted Accounting Principles or 

International Financial Reporting 

Standards, and such consolidated 

financial statements include the 

financial results of such entity; and (3) 

is required to aggregate the positions of 

such entity under § 150.4 and does not 

claim an exemption from aggregation for 

such entity.’’ 168

The definition of ‘‘eligible affiliate’’ 

proposed in the current NPRM qualifies 

persons as eligible affiliates based on 

requirements similar to those recently 

adopted by the Commission in a 

separate rulemaking. On April 1, 2013, 

the Commission provided relief from 

the mandatory clearing requirement of 

section 2(h)(1)(A) of the Act for certain 

affiliated persons if the affiliated 

persons (‘‘eligible affiliate 

counterparties’’) meet requirements 

contained in § 50.52.169 Under both 

§ 50.52 and the current proposed 

definition, a person is an eligible 

affiliate if the person, directly or 

indirectly, holds a majority ownership 

interest in the other counterparty (a 

majority of the equity securities of such 

entity, or the right to receive upon 

dissolution of, or the contribution of, a 

majority of the capital of such entity), 

reports its financial statements on a 

consolidated basis under Generally 

Accepted Accounting Principles or 

International Financial Reporting 

Standards, and such consolidated 

financial statements include the 

financial results of such entity. In 

addition, for purposes of the position 

limits regime, an eligible affiliate, as 

proposed in § 150.1, must be required to 

aggregate the positions of such entity 

under § 150.4 and does not claim an 

exemption from aggregation for such 

entity.170

The Commission requests comment 

on the proposed definition. Is the 

definition an appropriate one for 

purposes of the position limits regime? 

Should the Commission consider 

adopting a definition that more closely 

tracks the ‘‘eligible affiliate 

counterparties’’ definition adopted in 

§ 50.52 or is the difference appropriate 

in light of the differing regulatory 

purposes of the two regulations? 

f. Entity 

The current proposal defines ‘‘entity’’ 

to mean ‘‘a ‘person’ as defined in 

section 1a of the Act.’’ 171 The term is 

not defined in either current § 150.1, but 

was defined in vacated § 151.1; the 

language proposed here tracks that 

adopted in § 151.1. The term ‘‘entity,’’ 

like that of ‘‘person,’’ is used in a 

number of contexts, and in various 

definitions. Defining the term, therefore, 

provides a clear and unambiguous 

meaning, and prevents confusion. 

g. Excluded Commodity 

The phrase ‘‘excluded commodity’’ 

was added into the CEA in the CFMA, 

but was not defined or used in part 150. 

CEA section 4a(a)(2)(A), as amended by 

the Dodd-Frank Act, utilizes the phrase 

‘‘excluded commodity’’ when it 

provides a timeline under which the 

Commission is charged with setting 

limits for futures and option contracts 

other than on excluded commodities.172

Part 151 included in the definition 

section of vacated § 151.1, a definition 

which simply incorporated into part 151 

the statutory meaning, as a useful term 

for purposes of a number of the changes 

made by part 151 to the position limits 

regime. For example, the phrase was 

used in vacated § 151.11, in the 

provision of acceptable practices for 

DCMs and SEFs in their adoption of 

rules and procedures for monitoring and 

enforcing position accountability 

provisions; it was also used in the 

amendments to the definition of bona 

fide hedging.173 Similarly, the 

Commission believes that the adoption 

into part 150 of the excluded 

commodity definition will be a useful 

tool in addressing the same provisions, 

and so proposes to adopt into § 150.1 

the definition used in § 151.1.174

h. First Delivery Month of the Crop Year 

The term ‘‘first delivery month of the 

crop year’’ is currently defined in 

§ 150.1(c), with a table of the first 

delivery month of the crop year for the 

commodities for which position limits 

are currently provided in § 150.2. The 

crop year definition has been pertinent 

for purposes of the spread exemption to 

the single month limit in current 

§ 150.3(a)(3), which limits spread 

positions in a single month to a level no 

more than that of the all-months limit. 

The Commission did not adopt this 

definition in vacated part 151.175 In the 

current proposal, the Commission 

proposes to amend § 150.1 to delete the 

definition of ‘‘crop year.’’ The 

elimination of the definition reflects the 

fact that the definition is no longer 

needed, since the current proposal, like 

the approach adopted in part 151, 

would raise the level of individual 

month limits to the level of the allmonth limits. 

i. Futures Equivalent 

The term ‘‘futures-equivalent’’ is 

currently defined in § 150.1(f) to mean 

‘‘an option contract which has been 

adjusted by the previous day’s risk 

factor, or delta coefficient, for that 

option which has been calculated at the 

close of trading and published by the 

applicable exchange under § 16.01 of 

this chapter.’’ 176 The Commission 

proposes to retain the definition 

currently found in § 150.1(f), while 

broadening it in light of the Dodd-Frank 

Act amendments to CEA section 4a.177

The proposed amendments would also 

delete, as unnecessary, the reference to 

§ 16.01 found in the current definition. 

As proposed, ‘‘futures equivalent’’ 

would be defined in § 150.1 as ‘‘(1) An 

option contract, whether an option on a 

future or an option that is a swap, which 

has been adjusted by an economically 

reasonable and analytically supported 

risk factor, or delta coefficient, for that 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75699 

178 76 FR at 71633 (n. 67) (stating that ‘‘For 

purposes of applying the limits, a trader shall 

convert and aggregate positions in swaps on a 

futures equivalent basis consistent with the 

guidance in the Commission’s appendix A to Part 

20, Large Trader Reporting for Physical Commodity 

Swaps.’’). See also 76 FR 43851, 43865, Jul. 22, 

2011. 

179See 17 CFR 20.1 (‘‘Futures equivalent means 

an economically equivalent amount of one or more 

futures contracts that represents a position or 

transaction in one or more paired swaps or 

swaptions consistent with the conversion 

guidelines in appendix A of this part.’’). 

180 In vacated part 151, ‘‘intercommodity spread 

contract’’ was defined to mean ‘‘a cash-settled 

agreement, contract or transaction that represents 

the difference between the settlement price of a 

Referenced Contract and the settlement price of 

another contract, agreement, or transaction that is 

based on a different commodity.’’ See vacated 

§ 151.1. 

181See e.g., discussions of Dodd-Frank changes to 

CEA section 4a above and below. 

182CEA section 4a(a)(6) requires the Commission 

to apply position limits on an aggregate basis to (1) 

contracts based on the same underlying commodity 

across DCMs; (2) with respect to foreign boards of 

trade (‘‘FBOTs’’), contracts that are price-linked to 

a DCM or SEF contract and made available from 

within the United States via direct access; and (3) 

SPDF swaps. 7 U.S.C. 6a(a)(6). See also, 

consideration of proposed changes to § 150.2 for 

further discussion. 

183See e.g., § 150.5(a)(2)(B)(ii); see also 

150.5(b)(5)(b)(iv). 

option computed as of the previous 

day’s close or the current day’s close or 

contemporaneously during the trading 

day, and; (2) A swap which has been 

converted to an economically equivalent 

amount of an open position in a core 

referenced futures contract.’’ 

Vacated § 151.1 did not retain a 

definition for ‘‘futures-equivalent;’’ 

instead final part 151 referred to 

guidance on futures equivalency 

provided in appendix A to part 20.178

The Commission notes that while the 

part 20 ‘‘futures equivalent’’ definition 

is consistent with the ‘‘futuresequivalent’’ definition proposed herein, 

it addresses only swaps, and cites to, 

and relies on, the guidance provided in 

appendix A to part 20.179 The definition 

proposed herein addresses both options 

on futures and options that are swaps; 

it also includes and expands upon 

clarifications that are incorporated into 

the current definition regarding the 

computation time and the adjustment by 

an economically reasonable and 

analytically supported risk factor, or 

delta coefficient. 

As noted above, the current § 150.1(f) 

definition of ‘‘futures-equivalent’’ is 

narrowly defined to mean ‘‘an option 

contract,’’ and nothing else. Although 

certain contracts, from a practical 

standpoint, may be economically 

equivalent to futures contracts, as that 

terms is defined in § 150.1, such 

products are not ‘‘futures-equivalent’’ 

under the narrow definition of current 

§ 150.1(f) unless they are options on 

those actual futures. Therefore, current 

§ 150.1(f) is narrowly tailored to target 

only specifically enumerated futures 

contracts on ‘‘legacy’’ agricultural 

commodities and their equivalent 

options. 

The current rulemaking, like vacated 

part 151, establishes federal position 

limits and limit formulas for 28 physical 

commodity futures and option 

contracts, or ‘‘core referenced futures 

contracts,’’ and applies these limits to 

all derivatives that are directly or 

indirectly linked to the price of a core 

referenced futures contracts, or based on 

the price of the same commodity 

underlying that particular core 

referenced futures contract for delivery 

at the same location or locations as 

specified in that particular core 

referenced futures contract, and defines 

such derivative products, collectively, 

as ‘‘referenced contracts.’’ Therefore, the 

position limits amendments proposed in 

this current rulemaking, similar to the 

position limits regime established in 

vacated part 151, apply across different 

trading venues to economically 

equivalent contracts, as that term is 

defined in § 150.1, that are based on the 

same underlying commodity. As 

discussed supra, however, current part 

150 defines ‘‘futures-equivalent’’ 

narrowly to mean ‘‘an option contract,’’ 

and makes no mention of broadly 

defined ‘‘referenced contracts.’’ 

Consequently, as noted above, and 

consistent with these changes to the 

position limits regime, including the 

applicability of aggregate position limits 

to economically equivalent ‘‘referenced 

contracts’’ across different trading 

venues, the Commission proposes to 

expand the strict ‘‘futures-equivalent’’ 

standard set forth in current part 150. 

j. Intercommodity Spread Contract 

Current part 150 does not include a 

definition of the term ‘‘intercommodity 

spread contract,’’ which was introduced 

and adopted in vacated part 151. The 

Commission proposes to add into 

§ 150.1 the definition adopted in 

§ 151.1,180 such that an 

‘‘intercommodity spread contract’’ 

means ‘‘a cash-settled agreement, 

contract or transaction that represents 

the difference between the settlement 

price of a referenced contract and the 

settlement price of another contract, 

agreement, or transaction that is based 

on a different commodity.’’ The 

Commission determined, however, to 

adopt the term ‘‘intercommodity spread 

contract’’ as part of the definition of 

reference contract rather than as a 

separate term, since the phrase 

‘‘intercommodity spread contract’’ is 

used solely for purposes of defining the 

term ‘‘referenced contract.’’ The 

inclusion of the term as part of the 

definition of referenced contract is 

intended to simplify the definition 

section and make it easier to 

understand. 

k. Intermarket Spread Position 

The term ‘‘intermarket spread 

position’’ is not defined in current part 

150, and was not adopted in part 151. 

But in conjunction with the 

amendments to part 150 to address the 

changes to CEA section 4a made by the 

Dodd-Frank Act,181 the Commission 

proposes to add into § 150.1 a definition 

for ‘‘intermarket spread position’’ to 

mean ‘‘a long position in a commodity 

derivative contract in a particular 

commodity at a particular designated 

contract market or swap execution 

facility and a short position in another 

commodity derivative contract in that 

same commodity away from that 

particular designated contract market or 

swap execution facility.’’ Among the 

changes to CEA section 4a, new section 

4a(a)(6) of the Act requires the 

Commission to apply position limits on 

an aggregate basis to contracts based on 

the same underlying commodity across 

certain markets.182 The Commission 

believes that the term ‘‘intermarket 

spread position’’ simplifies the 

proposed changes to § 150.5, which 

provide acceptable exemptions DCMs 

and SEFs may choose to grant from 

speculative position limits.183

l. Intramarket Spread Position 

Neither current part 150, nor vacated 

part 151, includes a definition of the 

term ‘‘intramarket spread contract.’’ The 

Commission now proposes to add into 

§ 150.1 the definition, such that 

‘‘intramarket spread position’’ means ‘‘a 

long position in a commodity derivative 

contract in a particular commodity and 

a short position in another commodity 

derivative contract in the same 

commodity on the same designated 

contract market or swap execution 

facility.’’ 

Current part 150 includes exemptions 

for certain spread positions. For 

example, current § 150.3(a)(3) provides 

an exemption for spread (or arbitrage) 

positions, but this exemption is limited 

to those between single months for 

futures contracts and/or, options 

thereon, if outside of the spot month, 

and only if in the same crop year. While 

current § 150.3(a)(3) limits the spread 


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184The Commission notes that the exemption 

provided in § 150.5(a) for ‘‘positions which are 

normally known in the trade as ‘spreads, straddles, 

or arbitrage,’ ’’ tracks CEA section 4a(a)(1). 7 U.S.C. 

6a(a)(1). Also, various DCMs currently have rules in 

place that provide exemptions for such as ‘‘spreads, 

straddles, or arbitrage’’ positions. See, e.g., ICE 

Futures U.S. rule 6.27 and CME rule 559.C. 

185For further discussion regarding the 

exemptions for intramarket spread positions, see 

infra, discussion regarding § 150.5(a)(2) and (b)(5). 

186For position limits purposes, proposed § 150.1 

would define ‘‘physical commodity’’ to mean ‘‘any 

agricultural commodity as that term is defined in 

§ 1.3 of this chapter or any exempt commodity as 

that term is defined in section 1a(20) of the Act.’’ 

187 Vacated § 151.1 defined ‘‘Referenced 

Contract’’ to mean ‘‘on a futures-equivalent basis 

with respect to a particular Core Referenced Futures 

Contract, a Core Referenced Futures Contract listed 

in § 151.2, or a futures contract, options contract, 

swap or swaption, other than a basis contract or 

contract on a commodity index that is: (1) Directly 

or indirectly linked, including being partially or 

fully settled on, or priced at a fixed differential to, 

the price of that particular Core Referenced Futures 

Contract; or (2) Directly or indirectly linked, 

including being partially or fully settled on, or 

priced at a fixed differential to, the price of the 

same commodity underlying that particular Core 

Referenced Futures Contract for delivery at the 

same location or locations as specified in that 

particular Core Referenced Futures Contract.’’ 

188 76 FR at 71629. 189 Id. at 71630. 

190 Id. at 71630–31. 

191 Id. at 71631 n.50 (‘‘The Commission has 

clarified in its definition of ‘Referenced Contract’ 

that position limits extend to contracts traded at a 

fixed differential to a Core Referenced Futures 

Contract (e.g., a swap with the commodity reference 

price NYMEX Light, Sweet Crude Oil + $3 per 

barrel is a Referenced Contract) or based on the 

same commodity at the same delivery location as 

that covered by the Core Referenced Futures 

Contract, and not to unfixed differential contracts 

(e.g., a swap with the commodity reference price 

Argus Sour Crude Index is not a Referenced 

Contract because that index is computed using a 

variable differential to a Referenced Contract).’’). 

192 Id. at 71631. 

193 Id. 

194 In the current rulemaking, the term 

‘‘referenced contract’’ is defined in § 150.1 to mean, 

on a futures-equivalent basis with respect to a 

particular core referenced futures contract, ‘‘a core 

referenced futures contract listed in § 151.2(d) of 

this part, or a futures contract, options contract, or 

swap, other than a guarantee of a swap, a basis 

contract, or a commodity index contract: (1) That 

is: (a) Directly or indirectly linked, including being 

partially or fully settled on, or priced at a fixed 

differential to, the price of that particular core 

referenced futures contract; or (b) Directly or 

indirectly linked, including being partially or fully 

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

price of the same commodity underlying that 

particular core referenced futures contract for 

delivery at the same location or locations as 

specified in that particular core referenced futures 

contract; and (2) Where: (a) Calendar spread 

contract means a cash-settled agreement, contract, 

or transaction that represents the difference 

between the settlement price in one or a series of 

contract months of an agreement, contract or 

transaction and the settlement price of another 

contract month or another series of contract 

months’ settlement prices for the same agreement, 

contract or transaction; (b) Commodity index 

contract means an agreement, contract, or 

transaction that is not a basis or any type of spread 

contract, based on an index comprised of prices of 

exemption provided thereunder, the 

exemption under current § 150.5(a) is 

not so limited. Instead, under current 

§ 150.5(a), exchanges may exempt from 

position limits ‘‘positions which are 

normally known in the trade as 

‘‘spreads, straddles, or arbitrage. 

. . .’’ 184 The Commission notes that the 

definition it now proposes for 

‘‘intramarket spread position’’ is a 

generic term, and not limited only to 

futures and/or options thereon.185 In a 

similar manner to adoption of the term 

‘‘intermarket spread position,’’ the term 

‘‘intramarket spread position,’’ 

therefore, simplifies the Commissions 

amendments to exemptions for spread 

positions, including proposed changes 

to § 150.5, which, as noted above, 

provide acceptable exemptions DCMs 

and SEFs may choose to grant from 

speculative position limits. 

m. Long Position 

The term ‘‘long position’’ is currently 

defined in § 150.1(g) to mean ‘‘a long 

call option, a short put option or a long 

underlying futures contract,’’ but the 

phrase was not retained in vacated 

§ 151.1. The Commission proposes to 

retain the definition, but to update it to 

make it also applicable to swaps such 

that a long position would include a 

long futures-equivalent swap. 

n. Physical Commodity 

The Commission proposes to amend 

§ 150.1 by adding in a definition of the 

term ‘‘physical commodity’’ for position 

limits purposes. Congress used the term 

‘‘physical commodity’’ in CEA sections 

4a(a)(2)(A) and 4a(a)(2)(B) to mean 

commodities ‘‘other than excluded 

commodities as defined by the 

Commission.’’ Therefore, the 

Commission interprets ‘‘physical 

commodities’’ to include both exempt 

and agricultural commodities, but not 

excluded commodities, and proposes to 

define the term as such.186

o. Referenced Contracts 

Part 150 currently does not include a 

definition of the phrase ‘‘Referenced 

Contract,’’ which was introduced and 

adopted in vacated part 151.187 As was 

noted when part 151 was adopted, the 

Commission identified 28 core 

referenced futures contracts and 

proposed to apply aggregate limits on a 

futures equivalent basis across all 

derivatives that [met the definition of 

Referenced Contracts’].’’ 188

The vacated § 151.1 definition of 

Referenced Contracts included: (1) The 

Core Referenced Futures Contract; (2) 

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

settle off of the Core Referenced Futures 

Contract and contracts that are based on 

the same commodity for the same 

delivery location as the Core Referenced 

Futures Contract); (3) contracts with a 

reference price based only on the 

combination of at least one Referenced 

Contract price and one or more prices in 

the same or substantially the same 

commodity as that underlying the 

relevant Core Referenced Futures 

Contract; and (4) intercommodity 

spreads with two components, one or 

both of which are Referenced Contracts. 

According to the Commission, these 

criteria captured contracts with prices 

that are or should be closely correlated 

to the prices of the Core Referenced 

Futures Contract, as defined in vacated 

§ 151.1.189 In addition, the definition 

included categories of Referenced 

Contract based on objective criteria and 

readily available data (i.e., derivatives 

that are directly or indirectly linked to 

or based on the same commodity for 

delivery at the same delivery location as 

a Core Referenced Futures Contract).190

At that time, the Commission clarified 

that a swap contract using as its sole 

floating reference price the prices 

generated directly or indirectly from the 

price of a single Core Referenced 

Futures Contract or a swap priced based 

on a fixed differential to a Core 

Referenced Futures Contract, were lookalike Referenced Contracts, and subject 

to the limits adopted in vacated part 

151.191 In addition, the definition 

included options that expire into 

outright positions in such contracts.192

In response to comments that the 

Commission should broaden the scope 

of Referenced Contracts, the 

Commission noted that expanding the 

scope of position limits based, for 

example, on cross-hedging relationships 

or other historical price analysis would 

be problematic as historical 

relationships may change over time and, 

additionally, would require 

individualized determinations. In light 

of these circumstances, the Commission 

determined that it was not necessary to 

expand the scope of position limits 

beyond what was adopted. The 

Commission also noted that the 

commenters did not provide specific 

criteria or thresholds for making 

determinations as to which pricecorrelated commodity contracts should 

be subject to limits, further noting that 

it would consider amending the scope 

of economically equivalent contracts 

(and the relevant identifying criteria) as 

it gained experience in this area.193

The definition for ‘‘referenced 

contract’’ proposed in § 150.1 mirrors 

the definition proposed in § 151.1, with 

the delineation of several related terms 

incorporated into the definition.194 The 


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commodities that are not the same or substantially 

the same; (c) Spread contract means either a 

calendar spread contract or an intercommodity 

spread contract; and (d) Intercommodity spread 

contract means a cash-settled agreement, contract or 

transaction that represents the difference between 

the settlement price of a referenced contract and the 

settlement price of another contract, agreement, or 

transaction that is based on a different commodity.’’ 

195As defined in vacated § 151.1, ‘‘Referenced 

Contract’’ excludes ‘‘a basis contract or contract on 

a commodity index.’’ See vacated § 151.1. 196The Commission proposes to exclude a 

guarantee of a swap from the definition of a 

referenced contract due to regulatory developments 

that occurred after the vacated part 151 

Rulemaking. In connection with further defining 

the term ‘‘swap’’ jointly with the Securities and 

Exchange Commission, (see generally Further 

Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and 

‘‘Security-Based Swap Agreement’’; Mixed Swaps; 

Security-Based Swap Agreement Recordkeeping, 77 

FR 48208, Aug. 13, 2012 (‘‘Product Definitions 

Adopting Release’’)), the Commission interpreted 

the term ‘‘swap’’ (that is not a ‘‘security-based 

swap’’ or ‘‘mixed swap’’) to include a guarantee of 

such swap, to the extent that a counterparty to a 

swap position would have recourse to the guarantor 

in connection with the position. See id. at 48226. 

Excluding guarantees of swaps from the definition 

of referenced contract should help avoid any 

potential confusion regarding the application of 

position limits to guarantees of swaps, which could 

impede the Commission’s efforts to monitor 

compliance with the requirements of the CEA. In 

addition, if the rules proposed in the Aggregation 

NPRM are adopted, it would obviate the need to 

include guarantees of swaps in the definition of 

referenced contracts. 

197Compare vacated § 151.1 with proposed 

§ 150.1. 

198CEA section 6a(1) (Supp. II 1936). 

199 3 FR 3145, Dec. 24, 1938. 

200 17 CFR 150.1 (1938) (Part 150—Orders of The 

Commodity Exchange Commission)(‘‘Limits on 

position and daily trading in grain for future 

delivery. The following limits on the amount of 

trading under contracts of sale of grain for future 

delivery on or subject to the rules of contract 

markets which may be done by any person are 

hereby proclaimed and fixed, to be in full force and 

effect on and after December 31, 1938: (a) Position 

limits. (1) The limit on the maximum net long or 

net short position which any one person may hold 

or control in any one grain on any one contract 

market, except as specifically authorized by 

paragraph (a) (2), is: 2,000,000 bushels in any one 

future or in all futures combined. (2) To the extent 

that the net position held or controlled by any one 

person in all futures combined in any one grain on 

any one contract market is shown to represent 

spreading in the same grain between markets, the 

limit on net position in all futures combined set 

forth in paragraph (a)(1) may be exceeded on such 

contract market, but in no case shall the excess 

result in a net position of more than 3,000,000.’’). 

beginning of the current definition 

parallels the definition in vacated 

§ 151.1, differing only with the addition 

of a clarification that the definition of 

‘‘referenced contract’’ does not include 

guarantees of a swap. This clarification 

is added into the list of products that are 

not included in the definition.195 In the 

proposed definition, ‘‘referenced 

contract’’ would not include ‘‘a 

guarantee of a swap, a basis contract, or 

a commodity index contract.’’ 196 In 

addition, for the sake of clarify, the 

proposal incorporates into the definition 

of ‘‘referenced contract’’ several related 

terms. Consequently, the definition for 

‘‘referenced contract’’ delineates the 

meaning of ‘‘calendar spread contract,’’ 

‘‘commodity index contract,’’ ‘‘spread 

contract,’’ and ‘‘intercommodity spread 

contract.’’ 197 The incorporation of these 

terms into the definition of ‘‘referenced 

contract’’ is intended to retain in one 

place the various parts and meanings of 

the definition, thereby facilitating 

comprehension of the definition. 

p. Short Position 

The term ‘‘short position’’ is currently 

defined in § 150.1(c) to mean ‘‘a short 

call option, a long put option, or a short 

underlying futures contract.’’ Vacated 

part 151 did not retain this definition. 

The current proposal would amend the 

definition to state that a short position 

means ‘‘a short call option, a long put 

option or a short underlying futures 

contract, or a short futures-equivalent 

swap.’’ This revised definition reflects 

the fact that under the Dodd-Frank Act, 

the Commission is charged with 

applying the position limits regime to 

swaps. 

q. Speculative Position Limit 

The term ‘‘speculative position limit’’ 

is currently not defined in § 150.1 and 

was not defined in vacated part 151. 

The Commission now proposes to 

define the term ‘‘speculative position 

limit’’ to mean ‘‘the maximum position, 

either net long or net short, in a 

commodity derivatives contract that 

may be held or controlled by one 

person, absent an exemption, such as an 

exemption for a bona fide hedging 

position. This limit may apply to a 

person’s combined position in all 

commodity derivative contracts in a 

particular commodity (all-monthscombined), a person’s position in a 

single month of commodity derivative 

contracts in a particular commodity, or 

a person’s position in the spot month of 

commodity derivative contacts in a 

particular commodity. Such a limit may 

be established under federal regulations 

or rules of a designated contract market 

or swap execution facility. An exchange 

may also apply other limits, such as a 

limit on gross long or gross short 

positions, or a limit on holding or 

controlling delivery instruments.’’ 

This proposed definition is similar to 

definitions for position limits used by 

the Commission for many years; the 

various regulations and defined terms 

included use of maximum amounts ‘‘net 

long or net short,’’ which limited what 

any one person could ‘‘hold or control,’’ 

‘‘one grain on any one contract market’’ 

(or in ‘‘in one commodity’’ or ‘‘a 

particular commodity’’), and ‘‘in any 

one future or in all futures combined.’’ 

For example, in 1936, Congress enacted 

the CEA, which authorized the CFTC’s 

predecessor, the CEC, to establish limits 

on speculative trading. Congress 

empowered the CEC to ‘‘fix such limits 

on the amount of trading . . . as the 

[CEC] finds is necessary to diminish, 

eliminate, or prevent such burden.’’ 198

The first speculative position limits 

were issued by the CEC in December 

1938.199 Those first speculative position 

limits rules provided in § 150.1 for 

limits on position and daily trading in 

grain for future delivery, adopting a 

maximum amount ‘‘net long or net short 

position which any one person may 

hold or control in any one grain on any 

one contract market’’ as 2,000,000 

bushels ‘‘in any one future or in all 

futures combined.’’ 200

Another example is found in the 

glossaries published by the Commission 

for many years. Various Commission 

documents over the years have included 

a glossary. For example, the 

Commission’s annual report for 1983 

includes in its glossary ‘‘Position Limit 

The maximum position, either net long 

or net short, in one commodity future 

combined which may be held or 

controlled by one person as prescribed 

by any exchange or by the CFTC.’’ The 

version of the staff glossary currently 

posted on the CFTC Web site defines 

speculative position limit as ‘‘[t]he 

maximum position, either net long or 

net short, in one commodity future (or 

option) or in all futures (or options) of 

one commodity combined that may be 

held or controlled by one person (other 

than a person eligible for a hedge 

exemption) as prescribed by an 

exchange and/or by the CFTC.’’ 

r. Spot Month 

Vacated part 151 adopted an amended 

definition for ‘‘spot month’’ that 

replaced the definition for spot month 

currently found in § 150.1 by citing to 

the definition provided in § 151.3. 

Vacated § 151.3 provided detailed lists 

of spot months separately for 

agricultural, metals and energy 

commodities. 

The Commission proposes to adopt a 

simplified update to the definition of 

‘‘spot month’’ by expanding upon the 

current § 150.1 definition. The 

definition, as expanded, would 

specifically address both physicaldelivery contracts and cash-settled 

contracts, and clarify the duration of 

‘‘spot month.’’ Under the proposed 

changes, the term ‘‘spot month’’ does 

not refer to a month of time. Rather, the 

definition clarifies that the ‘‘spot 


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201For example, a ‘‘look-alike’’ contract that 

references a calendar-month average of settlement 

prices would have the same spot-month limit as the 

core referenced futures contract (CRFC) but the 

limit would be in effect beginning with the first 

calendar day of the cash-settlement period; a ‘‘lookalike’’ contract that references a single day’s 

settlement price in the spot-month of the CRFC 

would have a spot-month limit at the same level as 

the CRFC but the limit would be in effect only 

during the spot month of the CRFC. 

202For example, the physical-delivery NYMEX 

Henry Hub Natural Gas futures contract would 

have, as is currently the case for the exchange spot 

month limit, a spot period beginning on close of 

trading three business days prior to the last trading 

day of that core referenced futures contract. The 

NYMEX Henry Hub Natural Gas Penultimate 

Financial futures contract (which is cash-settled 

based on the NYMEX Henry Hub Natural Gas 

Futures contract settlement price on the business 

day preceding the last trading day for that physicaldelivery contract, and is currently subject to 

position accountability effective on the last three 

trading days of the futures contract), would have a 

spot month period that is the same as that of the 

physical-delivery NYMEX Henry Hub Natural Gas 

futures contract. 

203See supra discussion of the proposed 

definition of ‘‘speculative position limit.’’ 

204 Vacated § 151.1. 

205See supra discussion of proposed § 150.1 

‘‘referenced contract’’ definition. 

206The Commission notes that this is consistent 

with vacated part 151. See, e.g., the final part 151 

Rulemaking, which noted that commodity index 

contracts, which by the definition in vacated 

§ 151.1 were expressly excluded from the definition 

of ‘‘Referenced Contract,’’ were not spread 

contracts. 76 FR at 71656. See also, the definition 

of ‘‘commodity index contract,’’ which is defined as 

‘‘a contract, agreement, or transaction ‘‘that is not 

a basis or any type of spread contract, [and] based 

on an index comprised of prices of commodities 

that are not the same nor substantially the same.’’ 

Vacated § 151.1. 

207Under vacated § 151.1, the term ‘‘[s]wap 

means ‘swap’ as defined in section 1a of the Act and 

as further defined by the Commission.’’ 

208See 77 FR 48208, 48349, Aug. 13, 2012. 

209See vacated § 151.1. 

210 77 FR 30596, May 23, 2012. 

211For an historical perspective on the bona fide 

hedging provision prior to the Dodd-Frank 

amendments, see Testimony of General Counsel 

Dan M. Berkovitz, Commodity Futures Trading 

Commission, ‘‘Position Limits and the Hedge 

Exemption, Brief Legislative History,’’ July 28, 

2009, available at http://www.cftc.gov/PressRoom/

SpeechesTestimony/berkovitzstatement072809. 

month’’ is the trading period 

immediately preceding the delivery 

period for a physical-delivery futures 

contract as well as for any cash-settled 

swaps and futures contracts that are 

linked to the physical-delivery contract. 

The definition continues to define the 

spot month as the period of time 

beginning at of the close of trading on 

the trading day preceding the first day 

on which delivery notices can be issued 

to the clearing organization of a contract 

market, while adding in a clarification 

that this definition applies only to 

physical-delivery commodity 

derivatives contracts. For physicaldelivery contracts with delivery 

beginning after the last trading day, the 

proposal defines the spot month as the 

close of trading on the trading day 

preceding the third-to-last trading day, 

until the contract is no longer listed for 

trading (or available for transfer, such as 

through exchange for physical 

transactions). This definition is 

consistent with the current spot month 

for each of the 28 core referenced 

futures contracts. The definition 

proposes similar, but slightly different 

language for cash-settled contracts, 

providing that the spot month begins at 

the earlier of the start of the period in 

which the underlying cash-settlement 

price is calculated or the close of trading 

on the trading day preceding the thirdto-last trading day and continues until 

the contract cash-settlement price is 

determined.201 In addition, the 

definition includes a proviso that, if the 

cash-settlement price is determined 

based on prices of a core referenced 

futures contract during the spot month 

period for that core referenced futures 

contract, then the spot month for that 

cash-settled contract is the same as the 

spot month for that core referenced 

futures contract.202

s. Spot-Month, Single-Month, and AllMonths-Combined Position Limits 

In addition to a definition for ‘‘spot 

month,’’ current part 150 includes 

definitions for ‘‘single month,’’ and for 

‘‘all-months’’ where ‘‘single month’’ is 

defined as ‘‘each separate futures 

trading month, other than the spot 

month future,’’ and ‘‘all-months’’ is 

defined as ‘‘the sum of all futures 

trading months including the spot 

month future.’’ 

Vacated part 151 retained only the 

definition for spot month, and, instead, 

adopted a definition for ‘‘spot-month, 

single-month, and all-months-combined 

position limits.’’ The definition 

provided that, for Referenced Contracts 

based on a commodity identified in 

§ 151.2, the maximum number of 

contracts a trader may hold was as 

provided in § 151.4. 

In the current rulemaking proposal, as 

noted above, the Commission proposes 

to amend § 150.1 by deleting the 

definitions for ‘‘single month,’’ and for 

‘‘all-months.’’ Unlike the vacated part 

151 Rulemaking, the current proposal 

does not include a definition for ‘‘spotmonth, single-month, and all-monthscombined position limits.’’ Instead, the 

current rulemaking proposes to adopt a 

definition for ‘‘speculative position 

limits’’ that should obviate the need for 

these definitions.203

t. Spread Contract 

Spread contract was defined in 

vacated part 151 as ‘‘either a calendar 

spread contract or an intercommodity 

spread contract.’’ 204 The Commission 

proposes to add the same definition into 

§ 150.1 in conjunction with the proposal 

to define ‘‘referenced contract.’’ 205

The Commission also notes that while 

the proposed definition of ‘‘referenced 

contract’’ specifically excludes 

guarantees of a swap, basis contracts 

and commodity index contracts, spread 

contracts are not excluded from the 

proposed definition of ‘‘referenced 

contract.’’ 206

u. Swap 

The definitions of several terms 

adopted in vacated part 151 relied on 

the statutory definition in some cases in 

conjunction with a further definition 

adopted by the Commission in other 

rulemakings.207 Other defined terms 

that rely on the statutory definition in 

included: ‘‘entity,’’ ‘‘excluded 

commodity,’’ and ‘‘swap dealer.’’ Since 

the adoption of part 151, the 

Commission, in a joint rulemaking with 

the Securities and Exchange 

Commission, adopted a further 

definition for ‘‘swap’’ in § 1.3(xxx).208

Consequently, the definition of ‘‘swap’’ 

proposed in the current rulemaking, 

while paralleling that of the definition 

included in vacated § 151.1, and while 

substantially the same, additionally 

cites to the definition of ‘‘swap’’ found 

in § 1.3(xxx). 

v. Swap Dealer 

The term ‘‘swap dealer’’ is not 

currently defined in § 150.1, but was 

defined in vacated 151.1 to mean 

‘‘ ‘swap dealer’ as that term is defined in 

section 1a of the Act and as further 

defined by the Commission.’’ 209 Similar 

to the definition of ‘‘swap,’’ the 

Commission adopted a definition for 

‘‘swap dealer’’ since part 151 was 

finalized.210 Under the current proposal, 

§ 150.1 would be amend to define 

‘‘swap dealer’’ to mean ‘‘ ‘swap dealer’ 

as that term is defined in section 1a of 

the Act and as further defined in section 

1.3 of this chapter.’’ This revised 

definition reflects the fact that the 

definition of ‘‘swap dealer,’’ while 

paralleling that of the definition 

included in § 151.1, and while 

substantially the same, additionally 

cites to the definition of ‘‘swap dealer’’ 

found in § 1.3(ggg). 

ii. Bona Fide Hedging Definition 

The core of the Commission’s 

approach to defining bona fide hedging 

over the years has focused on 

transactions that offset a recognized 

physical price risk.211 Once a bona fide 


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212Section 404 of Public Law 93–463, October 23, 

1974, (CFTC Act), amended section 4a(3) of the Act, 

deleting the statutory definition of bona fide 

hedging position or transaction and directing the 

newly-established Commission to issue a rule 

defining that term. 

213Pending promulgation of a definition by the 

Commission, the Secretary of Agriculture 

promulgated § 1.3(z) pursuant to section 404 of the 

CFTC Act. 40 FR 11560, Mar. 12, 1975. This 

definition of bona fide hedging in new § 1.3(z) 

deviated in only minor ways from the hedging 

definition contained in section 4a(3) of the Act. The 

Commodity Exchange Commission subsequently 

issued conforming amendments to various rules. 40 

FR 15086, Apr. 4, 1975. 

214 40 FR 34627, Aug. 18, 1975. The Commission 

sought comment on many issues, including whether 

to include in the definition of bona fide hedging 

transactions and positions ‘‘the practice of many 

traders which results in hedging of gross cash 

positions rather than a net cash position—so-called 

‘double hedging.’ ’’ Id. at 34628. The Commission 

later noted ‘‘that net cash positions do not 

necessarily measure total risk exposure and in such 

cases the hedging of gross cash positions does not 

constitute ‘double hedging.’ ’’ 42 FR 42748, 42750, 

Aug. 24, 1977. 

215 40 FR 48688, Oct. 17, 1975. The Commission 

re-issued all regulations, with rule 1.3(z) essentially 

unchanged, in 1976. 41 FR 3192, 3195, Jan. 21, 

1976. 

216 42 FR 14832, Mar. 16, 1977. 

217 Id. 

218 42 FR 42748, Aug. 24, 1977. 

219 17 CFR 1.3(z)(1) (2010). The Commission 

cautions that the e-CFR version of § 1.3(z) reflects 

changes made by the vacated 2011 final rule. 

220The Commission notes that the definition of 

bona fide hedging transactions or positions 

historically included an exemption for unfilled 

anticipated requirements. As the Commission stated 

in 1974, in its proposal to adopt § 1.3(z), the 

regulation on the hedging definition proposed by 

the Secretary of Agriculture was intended to 

comply with the intent of section 404 of Public Law 

93–463, enacted October 23, 1974, as stated in the 

Conference Report accompanying HR. 13113, pp. 

40–1. The Commission noted in its proposal that 

the new statutory language was intended to allow 

processors and manufacturers to hedge unfilled 

annual requirements. 39 FR 39731, Nov. 11, 1974. 

221See 42 FR 42748, Aug. 24, 1977. 

222 Id. 

223 42 FR at 42749. 

hedge is implemented, the hedged 

entity should be price insensitive 

because any change in the value of the 

underlying physical commodity is offset 

by the change in value of the entity’s 

physical commodity derivative position. 

Because a firm that has hedged its 

price exposure is price neutral in its 

overall physical commodity position, 

the hedged entity should have little 

incentive to manipulate or engage in 

other abusive market practices to affect 

prices. By contrast, a party that 

maintains a derivative position that 

leaves them with exposure to price 

changes is not neutral as to price and, 

therefore, may have an incentive to 

affect prices. Further, the intention of a 

hedge exemption is to enable a 

commercial entity to offset its price risk; 

it was never intended to facilitate taking 

on additional price risk. 

The Commission recognizes there are 

complexities to analyzing the various 

commercial price risks applicable to 

particular commercial circumstances in 

order to determine whether a hedge 

exemption is warranted. These 

complexities have led the Commission, 

from time to time, to issue rule changes, 

interpretations, and exemptions. 

Congress, too, has periodically revised 

the Federal statutes applicable to bona 

fide hedging, most recently in the DoddFrank Act. These complexities will be 

further explored below. 

a. Bona Fide Hedging History 

Prior to 1974, the term bona fide 

hedging transactions or positions was 

defined in section 4a(3) of the Act. That 

definition only applied to agricultural 

commodities. When the Commission 

was created in 1974, the Act’s definition 

of commodity was expanded. At that 

time, Congress was concerned that the 

limited hedging definition, even if 

applied to newly regulated commodity 

futures, would fail to accommodate the 

commercial risk management needs of 

market participants that could emerge 

over time. Accordingly, Congress, in 

section 404 of the Commodity Futures 

Trading Commission Act of 1974, 

repealed the statutory definition and 

gave the Commission the authority to 

define bona fide hedging.212 In response 

to the 1974 legislation, the 

Commission’s predecessor adopted in 

1975 a bona fide hedging definition in 

§ 1.3(z) of its regulations stating, among 

other requirements, that transactions or 

positions would not be classified as 

hedging unless their bona fide purpose 

was to offset price risks incidental to 

commercial cash or spot operations, and 

such positions were established and 

liquidated in an orderly manner and in 

accordance with sound commercial 

practices.213 Shortly thereafter, the 

newly formed Commission sought 

comment on amending that 

definition.214 Given the large number of 

issues raised in comment letters, the 

Commission adopted the predecessor’s 

definition with minor changes as an 

interim definition of bona fide hedging 

transactions or positions, effective 

October 18, 1975.215

In 1977, the Commission proposed a 

revised definition of bona fide hedging 

that largely forms the basis of the 

current definition of bona fide 

hedging.216 The 1977 proposed 

definition set forth: (i) A general 

definition of bona fide hedging 

positions under economically 

appropriate circumstances and subject 

to other conditions (noted below); (ii) an 

enumerated list of specific positions 

that conform to the general definition; 

and (iii) a procedure to consider nonenumerated cases.217 The 1977 

proposal, as adopted, established the 

concept of portfolio hedging and 

recognized cross-commodity hedges and 

hedges of anticipated production or 

unfilled anticipated requirements, 

provided such hedges were not 

recognized in the five last days of 

trading in any particular futures 

contract (the ‘‘five-day rule’’ in current 

§ 1.3(z)(2)).218

The general definition of bona fide 

hedging in current § 1.3(z), as was the 

case when adopted in 1977, advises that 

a position should ‘‘normally represent a 

substitute for . . . positions to be taken 

at a later time in a physical marketing 

channel,’’ and requires such position to 

be ‘‘economically appropriate to the 

reduction of risks in the conduct of a 

commercial enterprise,’’ and where the 

risks arise from the potential change in 

value of assets, liabilities or services.219

Such bona fide hedges also must have 

a purpose ‘‘to offset price risks 

incidental to commercial cash or spot 

operations’’ and must be ‘‘established 

and liquidated in an orderly manner in 

accordance with sound commercial 

practices.’’ Thus a bona fide hedge 

exemption was appropriate where there 

was a demonstrated physical price risk 

that had been recognized. This also 

applies, for example, to bona fide hedge 

exemptions for unfilled anticipated 

requirements, where processors or 

manufacturers are exposed to price risk 

on such unfilled anticipated 

requirements necessary for their 

manufacturing or processing.220

The 1977 proposed definition did not 

include the modifying adverb 

‘‘normally’’ to the verb ‘‘represent.’’ 221

The Commission explained in the 1977 

preamble it intended to recognize bona 

fide hedging positions ‘‘on the basis of 

net risk related to changes in the values 

reflected on balance sheets.’’ 222 The 

Commission introduced the adverb 

normally in the 1977 final rulemaking 

in order to make clear it would 

recognize as bona fide such balance 

sheet hedging and ‘‘other [at the time] 

relatively infrequent but potentially 

important examples of risk reducing 

futures transactions’’ that would 

otherwise not have met the general 

definition of bona fide hedging.223 The 

Commission noted: ‘‘One form of 

balance sheet hedging would involve 

offsetting net exposure to changes in 

currency exchange rates for the purpose 

of stabilizing the domestic dollar 

accounting value of assets which are 

held abroad. In the case of depreciable 

capital assets, such hedging transactions 


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224 Id. at 42749 (n. 1). 

225 Id. at 42749. The five-day rule in current 

§ 1.3(z)(2) for anticipatory hedges permits an 

exception for a person with a long anticipatory 

hedging need, for up to two months unfilled 

anticipated requirements. 

226 Id. 

227 44 FR 7124, Feb. 6, 1979. 

228 Id. at 7125. 

229See, In re Nelson Bunker Hunt et al., CFTC 

Docket No. 85–12. 

230 46 FR 50938, 50945, Oct. 16, 1981. With the 

passage of the Commodity Futures Modernization 

Act in 2000 and the Commission’s subsequent 

adoption of the part 38 regulations covering DCMs 

in 2001 (66 FR 42256, Aug. 10, 2001), part 150’s 

approach to exchange-set speculative position 

limits was incorporated as an acceptable practice 

under DCM Core Principle 5—Position Limitations 

and Accountability. 72 FR 66097, 66098 n.1, Nov. 

27, 2007. 

231House Committee on Agriculture, Futures 

Trading Act of 1986, H.R. Rep. No. 624, 99th Cong., 

2d Sess. 44–46 (1986). 

232 Id. at 46. 

233 Id. 

234Senate Committee on Agriculture, Nutrition 

and Forestry, Futures Trading Act of 1986, S. Rep. 

No. 291, 99th Cong., 2d Sess. at 21–22 (1986). 

235 Id. at 22. 

236See, Clarification of Certain Aspect of the 

Hedging Definition, 52 FR 27195, Jul. 20, 1987 (July 

1987 Interpretative Statement). 

237 In current § 1.3(z)(1), the phrase ‘‘where such 

transactions or positions normally represent a 

substitute for transactions to be made or positions 

to be taken at a later time in a physical marketing 

channel’’ has been termed the ‘‘temporary 

substitute criterion.’’ (Emphasis added.) 

238 In current § 1.3(z)(1), the phrase ‘‘price risks 

incidental to commercial cash or spot operations’’ 

has been termed the ‘‘incidental test.’’ 

239 52 FR at 27197. 

240See, Risk Management Exemptions from 

Speculative Position Limits Approved under 

Commission Regulation 1.61, 52 FR 34633, Sep. 14, 

1987. 

241 Id. at 34637. 

242 Id. at 34636. 

might not represent a substitute for 

subsequent transactions in a physical 

marketing channel.’’ 224

With respect to the five-day rule in 

current § 1.3(z)(2) for anticipatory 

hedges of unfilled anticipated 

requirements, the Commission observed 

that historically there was a low 

utilization of this provision in terms of 

actual positions acquired in the futures 

market.225 For cross commodity and 

short anticipatory hedge positions, the 

Commission did ‘‘not believe that 

persons who do not possess or do not 

have a commercial need for the 

commodity for future delivery will 

normally wish to participate in the 

delivery process.’’ 226

In 1979, the Commission eliminated 

daily speculative trading volume limits 

and concluded such daily trading limits 

were ‘‘not necessary to diminish, 

eliminate or prevent excessive 

speculation.’’ 227 The Commission noted 

eliminating daily trading limits had no 

effect on the limits on the size of 

speculative positions which any one 

person may hold or control on a single 

contract market. The Commission also 

noted the speculative position limits 

apply to positions throughout the day as 

well as to positions at the close of the 

trading session.228 The Commission 

continues to apply position limits 

throughout the day and will continue 

under this proposal. 

In the aftermath of the silver futures 

market crisis during late 1979 to early 

1980,229 in 1981 the Commission 

adopted § 1.61, subsequently 

incorporated into § 150.5, requiring 

DCMs to adopt speculative position 

limits and providing an exemption for 

‘‘bona fide hedging positions as defined 

by a contract market in accordance with 

§ 1.3(z)(1) of the Commission’s 

regulations.’’ 230 That rule permits 

DCMs to limit bona fide hedging 

positions which it determines are not in 

accord with sound commercial practices 

or exceed an amount which the 

exchange determines may be established 

or liquidated in an orderly fashion. 

In 1986, in response to concerns 

raised in testimony regarding the 

constraints on investment decisions 

imposed by position limits, the House 

Committee on Agriculture, in its report 

accompanying the Commission’s 1986 

reauthorization legislation, instructed 

the Commission to reexamine its 

approach to speculative position limits 

and its definition of hedging.231

Specifically, the Committee Report 

‘‘strongly urge[d] the Commission to 

undertake a review of its hedging 

definition . . . and to consider giving 

certain concepts, uses, and strategies 

‘non-speculative’ treatment . . . 

whether under the hedging definition 

or, if appropriate, as a separate category 

similar to the treatment given certain 

spread, straddle or arbitrage positions 

. . . ’’ 232 The Committee Report singled 

out four categories of trading and 

positions that the Commission should 

consider recognizing as non-speculative: 

(i) ‘‘Risk management’’ trading by 

portfolio managers as an alternative to 

the concept of ‘‘risk reduction;’’ (ii) 

futures positions taken as alternatives 

to, rather than as temporary substitutes 

for, cash market positions; (iii) other 

positions acquired to implement 

strategies involving the use of financial 

futures including, but not limited to, 

asset allocation (altering portfolio 

exposure in certain areas such as equity 

and debt), portfolio immunization 

(curing mismatches between the 

duration and sensitivity of assets and 

liabilities to ensure that portfolio assets 

will be sufficient to fund the payment 

of liabilities), and portfolio duration 

(altering the average maturity of a 

portfolio’s assets); and (iv) certain 

options trading, in particular the writing 

of covered puts and calls.233

The Senate Committee on Agriculture, 

Nutrition and Forestry, in its report on 

the 1986 CFTC reauthorization 

legislation, also directed the 

Commission to reassess its 

interpretation of bona fide hedging.234

Specifically, the Senate Committee 

directed the Commission to consider 

‘‘whether the concept of prudent risk 

management [should] be incorporated in 

the general definition of hedging as an 

alternative to this risk reduction 

standard.’’ 235

The Commission heeded Congress’s 

recommendation, and the Commission 

issued two 1987 interpretive statements 

regarding the definition of bona fide 

hedging. The first 1987 interpretative 

statement clarified the meaning of 

current § 1.3(z)(1).236 The Commission 

interpreted the regulatory ‘‘temporary 

substitute’’ criterion 237 not to be a 

necessary condition for classification of 

positions as hedging. The Commission 

interpreted the ‘‘incidental test’’ 238 to 

be a ‘‘requirement that the risks that are 

offset by a futures or option hedge must 

arise from commercial cash market 

activities.’’ The Commission also noted 

bona fide hedges could include balance 

sheet and other trading strategies that 

are risk reducing, such as ‘‘strategies 

that provide protection equivalent to a 

put option for an existing portfolio of 

securities.’’ 239

The second 1987 interpretative 

statement provides assistance to an 

exchange who may wish to recognize 

risk management exemptions from 

exchange speculative position limit 

rules.240 ‘‘The Commission note[d] that 

providing risk management exemptions 

to commercial entities who are typically 

engaged in buying, selling or holding 

cash market instruments is similar to a 

provision in the Commission’s hedging 

definition, [namely], the risks to be 

hedged arise in the management and 

conduct of a commercial enterprise.’’ 241

The Commission believed that it would 

be consistent with the objectives of 

section 4a of the Act and § 1.61 [now 

incorporated as § 150.5] for exchange 

rules to exempt from speculative limits 

a number of risk management positions 

in debt-based, equity-based and foreign 

currency futures and options.242 Those 

positions included: Unleveraged long 

positions (covered by cash set aside); 

short calls on securities or currencies 

owned (i.e., covered calls); and long 

positions in asset allocation strategies 


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243 Id. 244 52 FR 38914, 38919, Oct. 20, 1987. 245 Id. at 38922. 246Petition for rulemaking of the CBOT, dated 

July 24, 1986, cited in 52 FR 6814, Mar. 5, 1987. 

247 52 FR 38914, 38920, Oct. 20, 1987. 

248 Id. The Commission noted at that time that the 

determination of whether a reverse crush position 

is bona fide hedging should be made on a case-bycase basis under § 1.47. 

249 72 FR 66097, Nov. 27, 2007. 

250 73 FR 32261, Jun. 6, 2008. 

251 74 FR 12282, Mar. 24, 2009. 

252 Id. at 12284. 

253The comments are available for review on the 

Commission’s Web site at http://www.cftc.gov/

LawRegulation/PublicComments/09-004. 

254 75 FR 4144, Jan. 26, 2010 (withdrawn 75 FR 

50950, Aug. 18, 2010). 

255 75 FR at 4152. 

256 7 U.S.C. 6a(c)(1). 

257 Id. The Dodd-Frank Act did not change the 

language found in prior 7 U.S.C. 6a(c) (2010). 

258See infra discussion of ‘‘temporary substitute 

test.’’ 

259Section 4a(a)(7) of the Act provides: ‘‘The 

Commission, by rule, regulation, or order, may 

exempt, conditionally or unconditionally, any 

person or class of persons, any swap or class of 

swaps, any contract of sale of a commodity for 

future delivery or class of such contracts, any 

option or class of options, or any transaction or 

class of transactions from any requirement it may 

establish under this section with respect to position 

limits.’’ 7 U.S.C. 6a(a)(7). 

covered by hedged debt securities or 

currencies owned.243

In 1987, the Commission also added 

an enumerated hedging position for 

spread positions which offset unfixedprice cash sales and unfixed-price cash 

purchases that are priced basis different 

delivery months in a futures contract 

(that is, floating-price cash purchases 

coupled with floating-price cash 

sales).244 In this regard, the Commission 

extended the cross-commodity hedging 

provisions to offsets of such coupled 

floating-price cash contracts that were 

not cash market transactions in the same 

commodity underlying the futures 

contract.245

The Commission adopted federal 

limits on soybean meal and soybean oil 

futures contracts in 1987, in response to 

a petition by the Chicago Board of 

Trade.246 In the final rule, the 

Commission noted: ‘‘Crush positions 

allow the processor to determine or fix 

his processing margin in advance and 

are included within the exemptions 

permitted for anticipatory hedging 

under Commission Rule 1.3(z)(2).’’ 247

Specifically, the Commission noted for 

a crush position established by a 

soybean processor, the short positions 

in soybean oil and soybean meal futures 

would be permitted to the extent of 

twelve months unsold anticipated 

production; and the long positions in 

soybean futures would be permitted to 

the extent of twelve months unfilled 

anticipated requirements. The 

Commission declined to adopt an 

exemption for a reverse crush position. 

The Commission stated its belief, based 

upon comments received and its own 

analysis, ‘‘that there are important 

differences between the crush and 

reverse crush positions from the 

standpoint of bona fide hedging by 

soybean processors.’’ The results of a 

crush position, plus or minus basis 

variation, are known once the position 

is established. In contrast, the 

Commission noted with a reverse crush 

spread position, ‘‘the intended results 

transpire only if, and when, the futures 

markets reflect the expected or 

anticipated more favorable crushing 

margin and the position can be lifted.’’ 

Accordingly, the Commission noted it 

did not appear appropriate to recognize 

the reverse crush spread position as an 

enumerated category of bona fide 

hedging.248

In 2007, the Commission proposed a 

risk management exemption to federal 

position limits, in addition to the bona 

fide hedging exemption.249 A risk 

management position would have been 

defined as a futures or futures 

equivalent position held as part of a 

broadly diversified portfolio of longonly or short-only futures or futures 

equivalent positions, that is based on 

either tracking a broadly diversified 

index for clients or a portfolio 

diversification plan that included an 

exposure to a broadly diversified index. 

In either case, the exemption would 

have been conditioned on the futures 

positions being passively managed, 

unleveraged, and outside of the spot 

month. The Commission withdrew that 

proposal in 2008, citing a lack of 

consensus.250

In March of 2009, the Commission 

issued a concept release on whether to 

eliminate the bona fide hedge 

exemption for certain swap dealers and 

create a new limited risk management 

exemption from speculative position 

limits.251 The Commission explained 

that, beginning in 1991, the Commission 

had granted bona fide hedge exemptions 

under § 1.47 to a number of swap 

intermediaries who were seeking to 

manage price risk on their books as a 

result of their serving as counterparties 

to their swap clients in commodity 

index swap contracts or commodity 

swap contracts.252 The swap clients 

included pension funds and other 

passive investors who were not using 

swaps to offset risks in the physical 

marketing channel. In order to protect 

itself from the risks of such swaps, the 

swap intermediary would establish a 

portfolio of long futures positions in the 

commodities making up the index or the 

commodity underlying the swap, in 

such amounts as would offset its 

exposure under the swap transaction. 

By design, the commodity index did not 

include contract months in the spot 

month. The exemptions did not cover 

positions carried into the spot month. 

The comments on the March 2009 

concept release were about equally 

divided between those who favored 

eliminating the bona fide hedge 

exemption for swap dealers (or 

restricting the exemption to positions 

offsetting swap dealers’ exposure to 

traditional commercial market users) 

and those who favored retaining the 

swap dealer hedge exemption in its 

current form, or some variation 

thereof.253

In January of 2010, the Commission 

proposed an integrated speculative 

position framework for the major energy 

contracts listed on DCMs.254 The 

proposed rules would not have 

recognized futures and option 

transactions offsetting exposure 

acquired pursuant to swap dealing 

activity as bona fide hedges. Instead, 

upon compliance with several 

conditions including reporting and 

disclosure obligations, the proposed 

regulations would have allowed swap 

dealers to seek a limited exemption 

from the proposed speculative position 

limits for the major energy contracts.255

The proposed framework was 

withdrawn after enactment of the DoddFrank Act, which the Commission 

interprets as expanding the range of 

derivative contracts, beyond contracts 

listed on DCMs, on which the 

Commission must impose position 

limits. 

Since 1974, the Commission has had 

authority under the Act to define the 

term bona fide hedging position. With 

the enactment on July 21, 2010 of the 

Dodd-Frank Act, section 4a(c)(1) of the 

Act,256 continues to provide that 

position limits do not apply to positions 

shown to be bona fide hedging positions 

as defined by the Commission.257

However, Dodd-Frank added section 

4a(c)(2) of the Act, which the 

Commission interprets as directing the 

Commission to narrow the bona fide 

hedging position definition for physical 

commodities from the definition found 

in current § 1.3(z)(1), as discussed 

further below.258 Separately, DoddFrank added section 4a(a)(7) of the Act 

to give the Commission plenary 

authority to grant general exemptive 

relief from the position limit rules.259

On November 18, 2011, the 

Commission adopted part 151 to 

establish a position limits regime for 


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260See generally 76 FR 71626, Nov. 18, 2011. 

261See 17 CFR 151.5(a)(2)(i)–(viii). The 

Commission also recognized pass-through swaps 

and pass-through swap offsets as bona fide hedging 

transactions. 17 CFR 151.5(a)(3)–(4). 

262Section 140.99 sets out general procedures and 

requirements for requests to Commission staff for 

exemptive, no-action and interpretative letters. 

263 17 CFR § 151.5(a)(5). 

264The Working Group Petition is available at 

http://www.cftc.gov/stellent/groups/public/@

rulesandproducts/documents/ifdocs/

wgbfhpetition012012.pdf. The Working Group 

supplemented the petition in a letter dated April 

17, 2012, available at http://www.cftc.gov/stellent/

groups/public/@rulesandproducts/documents/

ifdocs/workinggroupltr041712.pdf. As noted in 

their submission, the Working Group is a diverse 

group of commercial firms in the energy industry 

whose primary business activity is the physical 

delivery of one or more energy commodities to, 

among others, industrial, commercial and 

residential consumers. Members of the Working 

Group and their affiliates actively trade futures and 

swaps and they assert that they would be materially 

impacted by position limit rules under part 151. 

265See Working Group Petition at 1. 

266See Working Group Petition at 3. In letters 

dated March 1,2012, and March 26, 2012, 

respectively, a group of three energy trade 

associations (Edison Electric Institute, American 

Gas Association, and Electric Power Supply 

Association), and the Futures Industry Association 

submitted comments in support of the Working 

Group Petition, available at http://www.cftc.gov/

stellent/groups/public/@rulesandproducts/

documents/ifdocs/eei-aga-epsa_comments.pdf and 

http://www.cftc.gov/stellent/groups/public/@

rulesandproducts/documents/ifdocs/

fialtr032612.pdf. 

267The API Petition is available at http:// 

www.cftc.gov/stellent/groups/public/@

rulesandproducts/documents/ifdocs/

apiltr031312.pdf. As noted in their submission, API 

is a national trade association representing more 

than 450 oil and natural gas companies. Its 

members transact in physical and financial, 

exchange-traded, and over-the-counter markets 

primarily to hedge or mitigate commercial risks 

associated with their core business of delivering 

energy to wholesale and retail customers. 

268See API Petition at 1. 

269The CME Petition is available at http:// 

www.cftc.gov/stellent/groups/public/@

rulesandproducts/documents/ifdocs/

cmeltr042612.pdf. 

270The proposed definition does not reference 

‘‘transactions’’ because the Commission has not had 

trading volume limits on transactions since 1979. 

See generally Elimination of Daily Speculative 

trading Limits, 44 FR 7124, Feb. 6, 1979. 

271 7 U.S.C. 6a(c)(1). 

272 7 U.S.C. 6a(c)(2). 

273Regarding the definition of bona fide hedging 

positions in excluded commodities, the 

Commission notes this proposed definition also 

would provide flexibility to exchanges adopting 

exemptions for securities futures contracts 

consistent with § 41.25(a)(3)(iii). 

twenty-eight exempt and agricultural 

commodity futures and options 

contracts and the physical commodity 

swaps that are economically equivalent 

to such contracts.260 In connection with 

issuing the part 151 limits, the 

Commission defined bona fide hedging 

transactions or positions in § 151.5(a) 

and enumerated eight transactions or 

positions that would constitute bona 

fide hedging transactions or positions 

and, thus, would be exempt from the 

part 151 limits.261

In addition to the exemptions 

enumerated in § 151.5(a)(2) and (5) 

provided that, ‘‘Any person engaging in 

other risk reducing practices commonly 

used in the market which they believe 

may not be specifically enumerated in 

§ 151.5(a)(2) may request relief from 

Commission staff under § 140.99 of this 

chapter 262 or the Commission under 

section 4a(a)(7) of the Act concerning 

the applicability of the bona fide 

hedging transaction exemption.’’ 263

On January 20, 2012, the Working 

Group of Commercial Energy Firms (the 

‘‘Working Group’’) filed a petition 

pursuant to both section 4a(a)(7) of the 

Act and § 151.5(a)(5) (the ‘‘Working 

Group Petition’’) 264 requesting that the 

Commission ‘‘grant exemptive relief for 

[ten] classes of risk-reducing 

transactions described [in the petition] 

to the extent that such transactions are 

not covered by [§§ ] 151.5(a)(1) or (2) of 

the Position Limit Rules or, in the 

alternative, clarify that such classes of 

transactions qualify as ‘bona fide 

hedging transactions or positions’ 

within the meaning of [§§ ] 151.5(a)(1) 

and (2); [(‘‘Requests One–Ten’’)] and 

provide exemptive relief regarding the 

definition of (a) ‘‘spot month’’ set forth 

in [§ ] 151.3(c) of the Position Limit 

Rules, and (b) ‘‘swaption’’ set forth in 

[§ ] 151.1 of the Position Limit Rules 

[(‘Other Requests)].’’ 265 In connection 

with any relief ultimately granted as a 

result of the Petition, the Working 

Group also requested that the 

Commission ‘‘confirm that any relief 

granted is generally applicable to the 

entire market.’’ 266

In addition to the Working Group 

Petition, on March 13, 2012, the 

American Petroleum Institute (‘‘API’’) 

also filed a petition pursuant to both 

section 4a(a)(7) of the Act and 

§ 151.5(a)(5) (the ‘‘API Petition’’).267 The 

API Petition generally endorsed the 

Working Group petition and requested 

that the Commission recognize as bona 

fide hedging transactions certain routine 

energy market transactions that are 

priced at monthly average index 

prices.268 The request in the API 

Petition is essentially a restatement of 

Requests One through Three of the 

Working Group Petition. The API 

Petition also requested relief for passthrough swaps. 

Further, the CME Group, on April 26, 

2012, filed a petition pursuant to section 

4a(a)(7) of the Act and § 151.5(a)(5) (the 

‘‘CME Petition’’).269 The CME Petition 

generally requested that the 

Commission recognize as bona fide 

hedging transactions certain purchases 

by persons engaged in processing, 

manufacturing or feeding that were 

permitted under § 1.3(z)(2)(ii)(C) during 

the last five trading days in physicaldelivery contracts, not to exceed 

anticipated requirements for that month 

and the next succeeding month. The 

request in the CME Petition is 

substantively similar to Request Eight of 

the Working Group Petition. 

With the court’s September 28, 2012, 

order vacating part 151, the Commission 

now re-proposes a definition of bona 

fide hedging position. 

b. Proposed Definition of Bona Fide 

Hedging Position 

The Commission proposes to delete 

§ 1.3(z), the current definition of ‘‘bona 

fide hedging transactions or positions,’’ 

and replace it with a new definition of 

‘‘bona fide hedging position’’ in 

§ 150.1.270 Section 4a(c)(1) of the Act, as 

added by the Dodd-Frank Act, 

authorizes the Commission to define 

bona fide hedging positions ‘‘consistent 

with the purposes of this Act.’’ 271 The 

proposed definition of bona fide 

hedging position builds on the 

Commission’s history, both in 

administering a regulatory exemption to 

federal limits and in providing guidance 

to exchanges in establishing exchange 

limits, and is grounded for physical 

commodities on the new requirements 

in section 4a(c)(2) of the Act, as 

amended by section 737 of the DoddFrank Act in July 2010.272

Organization. The proposed 

definition of bona fide hedging position 

is organized into six sections: an 

opening paragraph with two general 

requirements for all hedges; and five 

numbered paragraphs (paragraphs (1)– 

(5)). Paragraph (1) of the proposed 

definition sets forth requirements for 

hedges of an excluded commodity, and 

incorporates guidance on risk 

management exemptions that may be 

adopted by an exchange.273 Paragraph 

(2) lists requirements for hedges of a 

physical commodity. Paragraphs (3) and 

(4) list enumerated exemptions. 

Paragraph (5) specifies the requirements 

for cross-commodity hedges. 

c. General Requirements for All Bona 

Fide Hedges—Opening Paragraph 

The opening paragraph of the 

proposed definition sets forth two 

general requirements for any legitimate 

hedging position: (i) The purpose of the 

position must be to offset price risks 

incidental to commercial cash 

operations (the ‘‘incidental test’’); and 


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274 In relevant part, current § 1.3(z)(1) provides: 

‘‘Notwithstanding the foregoing, no transaction or 

position shall be classified as bona fide hedging for 

purposes of section 4a of the Act unless their 

purpose is to offset price risks incidental to 

commercial cash or spot operations and such 

position are established and liquidated in an 

orderly manner in accordance with sound 

commercial practices and [unless other] provisions 

[of this definition] have been satisfied.’’ 17 CFR 

1.3(z)(1). The second characteristic was contained 

in vacated § 151.5(a)(1)(v). 

275See, Clarification of Certain Aspect of the 

Hedging Definition, 52 FR 27195, Jul. 20, 1987 (July 

1987 interpretative statement). 

276 7 U.S.C. 6a(c)(1). 

277The incidental test was not contained in 

vacated § 151.5(a)(1). This omission was not 

discussed in the preambles to the proposed or final 

rule. However, the incidental test was retained in 

amended § 1.3(z)(1) for excluded commodities. 76 

FR at 71683. 

278Compare, section 4c(a)(5)(B) of the Act, which 

makes it unlawful for any person to engage in any 

trading, practice, or conduct on or subject to the 

rules of a registered entity that, for example, 

demonstrates intentional or reckless disregard for 

the orderly execution of transactions during the 

closing period. 7 U.S.C. 6c(a)(5)(B). Section 4c(a)(6) 

of the Act authorizes the Commission to promulgate 

such ‘‘rules and regulations as, in the judgment of 

the Commission, are reasonable necessary to 

prohibit . . . any other trading practice that is 

disruptive of fair and equitable trading.’’ 7 U.S.C. 

6c(a)(6). 

279See sections 4a(3)(B)(i) and (iv) of the Act. 7 

U.S.C. 6a(3)(B)(i) and (iv). 

280See Interpretive Guidance and Policy 

Statement on Antidisruptive Practices Authority, 78 

FR 31890, 31895–96 (May 28, 2013) (available at 

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

lrfederalregister/documents/file/2013-12365a.pdf). 

281 ‘‘Excluded commodity’’ is defined in section 

1a(19) of the Act. 7 U.S.C. 1a(19). 

282See the discussion below of proposed 

§ 150.5(b)(5), requiring exchange hedge exemptions 

to exchange limits on contracts in an excluded 

commodity to conform to the definition of bona fide 

hedging position in § 150.1. The Dodd-Frank Act 

expanded the authority of the Commission with 

respect to core principles applicable to exchange 

traded contracts in an excluded commodity, but did 

not address directly the definition of bona fide 

hedging positions for excluded commodities. The 

Dodd-Frank Act amended the core principles for 

DCMs and established core principles for SEFs, 

authorizing the Commission, by rule or regulation, 

to restrict the reasonable discretion of the exchange 

in complying with core principles. 7 U.S.C. 

7(d)(1)(B) and 7b–3(f)(1)(B). 

283See, e.g., the definition of bona fide hedging 

promulgated by the Commission’s predecessor in 

§ 1.3(z) of its regulations in 1975. 40 FR 11560, 

11561, Mar. 12, 1975 (‘‘Bona fide hedging 

transactions or positions . . . shall mean sales of or 

short positions in any commodity for future 

delivery . . . ,’’ (emphasis added)). 

284The Commission adopted this requirement in 

§ 1.3(z)(1) in 1977. 42 FR 42748, 42751, Aug. 24, 

1977. Prior to that time, the concept of 

economically appropriate to the reduction of risk in 

Continued 

(ii) the position must be established and 

liquidated in an orderly manner in 

accordance with sound commercial 

practices (the ‘‘orderly trading 

requirement’’). These general 

requirements are found in current 

§ 1.3(z)(1).274

Incidental test. Consistent with its 

prior interpretation of the incidental test 

under § 1.3(z)(1), discussed above, the 

Commission intends the proposed 

incidental test to be a requirement that 

the risks offset by a commodity 

derivative contract hedging position 

must arise from commercial cash market 

activities.275 The Commission believes 

this requirement is consistent with the 

statutory guidance to define bona fide 

hedging positions to permit hedging 

‘‘legitimate anticipated business 

needs.’’ 276 In the absence of a 

requirement for a legitimate business 

need, the Commission believes it would 

be difficult to distinguish between 

hedging and speculative activities. The 

Commission believes the concept of 

commercial cash market activities is 

also embodied in the economically 

appropriate test for physical 

commodities in section 4a(c)(2) of the 

Act, discussed below. The proposed 

incidental test amends the incidental 

test in current § 1.3(z)(1) by clarifying 

that forward commercial operations may 

also serve as the basis for a bona fide 

hedging position.277 This is consistent 

with the Commission’s long-standing 

recognition of fixed-price purchase and 

fixed-price sales contracts (which may 

specify forward delivery dates) as the 

basis of certain enumerated hedges in 

current § 1.3(z)(2). 

Orderly trading requirement. The 

proposed orderly trading requirement is 

intended to impose on bona fide 

hedgers a duty of ordinary care when 

entering, maintaining and exiting the 

market in the ordinary course of 

business and in order to avoid as 

practicable the potential for significant 

market impact in establishing, 

maintaining or liquidating a position in 

excess of position limitations.278 The 

Commission believes the proposed 

orderly trading requirement is 

consistent with the policy objectives of 

position limits to diminish, eliminate or 

prevent excessive speculation and to 

ensure that the price discovery function 

of the underlying market is not 

disrupted.279 The Commission believes 

the orderly trading requirement is 

particularly important since the 

Commission intends to set the initial 

levels of position limits at the outer 

bound of the range of levels of position 

limits that may serve to maximize the 

statutory policy objectives. Thus, bona 

fide hedgers likely would only need an 

exemption for extraordinarily large 

positions. 

The Commission believes that 

negligent trading, practices, or conduct 

should be a sufficient basis for the 

Commission to disallow a bona fide 

hedging exemption. The Commission 

believes that an evaluation of ‘‘orderly 

trading’’ should be based on the totality 

of the facts and circumstances as of the 

time the person engaged in the relevant 

trading, practices, or conduct—i.e., the 

Commission intends to consider 

whether the person knew or should 

have known, based on the information 

available at the time, he or she was 

engaging in the conduct at issue. 

The Commission proposes to apply its 

policy regarding orderly markets for 

purposes of the disruptive trading 

practice prohibitions, to its orderly 

trading requirement for purposes of 

position limits. ‘‘The Commission’s 

policy is that an orderly market may be 

characterized by, among other things, 

parameters such as a rational 

relationship between consecutive 

prices, a strong correlation between 

price changes and the volume of trades, 

levels of volatility that do not 

dramatically reduce liquidity, accurate 

relationships between the price of a 

derivative and the underlying such as a 

physical commodity or financial 

instrument, and reasonable spreads 

between contracts for near months and 

for remote months.’’ 280 Further, in 

fulfilling their duty of ordinary care 

when entering, maintaining and exiting 

a position, market participants should 

assess market conditions and consider 

how their trading practices and conduct 

affect the orderly execution of 

transactions when establishing, 

maintaining or liquidating a position in 

excess of a speculative position limit. 

d. Requirements and Guidance for 

Hedges in an Excluded Commodity— 

Paragraph (1) 

The proposed definition of bona fide 

hedging position for contracts in an 

excluded commodity 281 includes the 

general requirements in the opening 

paragraph and would require that the 

position is economically appropriate to 

the reduction of risks in the conduct 

and management of a commercial 

enterprise (the ‘‘economically 

appropriate’’ test) and is either (i) 

specifically enumerated in paragraphs 

(3)–(5) of the definition of bona fide 

hedging position; or (ii) recognized as a 

bona fide hedging position by a DCM or 

SEF consistent with the guidance on 

risk management exemptions in 

proposed appendix A to part 150.282

The economically appropriate test in 

section 4a(c)(2) of the Act, applicable to 

physical commodities, also should 

apply to excluded commodities because 

it has long been a fundamental 

requirement of a bona fide hedging 

position.283 Current § 1.3(z)(1) contains 

the economically appropriate test.284


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the operation of a commercial enterprise was not 

separately articulated, but was reflected in the 

incidental test (‘‘unless their bona fide purpose is 

to offset price risks incidental to commercial cash 

or spot operations’’) in § 1.3(z)(1) as amended in 

1975. 40 FR 11560, 11561, Mar. 12, 1975. Current 

§ 150.5(d) provides guidance to DCMs that 

exchange regulations for bona fide hedging position 

exemptions (including exemptions for excluded 

commodity contracts) should be granted in 

accordance with current § 1.3(z)(1). 17 CFR 150.5(d) 

See, for example, Chicago Mercantile Exchange 

Rule 559.A., Bona Fide Hedging Positions, available 

at http://www.cmegroup.com/rulebook/CME/I/5/

5.pdf, that provides: ‘‘The Market Regulation 

Department may grant exemptions from position 

limits for bona fide hedge positions as defined by 

CFTC Regulation § 1.3(z)(1). Approved bona fide 

hedgers may be exempted from emergency orders 

that reduce position limits or restrict trading.’’ 

285Prior to 1974, section 4a of the Act defined 

bona fide hedging transactions as: ‘‘For the 

purposes of this paragraph, bona fide hedging 

transactions shall mean sales of any commodity for 

future delivery on or subject to the rules of any 

board of trade to the extent that such sales are offset 

in quantity by the ownership or purchase of the 

same cash commodity or, conversely, purchases of 

any commodity for future delivery on or subject to 

the rules of any board of trade to the extent that 

such purchases are offset by sales of the same cash 

commodity.’’ 7 U.S.C. 6a (1940). 

286 52 FR 34633, Sep. 14, 1987. 

287 Id. at 34626. 

288 52 FR 27195, Jul. 20, 1987 (July 1987 

Interpretative Statement). See also House of 

Representatives Committee Report quoted at 52 FR 

34633, 34634, September 14, 1987, regarding 

‘‘futures positions taken as alternatives rather than 

temporary substitutes for cash market positions.’’ 

H.R. Rep No. 624, 99th Cong., 2d Sess. 1, 45–46 

(1986). However, the Commission is proposing to 

withdraw the July 1987 Interpretative Statement, 

since the temporary substitute test was added by 

the Dodd-Frank Act as a statutory requirement for 

a bona fide hedging position in a physical 

commodity. 7 U.S.C. 4a(c)(2)(A)(i). 

289 7 U.S.C. 6a(c)(2). 

290This is consistent with the approach the 

Commission took in vacated § 151.5. 76 FR 71643 

n.168. 

291 7 U.S.C. 6a(a)(5)–(6). 

292 7 U.S.C. 6a(c)(2)(A)(i). 

The Commission notes that the concept 

of the reduction of risk was long 

embodied in the statutory concept of 

‘‘offset’’ prior to 1974.285 The 

economically appropriate test is 

discussed further, below. 

Under the proposed definition, an 

exchange would be permitted to grant 

an exemption based on its rules that 

were consistent with the enumerated 

exemptions in paragraphs (3)–(5) of the 

proposed definition of bona fide 

hedging position. Current § 1.3(z)(1) also 

requires a bona fide hedging position to 

be either (i) an enumerated exemption 

in current § 1.3(z)(2) or (ii) a nonenumerated exemption under current 

§ 1.3(z)(3) (a non-enumerated exemption 

may be granted under current § 1.47 as 

a risk management exemption). The 

enumerated exemptions in paragraphs 

(3)–(5) of the proposed definition of 

bona fide hedging position contain all of 

the enumerated exemptions in current 

§ 1.3(z)(2). The specifically enumerated 

exemptions also are discussed 

separately, below. 

The Commission is proposing to 

incorporate as guidance in appendix A 

to part 150 the concepts in the 1987 risk 

management exemptions interpretative 

statement.286 The Commission believes 

that it would be consistent with the 

objectives of section 4a of the Act for 

exchange rules to exempt from 

speculative limits a number of risk 

management positions in commodity 

derivative contracts in an excluded 

commodity. Such risk management 

exemption positions would include, but 

not be limited to, three types of 

exemptions for: (i) Unleveraged long 

positions (covered by cash set aside); (ii) 

short calls on securities or currencies 

owned (i.e., covered calls); and (iii) long 

positions in asset allocation strategies 

covered by hedged debt securities or 

currencies owned (i.e., unleveraged 

synthetic positions).287 The Commission 

is proposing to withdraw the 1987 risk 

management exemption interpretative 

statement in light of incorporating its 

concepts in proposed appendix A to 

part 150, thus rendering that 

interpretative statement redundant. The 

Commission requests comment on all 

aspects of proposed appendix A to part 

150. 

In addition, under the proposed 

guidance for excluded commodities and 

as is currently the case, there need not 

be any temporary substitute test for a 

bona fide hedging position in an 

excluded commodity. This is consistent 

with the Commission’s July 1987 

interpretative statement that the 

temporary substitute component need 

not apply to a bona fide hedging 

position in an excluded commodity.288

e. Requirements for Hedges in a 

Physical Commodity—Paragraph (2) 

The Commission is proposing to 

implement the statutory directive of 

section 4a(c)(2) of the Act in paragraph 

(2) of the proposed definition of bona 

fide hedging position under § 150.1. The 

proposed definition for physical 

commodities would also include the 

general requirements of the opening 

paragraph, as is the case under current 

§ 1.3(z)(1) and as discussed above. 

Section 4a(c)(2) of the Act directs the 

Commission to define what constitutes 

a bona fide hedging position for futures 

and option contracts on physical 

commodities listed by DCMs.289 The 

Commission proposes to apply the same 

definition to (i) swaps that are 

economically equivalent to futures 

contracts and (ii) direct-access linked 

FBOT futures contracts that are 

economically equivalent to futures 

contracts listed by DCMs.290 Applying 

the same definition to economically 

equivalent contracts would promote 

administrative efficiency. Applying the 

same definition to economically 

equivalent contracts also is consistent 

with congressional intent as embodied 

in the expansion of the Commission’s 

authority to apply position limits to 

swaps (i.e., those that are economically 

equivalent to futures and swaps that 

serve a significant price discovery 

function) and to direct-access linked 

FBOT contracts.291

Paragraph (2)(i) of the proposed 

definition would recognize as bona fide 

a position in a commodity derivative 

contract that (i) represents a substitute 

for positions taken or to be taken at a 

later time in the physical marketing 

channel (i.e., the ‘‘temporary substitute’’ 

test); (ii) is economically appropriate to 

the reduction of risks (i.e., the 

‘‘economically appropriate’’ test); and 

(iii) arises from the potential change in 

value of assets, liabilities or services 

(i.e., the ‘‘change in value’’ 

requirement), provided the position is 

enumerated in paragraphs (3) through 

(5) of the definition, as discussed below. 

This subparagraph would incorporate 

the provisions of section 4a(c)(2)(A) of 

the Act for futures and option contracts 

and also would include the provisions 

of section 4a(c)(2)(B)(ii) of the Act, 

regarding swaps, by using the term 

commodity derivative contracts, which 

includes swaps, futures and futures 

option contracts. 

Temporary substitute test. The 

temporary substitute test requires that a 

bona fide hedging position must 

represent ‘‘a substitute for . . . positions 

taken or to be taken at a later time in 

a physical marketing channel.’’ 292

Paragraph (2)(i) of the proposed 

definition incorporates the temporary 

substitute test of section 4a(c)(2)(A)(i) of 

the Act. The express language of section 

4a(c)(2)(A)(i) of the Act requires the 

temporary substitute test to be a 

necessary condition for classification of 

positions in physical commodities as 

bona fide hedging positions. Section 

4a(c)(2)(A) of the Act incorporates many 

aspects of the general definition of bona 

fide hedging in current § 1.3(z)(1). 

However, there are significant 

differences. Section 4a(c)(2)(A)(i) of the 

Act does not include the adverb 

‘‘normally’’ to modify the verb 

‘‘represents’’ in the phrase ‘‘represents a 

substitute for transactions made or to be 

made or positions taken or to be taken 

at a later time in a physical marketing 


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293 In contrast and as noted above, in current 

§ 1.3(z)(1), the phrase ‘‘where such transactions or 

positions normally represent a substitute for 

transactions to be made or positions to be taken at 

a later time in a physical marketing channel’’ has 

been termed the ‘‘temporary substitute’’ criterion. 

(Emphasis added.) 

294 52 FR 38914, 38920, Oct. 20, 1987. 295 42 FR 14832, 14834, Mar. 16, 1977. 

296See current § 19.00(b)(1) (providing that ‘‘[i]f 

the regular business practice of the reporting trader 

is to exclude certain products or byproducts in 

determining his cash position for bona fide hedging 

. . . , the same shall be excluded in the report’’). 

17 CFR 19.00(b)(1). 

297 43 FR 45825, 45827, Oct. 4, 1978 (explaining 

that the allowance for eggs not kept in cold storage 

to be excluded from reporting a cash position in 

eggs under part 19 ‘‘was appropriate when the only 

futures contract being traded in fresh shell eggs 

required delivery from cold storage warehouses.’’). 

298See id. Prior to the Commission’s revision of 

the part 19 reporting exclusion for eggs, the 

exclusion allowed ‘‘eggs not in cold storage or 

certain egg products’’ not to be reported as a cash 

position. 26 FR 2971, Apr. 7, 1961 (emphasis 

added). Additionally, the title to the revised 

exclusion read, ‘‘Excluding products or byproducts 

of the cash commodity hedged.’’ See 43 FR 45825, 

45828 (Oct. 4, 1978). So, in addition to a 

commodity itself that was not deliverable under any 

derivative contract, the Commission also recognized 

a separate class of ‘‘products and byproducts’’ that 

resulted from the processing of a commodity that 

it did not believe at the time were capable of being 

hedged by any derivative contract for purposes of 

a bona fide hedge. 

299See 42 FR 42748, Aug. 24, 1977. Crosscommodity hedging is discussed as an enumerated 

hedge, below. 

channel.’’ 293 In addition, Congress 

provided explicit requirements for 

recognizing swaps as bona fide hedging 

positions in section 4a(c)(2)(B), 

recognizing positions that reduce either 

the risk of swaps that meet the 

requirements of section 4a(c)(2)(A) of 

the Act or swaps that are executed 

opposite a counterparty whose 

transaction would qualify as bona fide 

under section 4a(c)(2)(A) of the Act. The 

statutory requirements are more 

stringent than the conditions for swap 

risk management exemptions the 

Commission previously granted under 

§ 1.3(z)(3) and § 1.47. As discussed 

above, the Commission granted risk 

management exemptions for persons to 

offset the risk of swaps that did not 

represent substitutes for transactions or 

positions in a physical marketing 

channel, neither by the intermediary nor 

the counterparty. Thus, positions that 

reduce the risk of such speculative 

swaps would no longer meet the 

requirements for a bona fide hedging 

transaction or position under the new 

statutory criteria. 

Economically appropriate test. 

Paragraph (2)(A)(ii) of the proposed 

definition incorporates the 

economically appropriate test of section 

4a(c)(2)(A)(ii) of the Act. This statutory 

provision mirrors the provisions in 

current § 1.3(z)(1). The Commission has 

provided interpretations and guidance 

over the years as to the meaning of 

‘‘economically appropriate’’ in current 

§ 1.3(z)(1). For example, the 

Commission has indicated that hedges 

of processing margins by a processor, 

such as a soybean processor that 

establishes long positions in the 

soybean contract and short positions in 

the soybean meal contact and the 

soybean oil contract, may be 

economically appropriate.294

By way of example, a manufacturer 

may anticipate using a commodity that 

it does not own as an input to its 

manufacturing process; however, the 

manufacturer expects to change output 

prices to offset substantially a change in 

price of the input commodity. For 

example, processing by a soybean crush 

operation or a fuel blending operation 

may add relatively little value to the 

price of the input commodity. In such 

circumstances, it would be 

economically appropriate for the 

processor to offset the price risks of both 

the unfilled anticipated requirement for 

the input commodity and the unsold 

anticipated production; such a hedge 

would, for example, fully lock in the 

value of soybean crush processing. 

Alternatively, a processor may wish to 

establish a calendar month hedge solely 

in terms of the input commodity, to 

offset the price risk of the anticipated 

input commodity and to crosscommodity hedge the unsold 

anticipated production. In such an 

alternative, a processor has hedged the 

commercial enterprise’s exposure to the 

value of the input commodity at the 

expected time of acquisition and to the 

input commodity’s value component of 

the processed commodity at the 

expected later time of production and 

sale. Unfilled anticipated requirements, 

unsold anticipated production and 

cross-commodity hedging are also 

discussed as enumerated hedges, below. 

The Commission affirms that gross 

hedging may be appropriate under 

certain circumstances, when net cash 

positions do not measure total risk 

exposure due to differences in the 

timing of cash commitments, the 

location of stocks, and differences in 

grades or types of the cash commodity 

being hedged.295 By way of example, a 

merchant may have sold a certain 

quantity of a commodity for deferred 

delivery in the current year (i.e., a fixedprice cash sales contract) and purchased 

that same quantity of that same 

commodity for deferred receipt in the 

next year (i.e., a fixed-price cash 

purchase contract). Such a merchant 

would be exposed to value risks in the 

two cash contracts arising from different 

delivery periods (that is, from a timing 

difference). Thus, although the 

merchant has bought and sold the same 

quantity of the same commodity, the 

merchant may elect to offset the price 

risk arising from the cash purchase 

contract separately from the price risk 

arising from the cash sales contract, 

with each offsetting commodity 

derivative contract regarded as a bona 

fide hedging position. However, if such 

a merchant were to offset only the cash 

purchase contract, but not the cash sales 

contract (or vice versa), then it 

reasonably would appear the offsetting 

commodity derivative contract would 

result in an increased value exposure of 

the enterprise (that is, the risk of 

changes in the value of the cash 

commodity contract that was not offset 

is likely to be higher than the risk of 

changes in the value of the calendar 

spread difference between the nearby 

and deferred delivery period) and, so, 

the commodity derivative contract 

would not qualify as a bona fide 

hedging position. 

In order for a position to be 

economically appropriate to the 

reduction of risks in the conduct and 

management of a commercial enterprise, 

the enterprise generally should take into 

account all inventory or products that 

the enterprise owns or controls, or has 

contracted for purchase or sale at a fixed 

price. For purposes of reporting cash 

market positions under current part 19, 

the Commission historically has 

allowed a reporting trader to ‘‘exclude 

certain products or byproducts in 

determining his cash positions for bona 

fide hedging’’ if it is ‘‘the regular 

business practice of the reporting 

trader’’ to do so.296 The Commission has 

determined to clarify the meaning of 

‘‘economically appropriate’’ in light of 

this reporting exclusion of certain cash 

positions. 

Originally, the Commission intended 

for the optional part 19 reporting 

exclusion to cover only cash positions 

that were not capable of being delivered 

under the terms of any derivative 

contract.297 The Commission 

differentiated between ‘‘products and 

byproducts’’ of a commodity and the 

underlying commodity itself, the former 

capable of exclusion from part 19 

reporting under normal business 

practices due to the absence of any 

derivative contract in such product or 

byproduct.298 This intention ultimately 

evolved to allow cross-commodity 

hedging of products and byproducts of 

a commodity that were not necessarily 

deliverable under the terms of any 

derivative contract.299


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300Compare 7 U.S.C. 6a(c)(2)(A)(iii) and 17 CFR 

1.3(z)(1). Note that § 1.3(z)(1)(ii) uses the phrase 

‘‘liabilities which a person owes or anticipate 

incurring,’’ while section 4a(c)(2)(A)(iii)(II) uses the 

phrase ‘‘liabilities that a person owns or anticipates 

incurring.’’ (Emphasis added.) The Commission 

interprets the word ‘‘owns’’ to be an error and the 

word ‘‘owes’’ to be correct. 

301The Commission interprets the statutory 

provision that requires that ‘‘the transaction would 

qualify as a bona fide hedging transaction’’ to mean 

the swap position at the time of the transaction 

would qualify as a bona fide hedging position. 7 

U.S.C. 6a(c)(2)(B)(i). 

302This is consistent with netting permitted in 

vacated § 151.4(b) of swaps with futures for 

purposes of single-month and all-months-combined 

limits. The Commission noted in that final 

rulemaking that it did ‘‘not believe that including 

a risk management provision is necessary or 

appropriate given that the elimination of the class 

limits outside of the spot-month will allow entities, 

including swap dealers, to net Referenced Contracts 

whether futures or economically equivalent swaps.’’ 

76 FR at 71644. 

303 42 FR 42748, Aug. 24, 1977. 

304 Id. 42749. 

305Compare 76 FR at 71690. Vacated 

§ 151.5(a)(2)(3) recognized a pass-through swap 

offset during the spot period as an exception to the 

five-day rule if the ‘‘pass-through swap position 

continues to offset the cash market commodity 

price risk of the bona fide hedging counterparty.’’ 

Based on a review of open positions in physicaldelivery futures contracts, the Commission no 

longer believes it necessary to recognize offsets of 

swaps in the last few days of the expiring physicaldelivery contract and has not provided this 

additional provision in the current proposal. 

Rather, the Commission has decided to forego this 

exception to the five-day rule in the interest of 

ensuring that the price discovery function of the 

underlying market is not disrupted during the last 

few days of the spot period. Further, the 

Commission believes it would have been 

administratively burdensome for a trader to 

demonstrate that its counterparty continued to have 

a bona fide hedging need through the spot period. 

306The Commission also relies upon the 

congressional shift evidenced in the Dodd-Frank 

Act amendments to the CEA, that directed the 

Commission, to the maximum extent practicable, in 

its discretion, (i) to diminish, eliminate, or prevent 

excessive speculation, (ii) to deter and prevent 

market manipulation, squeezes, and corners, (iii) to 

ensure sufficient market liquidity for bona fide 

hedgers, and (iv) to ensure that the price discovery 

function of the underlying market is not disrupted. 

7 U.S.C. 6a(a)(3)(B). The five-day rule would serve 

to prevent excessive speculation as a physicaldelivery contract nears expiration, thereby deterring 

or preventing types of market manipulations such 

as squeezes and corners and protecting the price 

discovery function of the market. The restriction of 

the five-day rule does not appear to deprive the 

market of sufficient liquidity for bona fide hedgers. 

The instructions to current Form 204 

go a step further than current 

§ 19.00(b)(1) by allowing for a reporting 

trader to exclude ‘‘certain source 

commodities, products, or byproducts in 

determining [ ] cash positions for bona 

fide hedging.’’ (Emphasis added.) In line 

with its historical approach to the 

reporting exclusion, the Commission 

does not believe that it would be 

economically appropriate to exclude 

large quantities of a source commodity 

held in inventory when an enterprise is 

calculating its value at risk to a source 

commodity and it intends to establish a 

long derivatives position as a hedge of 

unfilled anticipated requirements. As 

explained in the revisions to part 19, 

discussed below, a source commodity 

itself can only be excluded from a 

calculation of a cash position if the 

amount is de minimis, impractical to 

account for, and/or on the opposite side 

of the market from the market 

participant’s hedging position. 

Change in value requirement. 

Paragraph (2)(A)(iii) of the proposed 

definition incorporates the potential 

change in value requirement of section 

4a(c)(2)(A)(iii) of the Act. This statutory 

provision largely mirrors the provisions 

in current § 1.3(z)(1).300 The 

Commission notes that it uses the term 

‘‘price risk’’ to mean a ‘‘potential change 

in value.’’ To satisfy the change in value 

requirement, the purpose of a bona fide 

hedge must be to offset price risks 

incidental to a commercial enterprise’s 

cash operations. The change in value 

requirement is embedded in the concept 

of offset of price risks. 

Pass-through Swaps and Offsets. 

Subparagraph (2)(B) of the proposed 

definition would recognize as bona fide 

a commodity derivative contract that 

reduces the risk of a position resulting 

from a swap executed opposite a 

counterparty for which the position at 

the time of the transaction would 

qualify as a bona fide hedging position 

under subparagraph (2)(A). This 

provision generally mirrors the 

provisions of section 4a(c)(2)(B)(i) of the 

Act,301 and clarifies that the swap itself 

is also a bona fide hedging position to 

the extent it is offset. However, the 

Commission is proposing that it will not 

recognize as bona fide hedges the offset 

of such swaps with physical-delivery 

contracts during the lesser of the last 

five days of trading or the time period 

for the spot month in such physicaldelivery commodity derivative contract 

(the ‘‘five-day’’ rule). 

The Commission is proposing to use 

its exemptive authority under section 

4a(a)(7) of the Act to net positions in 

futures, futures options, economically 

equivalent swaps and direct-access 

linked FBOT contracts in the same 

referenced contract for purposes of 

single month and all-months-combined 

limits under proposed § 150.2, 

discussed below.302 Thus, a passthrough swap exemption would not be 

necessary for a swap portfolio in 

referenced contracts that would 

automatically be netted with futures and 

futures options in the same referenced 

contract outside of the spot month 

under the proposed rules. The 

Commission historically has permitted 

non-enumerated risk management 

positions under § 1.3(z)(3) and § 1.47. 

Almost all exemptions historically 

requested and granted under these 

provisions were for risk management of 

swap positions related to the 

agricultural commodities subject to 

federal position limits under part 150. 

As noted above, the proposed rule 

would impose a five-day rule during the 

spot-month. In the risk management 

exemptions for swaps issued to date by 

the Commission under current 

§ 1.3(z)(3) and § 1.47, the exemptions for 

swap offsets did not run to the spot 

month. As discussed above, the 

Commission has long imposed a fiveday rule in current § 1.3(z)(2) for other 

exemptions. For example, for hedges of 

unfilled anticipated requirements, the 

Commission observed that historically 

there was a low utilization of this 

provision in terms of actual positions 

acquired in the futures market.303 For 

cross-commodity and short anticipatory 

hedge positions, the Commission did 

not believe that persons who do not 

possess or do not have a commercial 

need for the commodity for future 

delivery will normally wish to 

participate in the delivery process.304 In 

the instant cases of swaps, the 

Commission has observed generally low 

usage among all traders of the physicaldelivery futures contract during the spot 

month, relative to the existing exchange 

spot-month position limits.305 The 

Commission invites comments as to the 

extent to which traders actually have 

offset the risk of swaps during the spot 

month in a physical-delivery futures 

contract with a position in excess of an 

exchange’s spot-month position limit. 

The Commission has reviewed its 

historical policy position regarding the 

five-day rule for speculative limits in 

the spot month in light of position 

information, including positions in 

physical-delivery energy futures 

contracts.306 For example, the 

Commission reviewed three years of 

confidential large trader data in cashsettled and physical-delivery energy 

contracts. The review covered actual 

positions held in the physical-delivery 

energy futures markets during the threeday spot period, among all traders 

(including those who had received 

hedge exemptions from their DCM). It 

showed that, historically, there have 

been relatively few positions held in 

excess (and those few not greatly in 

excess) of the spot month limits. 

Accordingly, the Commission generally 

is not inclined to change its long-held 

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307Nevertheless, the Commission requests 

comment on whether the five-day rule should be 

waived for pass-through swaps and offsets in the 

event a position of the bona fide counterparty in the 

physical-delivery futures contract would have been 

recognized as a bona fide hedging position. If so, 

should a person be required to document the 

continuing bona fides of the counterparty to such 

swaps through the spot period, that is, in addition 

to the time of the transaction? Further, should a 

person also be required to have an unfixed-price 

forward contract with the bona fide counterparty, 

so that a person would have a bona fide need and 

ability to make or take delivery on the physicaldelivery futures contract, analogous to the agent 

provisions in proposed paragraph (3)(iv) of the 

definition of bona fide hedging position? 

308As authorized by CEA section 8(a)(1). 7 U.S.C. 

12(a)(1). 

309Marking the close refers to, among other 

things, the practice of acquiring a substantial 

position leading up to the closing period of trading 

in a futures contract, followed by offsetting the 

position before the end of the close of trading, in 

an attempt to manipulate prices in the closing 

period. 

310The Commission gathers large trader position 

reports on reportable traders in futures under part 

17 of the Commission’s rules. That data has 

historically remained confidential pursuant to CEA 

section 8. The Commission does, however, publish 

summary statistics for all-months-combined in its 

Commitments of Traders Report, available on 

http://www.cftc.gov/MarketReports/

CommitmentsofTraders/index.htm. 

311See 17 CFR 32.2; Commodity Options, 77 FR 

25320 (Apr. 27, 2012). 

312Additionally, the offeror can be an eligible 

contract participant (‘‘ECP’’) as defined in CEA 

section 1a(18). 

313The Commission noted in the preamble to the 

trade option exemption that in determining delivery 

intent, market participants could refer to the 

guidance provided for the forward contract 

exclusion in the Product Definition rulemaking. See 

77 FR at 25326. This guidance conveyed that the 

Commission’s ‘‘Brent Interpretation’’ is equally 

applicable to the forward exclusion from the swap 

definition as it was to the forward exclusion from 

the ‘‘future delivery’’ definition, which allows for 

subsequently, separately negotiated book-out 

transactions to qualify for the forward contract 

exclusion. See 77 FR 48208, 48228, Aug. 13, 2012 

(citing Statutory Interpretation Concerning Forward 

Transactions, 55 FR 39188, Sep. 25, 1990). 

314See 17 CFR 32.3(b)–(d). 

315 7 U.S.C. 6a(a)(7). 

316See the proposed § 150.1 definition of ‘‘bona 

fide hedge exemption’’ at paragraph (2)(ii). 

delivery futures contracts at this 

time.307

The Commission typically does not 

publish ‘‘general statistical 

information’’ 308 regarding large trader 

positions in the expiring physicaldelivery energy futures contracts 

because of concerns that such data may 

reveal information about the amount of 

market power a person may need to 

‘‘mark the close’’ 309 or otherwise 

manipulate the price of an expiring 

contract.310

f. Trade Option Exemption 

The Commission previously amended 

part 32 of its regulations to allow 

commodity options to trade subject to 

the same rules applicable to any other 

swap, unless the commodity option 

qualifies under the new § 32.3 trade 

option exemption.311 In order to qualify 

for the trade option exemption, (i) both 

offeror and offeree must be a producer, 

processor, or commercial user of, or 

merchant handling the commodity that 

is the subject of the commodity option 

transaction, or the products or 

byproducts thereof, and both offeror and 

offeree must be offering or entering into 

the commodity option transaction solely 

for purposes related to their business as 

such,312 and (ii) the option is intended 

to be physically settled such that, if 

exercised, the commodity option would 

result in the sale of an exempt or 

agricultural commodity for immediate 

or deferred shipment or delivery.313

Qualifying trade options are exempt 

from all requirements of the CEA and 

Commission’s regulations, except for 

certain enumerated provisions, 

including position limits.314

The Commission is making 

conforming changes to the trade option 

exemption requirement that position 

limits still apply. Under § 32.3(c)(2), 

‘‘Part 151 (Position Limits)’’ of the 

Commission’s regulations applies to 

every counterparty to a trade option ‘‘to 

the same extent that [part 151] would 

apply to such person in connection with 

any other swap.’’ The Commission is 

replacing the reference to ‘‘Part 151,’’ 

now vacated, with ‘‘Part 150’’ to clarify 

that the position limit requirements 

proposed herein still would be 

applicable to trade options qualifying 

under the exemption. 

The Commission also is requesting 

comment as to whether the Commission 

should use its exemptive authority 

under CEA section 4a(a)(7) 315 to 

provide that the offeree of a commodity 

option qualifying for the trade option 

exemption would be presumed to be a 

‘‘pass-through swap counterparty’’ for 

purposes of the offeror of the trade 

option qualifying for the pass-through 

swap offset.316 Although the 

Commission is proposing generally to 

net futures and swaps in reference 

contracts in the same commodity under 

proposed § 150.2, as discussed below, 

the Commission notes that crosscommodity offsets of pass-through 

swaps would not be recognized unless 

the counterparty to the swap is a bona 

fide hedger. Would this presumption 

help offerors determine the 

appropriateness of carrying out crosscommodity hedge transactions? 

In addition, the Commission requests 

comments on whether adopting such a 

presumption might allow use of the 

exemption to evade Commission rules 

pertaining to swap transactions. Should 

the Commission adopt an anti-evasion 

provision to address this concern? 

Furthermore, might some additional 

safeguards be included to allow the 

Commission to provide administrative 

simplicity through use of the 

presumption, while also limiting use of 

the presumption to evade other 

regulations? 

Further, the Commission requests 

comment on whether it would be 

appropriate to exclude trade options 

from the definition of referenced 

contracts and, thus, to exempt trade 

options from the proposed position 

limits. If trade options were excluded 

from the definition of reference 

contracts, then commodity derivative 

contracts that offset the risk of trade 

options would not automatically be 

netted with such trade options for 

purposes of non-spot month position 

limits. The Commission notes that 

forward contracts are not subject to the 

proposed position limits; however, 

certain forward contracts may serve as 

the basis of a bona fide hedging position 

exemption, e.g., an enumerated bona 

fide hedging position exemption is 

available for the offset of the risk of a 

fixed price forward contract with a short 

futures position. Should the 

Commission include trade options as 

one of the enumerated exemptions (e.g., 

proposed paragraphs (3)(ii) and (iii) of 

the definition of bona fide hedging 

position under proposed § 150.1)? As an 

alternative to excluding trade options 

from the definition of referenced 

contract, should the Commission 

provide an exemption under CEA 

section 4a(a)(7) that permits the offeree 

or offeror to submit a notice filing to 

exclude their trade options from 

position limits? If so, why and under 

what circumstances? Are there any 

other characteristics of trade options or 

the parties to trade options that the 

Commission should consider? Would 

any of these alternatives permit 

commodity options that should be 

regulated as swaps to circumvent the 

protections established in the DoddFrank Act for the forward contract 

exclusion for non-financial 

commodities? 

g. Enumerated Hedges—Paragraphs 

(3)–(5). 

Proposed paragraph (1)(i) would 

require a bona fide hedging position in 

an excluded commodity to be 

enumerated under paragraphs (3), (4), or 

(5) of the definition or to be granted an 

exemption under exchange rules 

consistent with the risk management 

guidance of appendix A to part 150. 

Proposed paragraph (2)(i)(D) would 

require a bona fide hedging position in 


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317 44 FR 7124, Feb. 6, 1979. 

318The statutory definition of bona fide hedging 

in section 4a(3) of the Act (prior to the CFTC Act 

of 1974) used the terms ‘‘sales of any commodity 

for future delivery . . . to the extent that such sales 

are offset in quantity by the ownership or purchase 

of the same cash commodity’’ and ‘‘purchases of 

any commodity for future delivery . . . to the 

extent that such purchases are offset by sales of the 

same cash commodity.’’ 7 U.S.C. 6a(3) (1940). 

Following enactment of the CFTC Act, the Secretary 

of Agriculture’s initial proposed definition of bona 

fide hedging transactions or positions makes clear 

this understanding, as that definition provided, in 

relevant part, for ‘‘sales of, or short positions in any 

commodity for future delivery . . . to the extent 

that such sales or short positions are offset in 

quantity by the ownership or fixed-price purchase 

of the same cash commodity’’ and for ‘‘purchases 

of, or long positions in, any commodity for future 

delivery . . . to the extent that such purchases or 

long positions are offset by fixed-price sales of the 

same cash commodity. . . .’’ 39 FR 39731, Nov. 11, 

1974. The Commission adopted that same language 

in its initial definition of bona fide hedging 

transactions or positions. 40 FR 48688, 48689, Oct. 

17, 1975. In both the proposed and final rules in 

1977, the Commission was silent as to why it 

omitted the clarifying phrases ‘‘long positions’’ and 

‘‘short positions.’’ Proposed Rule, 42 FR 14832, 

Mar. 16, 1977; Final Rule, 42 FR 42748, Aug. 24, 

1977. 

a physical commodity to be enumerated 

under paragraphs (3), (4), or (5) of the 

definition. The Commission has 

historically enumerated acceptable bona 

fide hedging positions in § 1.3(z)(2) for 

physical commodities. Each of the 

enumerated provisions is discussed 

below. For convenience, the 

Commission is providing a summary 

comparison of the various provisions of 

the proposed rule, vacated part 151, and 

current rules, in Table 4 below. 

TABLE 4—PROPOSED, CURRENT, AND VACATED ENUMERATED BONA FIDE HEDGES

Cash position underlying bona fide 

hedging position 

Paragraph in proposed definition 

of bona fide hedging position 

under § 150.1 and related 

provisions 

Current § 1.3(z) and related 

provisions Vacated part 151 definition 

Inventory and fixed-price cash commodity purchase contracts.(3)(i) .............................................. 1.3(z)(2)(i)(A) ................................ 151.5(a)(2)(i)(A). 

Fixed-price cash commodity sales 

contracts.

(3)(ii) ............................................. 1.3(z)(2)(ii)(A) and (B) .................. 151.5(a)(2)(ii)(A) and (B). 

Unfilled anticipated requirements 

for same cash commodity.

(3)(C)(i) ......................................... 1.3(z)(2)(ii)(C) ............................... 151.5(a)(2)(ii)(C). 

Unfilled anticipated requirements 

for resale by a utility.

(3)(C)(ii) ........................................ N/A ............................................... N/A. 

Hedges by agents ........................... (3)(iv) ............................................ 1.3(z)(3) ........................................

Discussed as example of nonenumerated hedge.

151.5(a)(2)(iv). 

Unsold anticipated production ......... (4)(i) .............................................. 1.3(z)(2)(i)(B) ................................ 151.5(a)(2)(i)(B). 

Offsetting unfixed-price cash commodity sales and purchases.(4)(ii) .............................................

Scope expanded in comparison 

to part 151.

1.3(z)(2)(iii) ................................... 151.5(a)(2)(iii). 

Anticipated royalties ........................ (4)(iii) ............................................

Scope reduced in comparison to 

part 151 to ownership of royalties.

N/A ............................................... 151.5(a)(2)(vi). 

Services ........................................... (4)(iv) ............................................ N/A ............................................... 151.5(a)(2)(vii). 

Cross-commodity hedges ............... (5) .................................................

Scope expanded to permit crosshedge of pass-through swap in 

comparison to part 151.

1.3(z)(2)(iv) ................................... 151.5(a)(2)(viii). 

Pass-through swap offset ............... (2)(ii)(A) ........................................ 1.3(z)(3) and 1.47 ........................

Non-enumerated exemption for 

futures used in risk management of swaps.

151.5(a)(3). 

Pass-through swap ......................... (2)(ii)(B) ........................................ N/A, as not subject to current federal limits.151.5(a)(4). 

Non-enumerated hedges ................ 150.3(e) ........................................ 1.3(z)(3) and 1.47 ........................ 151.5(a)(5). 

Filing for anticipatory hedges .......... 150.7 ............................................ 1.3(z) and 1.48 ............................. 151.5(d). 

N/A denotes not applicable. 

For clarity, the proposed definition 

uses the terms long positions and short 

positions in commodity derivative 

contracts as those terms are proposed to 

be defined, rather than the terms 

purchases or sales of any commodity for 

future delivery, used in current 

§ 1.3(z)(2). These clarifications are for 

two reasons. First, the proposed 

definition only addresses bona fide 

hedging positions, and does not address 

bona fide hedging transactions. 

Although the language of current 

§ 1.3(z)(2) was written to address 

purchase or sales transactions, the 

Commission eliminated daily 

speculative trading volume limits in 

1979, as noted above.317 The 

Commission and its predecessor has 

long interpreted the terms sales or 

purchases of futures contracts in 

§ 1.3(z)(2) to mean short or long 

positions in futures contracts in the 

context of position limits.318 Second, the proposed definition would be 

applicable to positions in commodity 

derivative contracts (i.e., futures, 

options thereon, swaps and directaccess linked FBOT contracts) rather 

than only to futures and options 

contracts. As noted above, the 

Commission preliminarily believes it 

appropriate to apply the same definition 

of bona fide hedging positions to all 

physical commodity derivative 

contracts subject to federal limits. 

The Commission notes that DCMs and 

SEFs may impose additional conditions 

on holders of positions in commodity 

derivative contracts, particularly in the 

spot month. The Commission has long 

relied on the DCMs to protect the 

integrity of the exchange’s delivery 

process in physical-delivery contracts. 

Congress recognizes this obligation, 

including in core principle 5, which 


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

320See, e.g., 7 U.S.C 6a(3) (1970). That statutory 

definition of bona fide hedging included ‘‘sales of, 

or short positions in, any commodity for future 

delivery on or subject to the rules of any contract 

market made or held by such person to the extent 

that such sales or short positions are offset in 

quantity by the ownership or purchase of the same 

cash commodity by the same person.’’ 

321For example, it would not appear to be 

economically appropriate to hold a short position 

in the spot month of a commodity derivative 

contract against fixed-price purchase contracts that 

provide for deferred delivery in comparison to the 

delivery period for the spot month commodity 

derivative contract. This is because the commodity 

under the cash contract would not be available for 

delivery on the commodity derivative contract. 

322Further, the Commission notes an exchange, 

pursuant to its position accountability rules, may at 

any time direct a trader that is in excess of 

accountability levels to reduce a position in a 

contract traded on that exchange. 323See, e.g., 7 U.S.C. 6a(3)(1970). That statutory 

definition of bona fide hedging included 

‘‘purchases of, or long positions in, any commodity 

for future delivery on or subject to the rules of any 

contract market made or held by such person to the 

extent that such purchases or long positions are 

offset by sales of the same cash commodity by the 

same person.’’ 324See, e.g., 7 U.S.C. 6a(3)(C) (1970). That 

statutory definition of bona fide hedging included 

‘‘an amount of such commodity the purchase of 

which for future delivery shall not exceed such 

person’s unfilled anticipated requirements for 

processing or manufacturing during a specified 

operating period not in excess of one year: 

Provided, That such purchase is made and 

liquidated in an orderly manner and in accordance 

with sound commercial practice in conformity with 

such regulations as the Secretary of Agriculture may 

prescribe.’’ 

325See, e.g., ‘‘Use of Hedging by Local Gas 

Distribution Companies: Basic Considerations and 

Continued 

requires DCMs to consider position 

limitations or position accountability for 

speculators to reduce the potential 

threat of market manipulation or 

congestion, especially during trading in 

the delivery month.319 Exchanges will 

typically impose on large short position 

holders in a physical-delivery contract a 

continuing obligation to compare cash 

market and futures market prices in the 

spot month and to liquidate the 

derivative position (i.e., buy back the 

short position) if the commodity may be 

sold at a more favorable (higher) price 

in the cash market. Further, exchanges 

will typically impose on large long 

position holders in a physical-delivery 

contract a continuing obligation to 

compare cash market and futures market 

prices in the spot month and to 

liquidate the derivative position (i.e., 

sell the long position) if the commodity 

may be purchased at a more favorable 

(lower) price in the cash market. 

Exchanges can continue these practices 

under the proposed rule. 

(1) Exemption-by-Exemption Discussion 

Inventory and cash commodity 

purchase contracts—paragraph (3)(A). 

Inventory and fixed-price cash 

commodity purchase contracts have 

long served as the basis of a bona fide 

hedging position.320 This provision is in 

current § 1.3(z)(2)(i)(A). A commercial 

enterprise is exposed to price risk if it 

has (i) obtained inventory in the normal 

course of business or (ii) entered into a 

fixed-price purchase contract, whether 

spot or forward, calling for delivery in 

the physical marketing channel of a 

commodity; and has not offset that price 

risk. For example, an enterprise may 

offset such price risk in the cash market 

by entry into fixed-price sales contracts. 

An appropriate hedge of inventory or a 

fixed-price purchase contract would be 

to establish a short position in a 

commodity derivative contract to offset 

the risk of such position. Such short 

position may be held into the spot 

month in a physical-delivery contract if 

economically appropriate.321

A person can use a commodity 

derivative contract to hedge inventories 

of a cash commodity that is deliverable 

on that physical-delivery contract. Such 

a deliverable cash commodity inventory 

need not be in a delivery location. 

However, the Commission notes that a 

DCM or SEF may prudentially require 

such short positions holders to 

demonstrate the ability to move the 

commodity into a deliverable location, 

particularly during the spot month.322

Once inventory has been sold, a 

person is permitted a commercially 

reasonable time period, as necessary to 

exit the market in an orderly manner, to 

liquidate a position in commodity 

derivative contracts in excess of a 

position limit. Generally, the 

Commission believes such time period 

would be less than one business day. 

Cash commodity sales contracts— 

paragraph (3)(B). Fixed-price cash 

commodity sales have long served as the 

basis of a bona fide hedging position.323

This provision is in current 

§ 1.3(z)(2)(ii)(A) and (B). A commercial 

enterprise is exposed to price risk if it 

has entered into a fixed-price sales 

contract, whether spot or forward, 

calling for delivery in the physical 

marketing channel of a commodity and 

has not offset that price risk, for 

example, by entering into a fixed-price 

purchase contract. An appropriate 

hedge of a fixed-price sales contract 

would be to establish a long position in 

a commodity derivative contract to 

offset the risk of such cash market 

contact. Such long position may be held 

into the spot month in a physicaldelivery contract if economically 

appropriate. 

Unfilled anticipated requirements— 

paragraph (3)(C)(i). Unfilled anticipated 

requirements for the same cash 

commodity have long served as the 

basis of a bona fide hedging position.324

This provision mirrors the requirement 

of current § 1.3(z)(2)(ii)(C). An 

appropriate hedge of unfilled 

anticipated requirements would be to 

establish a long position in a commodity 

derivative contract to offset the risk of 

such unfilled anticipated requirements. 

Under the proposal, such long 

positions may not be held into the lesser 

of the last five days of trading or the 

time period for the spot month in a 

physical-delivery commodity derivative 

contract (the five-day rule), with the 

exception that a person may hold long 

positions that do not exceed the 

person’s unfilled anticipate 

requirements of the same cash 

commodity for the next two months. As 

noted above, the CME Group and the 

Working Group pointed out that 

previously, persons engaged in 

purchases of futures contracts have been 

permitted to hold up to twelve months 

unfilled anticipated requirements of the 

same cash commodity for processing, 

manufacturing, or feeding by the same 

person, provided that such transactions 

and positions in the five last trading 

days of any one futures do not exceed 

the person’s unfilled anticipated 

requirements of the same cash 

commodity for that month and for the 

next succeeding month. 

Utility hedging unfilled anticipated 

requirements of customers—paragraph 

(3)(iii)(B). The Commission is proposing 

a new exemption for unfilled 

anticipated requirements for resale by a 

utility. This provision is analogous to 

the unfilled anticipated requirements 

provision of paragraph (3)(iii)(A), except 

the commodity is not for use by the 

same person—that is, the utility—but 

rather for anticipated use by the utility’s 

customers. The proposed new 

exemption would recognize a bona fide 

hedging position where a utility is 

required or encouraged to hedge by its 

public utility commission (‘‘PUC’’). 

Request Six of the Working Group 

petition asked the Commission to grant 

relief with respect to a long position in 

a commodity derivative contract that 

arises from natural gas utilities’ desire to 

hedge the price of gas that they expect 

to purchase and supply to their retail 

customers. In support of its petition, the 

Working Group provided evidence that 

hedging natural gas price risk, which 

includes some combination of fixedprice supply contracts, storage and 

derivatives, is a prudent risk 

management practice that limits 

volatility in the prices ultimately paid 

by consumers.325


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75714 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

Regulatory Issues,’’ K. Costello and J. Cita, The 

National Regulatory Research Institute at the Ohio 

State University (May 2001). All supporting 

materials provided by the Working Group are 

available at http://sirt.cftc.gov/sirt/sirt.aspx?

Topic=CommissionOrdersandOtherActionsAD&

Key=23082. 

326 Id. 

327This provision is included in current 

§ 1.3(z)(3) as an example of a potential nonenumerated case. 17 CFR 1.3(z)(3). Compare 

vacated § 151.5(a)(2)(iv). 

328See 7 U.S.C 6a(3)(A) (1940). That statutory 

definition of bona fide hedging, enacted in 1936, 

included ‘‘the amount of such commodity such 

person is raising, or in good faith intends or expects 

to raise, within the next twelve months, on land (in 

the United States or its Territories) which such 

person owns or leases.’’ 

329 In contrast, prior to harvest, a farmer must 

plant and manage a crop until it is ripe. Anticipated 

agricultural production may not be available timely 

at a delivery location for a futures contract. Thus, 

historically, only inventories of agricultural 

commodities, rather than anticipated production, 

have been recognized as a basis for a bona fide 

hedging position under the five-day rule. 

330The Commission added this enumerated 

exemption to the definition of bona fide hedging in 

1987. 52 FR 38914, Oct. 20, 1987. 

331 51 FR 31648, 31650, September 4, 1986. ‘‘In 

particular, a cotton merchant may contract to 

purchase and sell cotton in the cash market in 

relation to the futures price in different delivery 

months for cotton, i.e., a basis purchase and a basis 

sale. Prior to the time when the price is fixed for 

each leg of such a cash position, the merchant is 

subject to a variation in the two futures contracts 

utilized for price basing. This variation can be offset 

by purchasing the future on which the sales were 

based [and] selling the future on which [the] 

purchases were based.’’ Id. (n. 3). 

332The Working Group requested this expansion 

in Requests One and Two. 

333A location differential is the difference in 

price between two derivative contracts in the same 

commodity (or substantially the same commodity) 

at two different delivery locations on the same (or 

similar) delivery dates. A location differential also 

may underlie a single derivative contract that is 

called a basis contract. 

Materials submitted in support of the 

Working Group petition 326 make it clear 

that the risk management transactions— 

fixed-price contracts, storage, and 

derivatives—engaged in by a typical 

natural gas utility to reduce risk 

associated with anticipated 

requirements of natural gas are used to 

fulfill its obligation to serve retail 

customers and are typically considered 

by the state PUC as prudent. The PUC 

may indeed obligate the natural gas 

utility to hedge some portion of the 

supply of natural gas needed to meet the 

needs of its customers and may take 

regulatory action if the utility fails to do 

so. As a result, in order to mitigate the 

impact of natural gas price volatility on 

the cost of natural gas acquired to serve 

its regulated retail natural gas 

customers, a utility may enter into long 

positions in commodity derivative 

contracts to hedge a specified 

percentage of such customers’ 

anticipated natural gas requirements 

over a multi-year horizon. The utility’s 

PUC considers such hedging practices to 

be prudent and has allowed gains and 

losses related to such hedging activities 

to be retained by its regulated retail 

natural gas customers. 

The Commission recognizes the 

highly regulated nature of the natural 

gas market, where state-regulated public 

utilities may have rules or guidance 

concerning locking in the costs of 

anticipated requirements for retail 

customers through a number of means, 

including fixed-price purchase 

contracts, storage, and commodity 

derivative contracts. Moreover, since the 

public utility typically does not directly 

profit from the results of its hedging 

activity (because most or all of the gains 

derived from hedging are passed on to 

customers, e.g., through the price 

charged for natural gas), the utility has 

no incentive to speculate. 

The Commission invites comments on 

all aspects of this new enumerated bona 

fide hedging exemption. 

Hedges by agents—paragraph (3)(iv). 

The Commission is proposing an 

enumerated exemption for hedges by an 

agent who does not own or has not 

contracted to sell or purchase the 

offsetting cash commodity at a fixed 

price, provided that the agent is 

responsible for merchandising the cash 

positions that are being offset in 

commodity derivative contracts and the 

agent has a contractual arrangement 

with the person who owns the 

commodity or holds the cash market 

commitment being offset. The 

Commission historically has recognized 

a merchandising transaction as a bona 

fide hedge in the narrow circumstances 

of an agent responsible for 

merchandising a cash market position 

which is being offset.327

Other enumerated hedging 

positions—paragraph (4). Each of the 

other enumerated hedging positions 

would be subject to the five-day rule for 

physical-delivery contracts. The 

Commission reiterates the intent of the 

five-day rule is to protect the integrity 

of the delivery process in physicaldelivery contracts. The reorganization 

into new paragraph (4) of existing 

provisions in 1.3(z) subject to the fiveday rule is intended for administrative 

ease. 

Unsold anticipated production— 

paragraph (4)(i). Unsold anticipated 

production has long served as the basis 

of a bona fide hedging position.328 This 

provision is in current § 1.3(z)(2)(i)(B). 

The Commission historically has 

recognized twelve months of unsold 

anticipated production in an 

agricultural commodity as the basis of a 

bona fide hedging position. Under the 

proposal, this twelve-month restriction 

would not apply to physical-delivery 

contracts that were not in an 

agricultural commodity. 

The Commission is considering 

relaxing the five-day rule to permit a 

person to hold a position in a physicaldelivery commodity derivative contract, 

other than in an agricultural 

commodity, through the close of the 

spot month that does not exceed in 

quantity the reasonably anticipated 

unsold forward production that would 

be available for delivery under the terms 

of a physical-delivery commodity 

derivative contract. For example, a 

person with a significant number of 

producing natural gas wells may be 

highly certain that she can be a position 

to deliver natural gas on the physicaldelivery natural gas futures contract.329

The Commission is considering 

permitting the exchange listing the 

physical-delivery commodity derivative 

contract to administer exemptions to the 

five-day rule upon application to such 

exchange specifying the unsold forward 

production that could be moved into 

delivery position. The Commission 

requests comment on this alternative. 

Offsetting unfixed-price cash 

commodity sales and purchases— 

paragraph (4)(ii). Offsetting unfixedprice cash commodity sales and 

purchases basis different delivery 

months in the same commodity 

derivative contract have long served as 

the basis of a bona fide hedging 

position. 330 This provision is in current 

§ 1.3(z)(2)(iii). The Commission 

explained a major rationale for this 

exemption for spread positions was to 

facilitate commercial risk shifting 

positions which may not have otherwise 

conformed to the definition of bona fide 

hedging.331

The proposed enumerated provision 

would be expanded from current 

§ 1.3(z)(2)(iii) to include unfixed-price 

cash contracts basis different 

commodity derivative contracts in the 

same commodity, regardless of whether 

the commodity derivative contracts are 

in the same calendar month.332 The 

Commission notes a commercial 

enterprise may enter into the described 

transactions to reduce the risk arising 

from either (or both) a location 

differential or a time differential in 

unfixed price purchase and sale 

contracts in the same cash 

commodity.333 The contemplated 

derivative transactions represent a 

substitute for two transactions to be 

made at a later time in a physical 

marketing channel: a fixed-price 

purchase and a fixed-price sale of the 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75715 

334See proposed paragraph (3)(i) of the definition 

of bona fide hedging position under § 150.1. 335See proposed paragraph (3)(ii) of the 

definition of bona fide hedging position under 

§ 150.1. 336 76 FR at 71689. 

337Black’s Law Dictionary, 6th Ed. 

338A short position fixes the price at the entry 

price to the commodity derivative contract. For any 

decrease (increase) in price of the commodity 

produced, the expected royalty would decline 

(increase) in value, but the commodity derivative 

contract would increase (decrease) in value, 

offsetting the price risk in the royalty. 

339For example, corn ‘‘rents’’ were cited in An 

Inquiry into the Nature and Causes of the Wealth 

of Nations, Smith, Adam, 1776, at cp. 5, available 

at: http://www.gutenberg.org/files/3300/3300-h/ 

3300-h.htm. This eBook is for the use of anyone 

anywhere at no cost and with almost no restrictions 

whatsoever. You may copy it, give it away, or reuse it under the terms of the Project Gutenberg 

License included with this eBook or online at 

www.gutenberg.org. 

340 42 FR 14832, 14833, Mar. 16, 1977. 

341 76 FR at 71689. 

342 Vacated § 151.5(a)(2)(vii)(B). 

same cash commodity. The commercial 

enterprise intends to later take delivery 

on one unfixed-price cash contract and 

to re-deliver the same cash commodity 

on another unfixed-price cash contract. 

There may be no substantive difference 

in time between taking and making 

delivery in the physical marketing 

channel, but the derivative contracts do 

not offset each other because they are in 

two different contracts (e.g., the NYMEX 

Light Sweet Crude Oil futures contract 

versus the ICE Europe Brent crude 

futures) or two different instruments 

(e.g., swaps versus futures). The 

contemplated derivative positions will 

offset the risk that the difference in the 

expected delivery prices of the two 

unfixed-price cash contracts in the same 

commodity will change between the 

time the hedging transaction is entered 

and the time of fixing of the prices on 

the purchase and sales cash contracts. 

Therefore, the contemplated derivative 

positions are economically appropriate 

to the reduction of risk. 

In the case of reducing the risk of a 

location differential, and where each of 

the underlying transactions in separate 

derivative contracts may be in the same 

contract month, the Commission notes 

that a position in a basis contract would 

not be subject to position limits, as 

discussed in the proposed definition of 

referenced contract. 

The Commission notes that upon 

fixing the price of, or taking delivery on, 

the purchase contract, the owner of the 

cash commodity may hold the short 

derivative leg of the spread as a hedge 

against a fixed-price purchase or 

inventory.334 However, the long 

derivative leg of the spread would no 

longer qualify as a bona fide hedging 

position since the commercial entity has 

fixed the price or taken delivery on the 

purchase contract. Similarly, if the 

commercial entity first fixed the price of 

the sales contract, the long derivative 

leg of the spread may be held as a hedge 

against a fixed-price sale,335 but the 

short derivative leg of the spread would 

no longer qualify as a bona fide hedging 

position. 

Anticipated royalties—paragraph 

(4)(iii). The new enumerated exemption 

would permit an owner of a royalty to 

lock in the price of anticipated mineral 

production. The Commission initially 

recognized the hedging of anticipated 

royalties in vacated § 151.5(a)(2)(vi).336

That provision would have recognized 

‘‘sales or purchases’’ in commodity 

derivative contracts that would be 

‘‘offset by the anticipated change in 

value of royalty rights that are owned by 

the same person . . . [and] arise out of 

the production, manufacturing, 

processing, use, or transportation of the 

commodity underlying the [commodity 

derivative contract], which may not 

exceed one year for agricultural’’ 

commodity derivative contracts; such 

positions would be subject to the fiveday rule. 

The Commission has reconsidered 

that exemption in vacated 

§ 151.5(a)(2)(vi) and now re-proposes it 

as an enumerated exemption for short 

positions in commodity derivative 

contracts offset by the anticipated 

change in value of mineral royalty rights 

that are owned by the same person and 

arise out of the production of a mineral 

commodity (e.g., oil and gas); such 

positions would be subject to the fiveday rule. This proposed exemption 

differs from the exemption in vacated 

§ 151.5(a)(2)(vi) because it applies only 

to: (i) Short positions; (ii) arising from 

production; and (iii) in the context of 

mineral extraction. 

A royalty arises as ‘‘compensation for 

the use of property . . . [such as] 

natural resources, expressed as a 

percentage of receipts from using the 

property or as an account per unit 

produced.’’ 337 A short position is the 

proper offset of a yet-to-be received 

payment based on a percentage of 

receipts per unit produced for a royalty 

that is owned. This is because a short 

position fixes the price of the 

anticipated receipts, removing exposure 

to change in value of the person’s share 

of the production revenue.338 In 

contrast, a person who has issued a 

royalty has, by definition, agreed to 

make a payment in exchange for value 

received or to be received (e.g., the right 

to extract a mineral). Upon extraction of 

a mineral and sale at the prevailing cash 

market price, the issuer of a royalty 

remits part of the proceeds in 

satisfaction of the royalty agreement. 

Thus, the issuer of a royalty does not 

have price risk arising from that royalty 

agreement. 

The Commission preliminarily 

believes that ‘‘manufacturing, 

processing, use, or transportation’’ of a 

commodity does not conform to the 

meaning of the term royalty. Further, 

while the Commission recognizes that, 

historically, royalties have been paid for 

use of land in agricultural 

production,339 the Commission has not 

received any evidence of a need for a 

bona fide hedging exemption from 

owners of agricultural production 

royalties. The Commission nonetheless 

invites comment on all aspects of this 

new royalty exemption. 

Services—paragraph (4)(iv). The 

Commission is proposing the hedging of 

services as a new enumerated hedge in 

subparagraph (4)(iv) of the proposed 

definition. This new exemption is not 

without Commission precedent. For 

example, in 1977, the Commission 

noted that the existence of futures 

markets for both source and product 

commodities, such as soybeans and 

soybean oil and meal, afford business 

firms increased opportunities to hedge 

the value of services.340 The 

Commission’s current proposal is 

similar to vacated § 151.5(a)(2)(vii).341

That provision would have recognized 

‘‘sales or purchases’’ in commodity 

derivative contracts that would be 

‘‘offset by the anticipated change in 

value of receipts or payments due or 

expected to be due under an executed 

contract for services held by the same 

person . . . [and] the contract for 

services arises out of the production, 

manufacturing, processing, use, or 

transportation of the commodity 

underlying the [commodity derivative 

contract], which may not exceed one 

year for agricultural’’ commodity 

derivative contracts; such positions 

would be subject to the five-day rule. 

That provision also made such positions 

subject to a provision for crosscommodity hedging, namely that, ‘‘The 

fluctuations in the value of the position 

in [commodity derivative contracts] are 

substantially related to the fluctuations 

in value of receipts or payments due or 

expected to be due under a contract for 

services.’’ 342

The Commission has reconsidered its 

proposed exemption in vacated 

§ 151.5(a)(2)(vii) and now re-proposes 

an enumerated exemption that is largely 

the same, save for deleting the crosscommodity hedging provision in this 

enumerated exemption, as that 

provision is included under the crossVerDate Mar<15>2010 18:06 Dec 11, 2013 Jkt 232001 PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 E:\FR\FM\12DEP2.SGM 12DEP2

emcdonald on DSK67QTVN1PROD with PROPOSALS2
75716 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

343 76 FR at 71654. 344Compare with vacated § 151.5(a)(2)(viii), 

which provided for cross-commodity hedges in 

enumerated positions but not for pass-through 

swaps. 345 42 FR 14832, 14834, Mar. 16, 1977. The 

Commission noted its belief that there is little 

commercial need to maintain cross-hedge positions 

during the last five trading days of any expiring 

contract. It believed the five-day restriction was 

necessary to guarantee the integrity of the markets. 

The Commission considered there was little 

commercial utility of such positions during the last 

five days of trading to offset anticipated production, 

which at that time was limited to agricultural 

commodities. The Commission considered its 

responsibility for orderly markets and concluded 

not to propose an enumerated exemption in the last 

five days of trading for anticipatory production. See 

also 7 U.S.C. 6a(3)(B) (1970). That statutory 

definition of bona fide hedging included ‘‘an 

amount of such commodity the sale of which for 

future delivery would be a reasonable hedge against 

the products or byproducts of such commodity 

owned or purchased by such person, or the 

purchase of which for future delivery would be a 

reasonable hedge against the sale of any product or 

byproduct of such commodity by such person.’’ Id. 

346Compare with current § 1.3(z)(2)(iv), which 

requires compliance with the substantially related 

test and with the five-day rule, and does not 

provide an exception to the five-day rule for cashsettled contracts. 

347The Commission understands that crosscommodity hedges in physical commodities are not 

generally recognized by accountants as eligible for 

hedge accounting treatment. 

348See, e.g., ‘‘The Alternative Field Crops 

Manual,’’ University of Minnesota, November 1989, 

available at http://www.hort.purdue.edu/newcrop/

afcm/sorghum.html. 

commodity hedging exemption, 

discussed below. Thus, the proposed 

exemption would recognize ‘‘sales or 

purchases’’ in commodity derivative 

contracts that are ‘‘offset by the 

anticipated change in value of receipts 

or payments due or expected to be due 

under an executed contract for services 

by the same person . . . [and] the 

contract for services arises out of the 

production, manufacturing, processing, 

use, or transportation of the commodity 

which may not exceed one year for 

agricultural’’ commodity derivative 

contracts; such positions would be 

subject to the five-day rule. 

As the Commission previously noted 

and under this proposed exemption, 

‘‘crop insurance providers and other 

agents that provide services in the 

physical marketing channel could 

qualify for a bona fide hedge of their 

contracts for services arising out of the 

production of the commodity 

underlying a [commodity derivative 

contract].’’ 343 The Commission invites 

comment on all aspects of this new 

services exemption. 

(2) Cross-Commodity Hedges— 

Paragraph (5) 

The proposed cross-commodity 

hedging provision would apply to all 

enumerated hedges in paragraphs (3) 

and (4) of the definition of bona fide 

hedging position, as well as to passthrough swaps under paragraph (2).344

The Commission has long recognized 

cross-commodity hedging, noting in 

1977 that sales for future delivery of any 

product or byproduct which is offset by 

the ownership of fixed-price purchase of 

the source commodity would be covered 

by the general provisions for crosscommodity hedging in § 1.3(z)(2).345

Under the proposed enumerated 

exemption, cross-commodity hedging 

would be conditioned on: (i) The 

fluctuations in value of the position in 

the commodity derivative contract (or 

the commodity underlying the 

commodity derivative contract) are 

substantially related to the fluctuations 

in value of the actual or anticipated cash 

position or pass-through swap (the 

‘‘substantially related’’ test); and (ii) the 

five-day rule being applied to positions 

in any physical-delivery commodity 

derivative contract.346 As discussed 

above, the five-day rule would not 

restrict positions in cash-settled 

contracts, but would restrict only 

positions in physical-delivery 

commodity derivative contracts. Thus, 

the Commission is protecting the 

integrity of the delivery process in the 

physical-delivery contract. Further, as 

noted above, few traders typically hold 

a position in excess of the position 

limits during the last few days of the 

spot month. Hence, a cross-commodity 

hedger who held a position deep into 

the spot month in excess of the spot 

position limit likely would be large 

relative to all traders. Such large 

positions may interfere with 

convergence of the commodity 

derivative contract with the cash market 

price, since the supply and demand 

expectations for cross-commodity 

hedgers may differ from those of 

persons hedging price risks of the 

commodity underlying the physicaldelivery derivative. 

Substantially related test. The 

Commission is proposing guidance on 

the meaning of the substantially related 

test. The Commission is proposing a 

non-exclusive safe harbor for crosscommodity hedges.347 The safe harbor 

would have two factors: (i) Qualitative; 

and (ii) quantitative. 

Qualitative factor: As a first factor in 

assessing whether a cross-commodity 

hedge is bona fide, the target commodity 

should have a reasonable commercial 

relationship to the commodity 

underlying the commodity derivative 

contract. For example, there is a 

reasonable commercial relationship 

between grain sorghum (commonly 

called milo), used as a food grain for 

humans or as animal feedstock, with 

corn underlying a commodity derivative 

contract.348

In contrast, there does not appear to 

be a reasonable commercial relationship 

between a physical commodity and a 

stock price index; while long-term price 

series of such commodities may be 

statistically related by either inflation or 

measures of economic activity, such 

disparate commodities do not appear to 

have the requisite commercial 

relationship. Such correlation appears 

for this purpose to be spurious. 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75717 

349By way of comparison, accounting practice 

may look to goodness of fit (R2) to be at least 0.80. 

The proposed correlation (R) of 0.80 corresponds to 

an R2 of 0.64, substantially less than accounting 

practice. Further, accounting practice may look to 

the coefficient (hedge ratio) from a regression 

analysis to be in the range of negative 0.80 to 1.25. 

The Commission notes that the size of this 

coefficient is dependent upon the unit of trading for 

the hedging instrument and the unit of trading for 

the target of the hedge. To the extent both may be 

expressed in similar terms, the coefficient may fall 

within the range suggested by accounting practice. 

However, given standardized hedging instruments 

such as futures are fixed in terms of a particular 

price quote for a commodity (such as in dollars per 

bushel) and the target of a cross-commodity hedge 

may not have units fixed in the same terms (such 

as in dollars per hundred weight), the hedge ratio 

will depend on a fairly arbitrary choice of units to 

express the price series of the target of the hedge. 

Thus, the Commission is not proposing any 

particular safe harbor or requirement for a hedge 

ratio. 

350The Commission notes this safe harbor is 

intentionally written in general terms. Appropriate 

hedge ratios may be determined using an 

appropriate model, including but not limited to 

ordinary lease squares (OLS), autoregressive 

conditional heteroscedasticity (ARCH), generalized 

autoregressive conditional heteroscedasticity 

(GARCH), or an error-correction model (ECM). 

351 ‘‘Goodness of fit’’ is defined as: ‘‘A general 

term describing the extent to which an 

econometrically estimated equation fits the data. 

There are various ways of summarizing this 

concept, including the coefficient of determination 

and adjusted R2.’’ ‘‘The MIT Dictionary of Modern 

Economics,’’ 4th Ed. (1996). 

352See, e.g., ‘‘A Guide to Econometrics,’’ 5th Ed., 

The MIT Press (2003), at p.319. 

Quantitative factor: The target 

commodity should also be offset by a 

position in a commodity derivative 

contract that provides a reasonable 

quantitative correlation and in light of 

available liquid commodity derivative 

contracts. The Commission will 

presume an appropriate quantitative 

relationship exists when the correlation 

(R), between first differences or returns 

in daily spot price series for the target 

commodity and the price series for the 

commodity underlying the derivative 

contract (or the price series for the 

derivative contract used to offset risk), 

is at least 0.80 for a time period of at 

least 36 months.349 When less granular 

price series than daily are used, R 

typically will be higher. Thus, price 

series data of at least daily frequency 

should be used, if available. 

The Commission will presume that 

positions in a commodity derivative 

contract that does not meet the safe 

harbor are not bona fide crosscommodity hedging positions. However, 

a person may rebut this presumption 

upon presentation of facts and 

circumstances demonstrating a 

reasonable relationship between the 

spot price series for the commodity to 

be hedged and either the spot price 

series for the commodity underlying the 

commodity derivative contract or the 

price series for the commodity 

derivative contract to be used for 

hedging. A person should consider 

whether there is an actively traded 

commodity derivative contract that 

would meet the safe harbor, in light of 

liquidity considerations. A person may 

seek interpretative relief under § 140.99 

for recognition of such a position as a 

bona fide hedging position. 

Generally, a regression or time series 

analysis of prices should be performed 

to determine an appropriate hedge 

ratio.350 Many price series are nonstationary because the prices increase 

with time and, thus, do not revert to a 

mean (i.e., stationary) price level. A 

regression on non-stationary data can 

give rise to spurious values for the 

‘‘goodness of fit’’ and other statistics.351

Thus, a quantitative analysis should be 

performed using first differences or 

returns (percentage price changes) so as 

to render the time series stationary.352

However, the Commission is not 

proposing to condition the substantially 

related test on any particular hedge ratio 

methodology. 

By way of example, the Commission 

believes that fluctuations in the value of 

electricity contracts typically will not be 

substantially related to fluctuations in 

value of natural gas. There may not be 

a substantial relation, for example, 

because the marginal pricing in a spot 

market may be driven by the price of 

something other than natural gas, such 

as nuclear, coal, transmission, outages, 

or water/hydroelectric power 

generation. Table 5 below shows 

illustrative simple correlations, both in 

terms of levels and returns, between 

spot electricity prices and natural gas 

(both spot Henry Hub prices and the 

nearby NYMEX Henry Hub Natural Gas 

futures prices, assuming a roll to the 

next deferred futures contract on the 

eleventh calendar day of each month). 

These correlations are much lower than 

the proposed safe harbor level of 0.80. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75718 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

353A generator must also be able to satisfy any 

operating constraints, including minimum 

production runs. 

354 76 FR at 71646. 

355A calendar month spread generally means the 

purchase of one delivery month of a given futures 

contract and simultaneous sale of a different 

delivery month of the same futures contract. See 

CFTC Glossary, available at http://www.cftc.gov/

ConsumerProtection/EducationCenter/

CFTCGlossary/index.htm. 

TABLE 5—CORRELATIONS—SPOT ELECTRICITY PRICES AND NATURAL GAS (SPOT AND FUTURES) PRICES JANUARY 2, 

2009 TO MAY 14, 2013 

Price series: Correlations using: Henry Hub spot Henry Hub futures 

Houston electricity ........................................ Levels ........................................................... 0.1333 0.0630 

Returns ......................................................... 0.1264 0.0488 

PJM electricity .............................................. Levels ........................................................... 0.4415 0.2724 

Returns ......................................................... 0.0987 0.0153 

New England electricity ................................ Levels ........................................................... 0.3450 0.2422 

Returns ......................................................... 0.1808 0.0121 

Data sources: Henry Hub Gulf Coast Natural Gas Spot Price ($ per mmBTUs) and Natural Gas Futures Contracts ($ per mmBTU), source: US 

Energy Information Administration, available at http://www.eia.gov/dnav/ng/ng_pri_fut_s1_d.htm; Wholesale Day Ahead Prices at Selected Hubs, 

Peak (5/16/2013), source: US Energy Information Administration, republished from the Intercontinental Exchange (ICE), available at http://

www.eia.gov/electricity/wholesale/. 

Alternatively, a generator of 

electricity that owns or leases a natural 

gas generator may qualify for an unfilled 

anticipated requirements bona fide 

hedge to meet a fixed price power 

commitment (sale of electricity). The 

position that is hedged is the quantity 

equivalent of natural gas through the 

generator to meet the contracted fixed 

price power commitment.353 A natural 

gas hedge exemption can also be 

applied to operating characteristics of 

the plant and sources of revenue such 

as ancillary services. 

(3) Examples of Bona Fide Hedging 

Positions in Appendix B 

The Commission is providing 

examples to illustrate enumerated bona 

fide hedging positions. The Commission 

invites comment on all aspects of the 

examples. 

h. Non-Enumerated Hedging 

Exemptions 

The Commission proposes to replace 

the existing procedures for persons 

seeking non-enumerated hedging 

exemptions under current § 1.3(z)(3) 

and § 1.47 with proposed § 150.3(e), 

discussed further below, that would 

provide guidance for persons seeking 

non-enumerated hedging exemptions 

through filing of a petition under 

section 4a(a)(7) of the Act. As noted 

above, practically all non-enumerated 

hedging exemption requests were from 

persons seeking to offset the risk arising 

from swap books, which the 

Commission has addressed in the 

proposed pass-through swaps and passthrough swap offsets, and in the 

proposal to net positions in futures and 

swap reference contracts for purposes of 

single-month and all-months-combined 

position limits. 

The Commission requests comment 

on industry practices involving the 

hedging of risks of cash market activities 

in a physical commodity that are not 

specifically enumerated in paragraphs 

(3), (4), and (5) of the proposed 

definition of bona fide hedging position, 

the extent to which such hedging 

practices reflect industry standards or 

best practices and the particular sources 

of changes in value that such hedging 

positions offset. 

Under the proposal for hedges of 

physical commodities, additional 

enumerated hedges could only be added 

to the proposed definition of bona fide 

hedging position by way of notice and 

comment rulemaking. Should the 

Commission adopt, as an alternative, an 

administrative procedure that would 

allow the Commission to add additional 

enumerated bona fide hedges without 

requiring notice and comment 

rulemaking? If so, what procedures 

should be used? Is current § 1.47 an 

appropriate process? And what 

standards, in addition to the statutory 

standards of CEA section 4a(c)(2), 

should be applicable to any such 

administrative procedure? The 

Commission is particularly concerned 

about the absence of standards in 

current § 1.47. If the Commission were 

to adopt such an administrative 

procedure, how should the Commission 

address the factors in CEA section 

4a(a)(3)(B) in such an administrative 

procedure? 

No Proposal of Unfilled Storage 

Capacity as an Anticipated 

Merchandizing Hedge. The Commission 

is not re-proposing a hedge for unfilled 

storage capacity that was in vacated 

§ 151.5(a)(2)(v). That exemption would 

have permitted a person to establish as 

a bona fide hedge offsetting sales and 

purchases of commodity derivative 

contracts that did not exceed in quantity 

the amount of the same cash commodity 

that was anticipated to be 

merchandized. That exemption was 

limited to the current or anticipated 

amount of unfilled storage capacity that 

the person owned or leased. 

The Commission previously noted it 

had not recognized anticipated 

merchandising transactions as bona fide 

hedges due to its historic view that 

merchandizing transactions generally 

fail to meet the economically 

appropriate test.354 The Commission 

explained, ‘‘A merchant may anticipate 

that it will purchase and sell a certain 

amount of a commodity, but has not 

acquired any inventory or entered into 

fixed-price purchase or sales contracts. 

Although the merchant may anticipate 

such activity, the price risk from 

merchandising activity is yet to be 

assumed and therefore a transaction in 

[commodity derivative contracts] could 

not reduce this yet-to-be-assumed risk.’’ 

In response to comments, the 

Commission opined that, ‘‘in some 

circumstances, such as when a market 

participant owns or leases an asset in 

the form of storage capacity, the market 

participant could establish market 

positions to reduce the risk associated 

with returns anticipated from owning or 

leasing that capacity. In these narrow 

circumstances, the transaction in 

question may meet the statutory 

definition of a bona fide hedging 

transaction.’’ 

With the benefit of further review, the 

Commission now sees a strong basis to 

doubt that such a position generally will 

meet the economically appropriate test. 

This is because the value fluctuations in 

a calendar month spread in a 

commodity derivative contract will 

likely have at best a low correlation 

with value fluctuations in expected 

returns (e.g., rents) on unfilled storage 

capacity. There are at least two factors 

that contribute to the size of a calendar 

month spread.355 One factor is the cost 

of carry, comprised of the anticipated 

storage cost plus the interest paid to 

finance purchase of the physical 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75719 

356For a brief discussion of cost of carry, see, e.g., 

‘‘Options, Futures, and Other Derivatives,’’ 3rd Ed., 

Hull, (1997) at p. 67. 

357See current § 1.3(z)(2)(i)(B) and (C). 

358See current § 1.48. 

359The Working Group Petition is available at 

http://www.cftc.gov/stellent/groups/public/@

rulesandproducts/documents/ifdocs/

wgbfhpetition012012.pdf. 

commodity over the time period of the 

calendar month spread.356 A second 

factor, and likely the factor that most 

contributes to value fluctuations in the 

calendar month spread, is the difference 

in the anticipated supply and demand 

of a commodity on the different dates of 

the calendar month spread. In this 

context, a calendar month spread 

position would likely increase, rather 

than decrease, risk in the operation of a 

commercial enterprise. Accordingly, for 

these reasons, the Commission is not reproposing to recognize a bona fide 

hedging position based on an unfilled 

storage bin and any of a number of 

commodities that a merchant might 

store in such bin. 

For example, the Commission 

recognizes there is commercial risk in 

operating off-farm storage, including the 

risk that total grain production may not 

be sufficient to ensure capacity 

utilization of such storage. Business 

costs of providing off-farm storage 

include the fixed cost of the storage 

facility and the variable costs for labor 

and fuel, in addition to other costs such 

as insurance. However, as the 

Commission noted above, based on its 

experience, the value fluctuations in a 

calendar month spread in a commodity 

derivative contract will likely have at 

best a low correlation with value 

fluctuations in expected returns (e.g., 

rents) on unfilled storage capacity. 

Therefore, the Commission requests 

comment on what positions in 

commodity derivative contracts, if any, 

would offset the value changes in the 

commercial risks (e.g., changes in 

anticipated rental income or changes in 

other revenue streams) arising from a 

commodity storage business. And for 

those positions that would offset value 

changes in the commercial risks, what 

data should the Commission obtain to 

verify such claims? By way of 

comparison, the Commission has 

recognized unsold anticipated 

production and unfilled anticipated 

requirements for processing, 

manufacturing or feeding, as the basis of 

a bona fide hedging position.357 The 

Commission has required persons 

seeking to claim such production or 

requirements exemptions to file 

statements showing historical 

production or usage and anticipated 

production or usage.358

The Commission invites commenters 

to provide specific, empirical analysis 

and data that would demonstrate how 

particular types of transactions could 

reduce the value at risk of unfilled 

storage space that could support such an 

exemption. 

i. Summary of Disposition of Working 

Group Petition Requests 

As noted above, the Working Group 

made ten requests for exemptions under 

vacated part 151.359 The Commission 

summarizes and addresses in a brief 

statement each request, below. 

Request One. Unfixed Price 

Transactions Involving a NonReferenced Contract: In a hedge of an 

unfixed price purchase and unfixed 

price sale of a physical commodity in 

which one leg of the hedge is a 

referenced contract and the other leg is 

a non-referenced contract, the Working 

Group requests that the referenced 

contract leg of the hedge be treated as 

a bona fide hedging position. 

The proposed definition of bona fide 

hedging position would permit Request 

One under proposed paragraphs 

(4)(ii)(B) and (5), discussed above. 

Request Two. Offsetting Unfixed Price 

Transactions Hedged with Derivatives 

in the Same Calendar Month: The 

Working Group requests that hedges of 

an unfixed price purchase and an 

unfixed price sale of a physical 

commodity in which the separate legs of 

the hedge are in the same calendar 

month, but which do not offset each 

other, because they are in different 

contracts or for any other reason, be 

treated as bona fide hedging positions. 

The proposed definition of bona fide 

hedging position would permit Request 

Two under proposed paragraphs 

(4)(ii)(B) and (5), discussed above. 

Request Three. Unpriced Physical 

Purchase or Sale Commitments: The 

Working Group requests that referenced 

contracts used to lock in a price 

differential where one leg of the 

underlying transaction is an unpriced 

commitment to buy or sell a physical 

energy commodity, and the offsetting 

sale or purchase has not been 

completed, be treated as bona fide 

hedging transactions or positions. 

This request would not be permitted 

under the proposed definition of bona 

fide hedging position. The transaction 

described in Request Three concerns a 

commercial entity that has entered into 

either an unfixed-price sale or an 

unfixed-price purchase, but has not 

entered into an offsetting purchase or 

sale contract. This differs from the 

proposed enumerated bona fide hedge 

exemption provided in paragraph (4)(ii) 

because both sides of the cash 

transactions have not been contracted. 

Locking in the spread for the same 

commodity between two markets is 

prudent risk management when a 

commercial trader has a contractual 

commitment both to buy and sell the 

physical commodity at unfixed prices in 

the same two markets. A commercial 

merchant may expect to match an 

unfixed-price purchase with an unfixedprice sale, regardless of which came 

first, and at that point, will qualify for 

a hedge exemption for the basis risk, 

under paragraphs (4)(ii) and (5), as 

discussed in Requests One and Two, 

above. 

However, a trader has not established 

a definite exposure to a value change 

when that trader has established only an 

unfixed price purchase or sales contract. 

This cash position fails the change in 

value requirement. Considering the 

anticipated merchandizing transaction, 

a merchant may assert her intention, but 

merchandizing intentions alone are not 

sufficient to recognize a price risk (that 

is, the yet-to-be established pair of 

unfixed-price cash purchase and sales 

contracts). The Commission is 

concerned that exempting such a yet-tobe established cash position would 

make it difficult or impossible for the 

Commission to distinguish hedging 

from speculation. For example, a trader 

could maintain a derivatives position, 

exempt from position limits, until that 

trader enters into a subsequent cash 

market transaction that results in a 

book-out of the first unfixed-price cash 

market transaction. The trader could 

assert that changed conditions resulted 

in a change in intentions. Since market 

prices are continually changing to 

reflect new information and, thus, 

changing conditions, the Commission 

believes an exemption standard based 

on merchandizing intentions alone 

would be no standard at all. 

The Commission recognizes there can 

be a gradation of probabilities that an 

anticipated transaction will occur. 

However, the example above offers no 

context in which to evaluate the nature 

or probability of an anticipated 

merchandising transaction, and such 

context is essential to determining the 

nature of any price risk that has been 

realized and could support the existence 

of a bona fide hedge. The Commission 

notes that in such cases, the only way 

to evaluate the nature of any price risk 

would be for the Commission to be 

provided with particulars of the 

transaction. This can be done, under the 

current proposal, either by requesting a 

staff interpretive letter under § 140.99 or 

seeking CEA section 4a(a)(7) exemptive 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75720 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

360For example, if the entity submits a fixed-price 

bid, it runs the risk that either (a) it did not enter 

into a derivative hedge position that would cover 

an accepted bid, and before its bid was accepted, 

the cash market price decreased (so that it ends up 

paying an above-market price); or (b) it did enter 

into a derivatives position (a short position) that 

would cover an accepted bid, and before its bid was 

rejected, the derivative price increased so that the 

entity loses money when it lifts the short position. 

Either outcome would create a loss for the 

commercial entity. 

relief. Furthermore, in instances where 

an entity can establish that the nature of 

their commercial operation is such that 

they have committed physical or 

financial resources towards the 

anticipated transaction, they should 

consider whether they can avail 

themselves of the exemption for unsold 

anticipated production or unfilled 

anticipated requirements exemptions. 

Request Four. Binding, Irrevocable 

Bids or Offers: The Working Group 

requests that referenced contracts used 

to hedge exposure to market price 

volatility associated with binding and 

irrevocable fixed-price bids or offers be 

treated as bona fide hedging positions. 

The contemplated transactions are not 

consistent with the enumerated hedges 

in proposed paragraphs (3)(i), as a hedge 

of a purchase contract, or (3)(ii), as a 

hedge of a sales contract, because the 

cash transaction is tentative and, 

therefore, neither a sale nor a purchase 

agreement. 

In the Commission’s view, a binding 

bid or offer by itself is too tenuous to 

serve as the basis for an exemption from 

speculative position limits, since it is an 

uncompleted merchandising transaction 

that, historically, has not been 

recognized as the basis for a bona fide 

hedging transaction under § 1.3(z)(2). 

Any related derivative would cover a 

conditional price risk for a bid or offer 

that would depend on that bid or offer 

being accepted and, therefore, would 

not be economically appropriate to the 

reduction of risk. The commercial entity 

submitting a binding, fixed-price bid or 

offer is essentially subject to a 

contingent price risk.360 The 

Commission also understands that some 

commercial entities submit bids or 

offers merely to obtain information 

about the request for proposal, without 

an intention of submitting a quote that 

is likely to be accepted. 

Moreover, the Working Group’s 

suggestion that the Commission 

condition its relief on a good-faith 

showing and immediate reclassification 

of the portion of the position not 

awarded against the bid or offer does 

not protect the market against the 

prospect that multiple participants may 

hold such a good-faith belief and may 

also hold a position in the same 

direction as the cover transaction. If the 

Commission were to grant relief with 

respect to such positions, then all 

persons who made good-faith bids or 

offers on a particular cash market 

solicitation would be eligible to enter 

into derivatives to cover their potential 

exposure, in addition to holding 

speculative positions on the same side 

of the market at the limit. Under such 

relief, such persons, in the aggregate, 

could hold derivatives as cover in an 

amount several times larger than the 

total amount to be awarded under the 

solicitation. Undue volatility could 

result when the winning bid is accepted 

and all the losing bidders 

simultaneously reduce their total 

positions to get below the speculative 

position limit level. 

In contrast, under the Commission’s 

proposed rules a commercial entity may 

cover the risk of a yet to be accepted bid 

or offer, provided its total position does 

not exceed the Commission’s 

speculative position limits. Thus, when 

such person’s bid or offer is not 

accepted and that person’s speculative 

position is appropriately limited, that 

person need not liquidate any of its 

position to come into compliance with 

limits. As discussed further below, the 

Commission proposes to set speculative 

limits at relatively high levels. Thus, a 

commercial entity is not likely to be 

constrained in covering bids or offers 

unless it also has a relatively large 

speculative position on the same side of 

the market. 

Request Five. Timing of Hedging 

Physical Transactions: The Working 

Group requests that referenced contracts 

used to hedge a physical transaction 

that is subject to ongoing, good-faith 

negotiations, and that the hedging party 

reasonably expects to conclude, be 

treated as bona fide hedging 

transactions or positions. 

As with Request Four, the 

contemplated transactions are not 

consistent with the enumerated hedges 

in proposed paragraphs (3)(i), as a hedge 

of a purchase contract, or (3)(ii), as a 

hedge of a sales contract, because the 

cash transaction is tentative (here, 

subject to negotiation) and, therefore, 

neither a sale nor a purchase agreement. 

The Commission is concerned that a 

trader has not established a definite 

exposure to a value change when that 

trader has only entered into negotiations 

for a fixed-price purchase or sales 

contract. This tentative cash position 

thus fails the change in value 

requirement. 

Further, a trader could assert that 

changed conditions resulted in a change 

in intentions and a failure to complete 

negotiations. Since market prices are 

continually changing to reflect new 

information and, thus, changing 

conditions, the Commission believes an 

exemption standard based on 

merchandizing intentions alone (even if 

the merchant were engaged in good faith 

negotiations) would be no standard at 

all. 

In the case where the anticipated 

merchandizing transaction is ‘‘naked,’’ 

or not backed by any existing physical 

exposure, the Commission is not aware 

of a methodology for distinguishing 

naked merchandizing from speculation. 

In the case of a firm bid or offer not 

offset by existing physical exposure, an 

entity can, at the time the bid or offer 

is accepted, enter into a corresponding 

hedge transaction or, in the alternative, 

an entity can enter into a corresponding 

hedge transaction at the time the bid or 

offer is made provided the entity 

remains within the speculative position 

limits. The Commission invites 

comment on why hedging in this 

manner is insufficient to offset physical 

risks. The Commission asks that parties 

submitting comments detail the nature 

of their merchandizing operations and 

how they realize and account for 

physical risks related to anticipatory 

merchandizing transactions not offset by 

anticipated production or processing 

requirements. In particular, the 

Commission requests comment on 

appropriate measures to address the 

risks for contingent bids or offers. Under 

what circumstances should the 

Commission recognize contingent bids 

or offers as the basis of a bona fide 

hedging position? If the Commission 

were to do so, should only the expected 

value of the risk of such position be 

recognized? And what would be an 

appropriate methodology for 

distinguishing naked merchandizing 

from speculation? How should the 

Commission address the varying ex ante 

subjective probability of completion of 

such bids or offers? For example, is an 

ex post measure of completion, e.g., the 

ratio of completed transactions to bids 

or offers, an acceptable proxy to impute 

the probability of acceptance for 

purposes of determining an ex ante 

hedge ratio, regardless of the expected 

probability of completion on a 

particular bid or offer? Should the 

Commission require a person, seeking to 

claim an exemption based on contingent 

bids or offers, keep complete records of 

all such cash market bids or offers? If so, 

what record format and specific data 

elements should be kept? 

Request Six. Local Natural Gas Utility 

Hedging of Customer Requirements: The 

Working Group requests that long 

positions in referenced contracts 

purchased by a state-regulated public 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75721 

361The petitioner separately requested relief for a 

seller of crude oil on a CMA basis that had 

contracted to deliver crude oil ratably to a refiner 

during a month at the daily average spot price. That 

is, the seller entered into an unfixed price forward 

sales contract to the refiner. Such a transaction 

would be covered by the existing bona fide hedging 

rules. Such an unfixed price sales contract would 

become partially fixed as each day in the month 

locked in the daily spot price that would be used 

to fix the price of deliveries in the forward delivery 

period. Thus, to the extent the price of the forward 

contract was partially fixed, a seller could use long 

positions in commodity derivative contracts to 

offset the risk of the partially-fixed-price sales 

contract under the provisions of proposed 

paragraph (3)(i). 

362Under NYMEX rules regarding EFP 

transactions in WTI futures, the buyer and seller of 

futures must be the seller and buyer of an 

approximately equivalent quantity of the physical 

product underlying the futures. See NYMEX rule 

200.20 (available at http://www.cmegroup.com/

rulebook/NYMEX/2/200.pdf), and NYMEX rule 538 

(available at http://www.cmegroup.com/rulebook/

NYMEX/1/5.pdf). 

363A refinery with fixed price sales contracts 

may, as appropriate, enter into a long position in 

commodity derivative contracts as a bona fide 

hedging position or cross-commodity hedging 

position under proposed paragraphs (3)(ii) and (5). 

364The refinery’s long position in WTI futures 

would be liquidated as a result of the EFP 

transaction that established the fixed price purchase 

contract. 

365Regarding the first time period, there is 

another enumerated bona fide hedging exemption 

involving offsetting commodity derivative 

contracts. Offsetting sales and purchases of 

commodity derivative contracts would be 

recognized as bona fide hedging positions to reduce 

the risk of unfixed price purchase and sales 

contracts of the cash commodity (paragraph (4)(ii)). 

This provision does not recognize positions as bona 

fide hedges under the five-day rule (i.e., during the 

lesser of the last five days of trading or the spot 

month for physical-delivery commodity derivative 

contracts). The refinery short positions are not 

similar to positions established to offset the risk of 

unfixed price sales and purchases, in that the 

refinery has not entered into open price purchase 

and sales contracts. 

utility to hedge the anticipated natural 

gas requirements of its retail customers 

be treated as bona fide hedging 

transactions or positions. 

The proposed definition of bona fide 

hedging position would permit Request 

Six under proposed paragraph 

(3)(iii)(B), discussed above. 

Request Seven. Use of PhysicalDelivery Referenced Contracts to Hedge 

Physical Transactions Using Calendar 

Month Average Pricing: The Working 

Group argues that referenced contracts 

used to hedge in connection with 

calendar month average (‘‘CMA’’) 

pricing are not speculative in nature and 

should be exempt from speculative 

position limits. The Working Group 

requests that firms engaged in CMApriced transactions involving physicaldelivery referenced contracts be 

permitted to hold those positions 

through the spot month as bona fide 

hedging positions. 

The discussion below summarizes 

and addresses the petitioner’s scenarios 

under Request Seven and notes the 

proposed exemptions that would be 

applicable or the reasons for denial. 

Summary of Scenario 1: Refinery 

hedging unfilled anticipatory 

requirements for crude oil on a calendar 

month average basis and cross-hedging 

the sale of anticipated processed 

distillate products 361

The Working Group noted that a 

refinery may buy crude oil on a CMA 

basis. The petitioner describes a threestep program whereby a refinery might 

buy crude oil on a CMA basis and 

subsequently sell distillate products on 

a CMA basis. First, on each trading day 

over approximately a one month period 

prior to expiration of the nearby 

NYMEX light sweet crude oil (WTI) 

futures contract, the refinery purchases 

futures contracts in the nearby contract 

month and sells an equivalent amount 

of futures in the next two deferred 

contract months in that same futures 

contract. The resulting positions are 

calendar month spreads in WTI futures 

contracts that are acquired at an average 

price over the one-month period. 

Second, following the establishment of 

the spread positions in WTI futures 

contracts, the refinery engages in 

exchange of futures for physical 

commodity (EFP) transactions, 

obtaining a short nearby WTI futures 

position in exchange for entering into 

cash market contracts for purchase of 

crude oil at a fixed price over the 

following calendar month.362 These 

nearby short WTI futures positions 

offset the nearby long WTI futures 

positions of the calendar month spread. 

Alternatively, the refinery stands for 

delivery on the nearby long WTI futures 

positions. As a result, the refinery holds 

only short deferred month WTI futures 

positions. Third, as the refinery takes 

deliveries of crude oil over the 

following calendar month on the cash 

market contracts (or alternatively under 

the physical delivery provisions of the 

futures contracts), the refinery processes 

the crude oil then sells the distillate 

products on the spot market. As the 

sales of distillate products occur, the 

refinery buys back the short WTI futures 

positions in the next two contract 

months. 

The contemplated long positions are 

consistent with proposed paragraph 

(3)(iii) to the extent a refinery does not 

establish a long position in excess of 

that refinery’s unfilled anticipated 

requirements for crude oil for the next 

two months. Further, in the case of a 

refinery, the Commission notes that, 

unless the refinery has fixed price 

sales 363 or offsetting short positions of 

the expected processed cash products, 

such contemplated long positions in 

WTI futures alone may not be 

economically appropriate to the 

reduction of risk in the conduct and 

management of a commercial enterprise; 

hence, the Commission also views the 

short positions in WTI futures to be an 

integral component of the contemplated 

calendar spreads. 

Regarding the short positions, the 

Commission considers the economic 

consequences of the positions over two 

time periods: (1) the period of time the 

refinery holds a calendar spread 

position (long nearby and short deferred 

WTI contract months); and (2) the 

subsequent period of time when the 

refinery holds only a short position in 

WTI futures 364 and has a fixed price 

purchase contract on which it receives 

crude oil that it processes into distillate 

products. 

Regarding the first time period, when 

considered as a whole with the long 

positions covering the unfilled 

anticipated requirements, the refinery’s 

short positions would be risk reducing 

transactions, and therefore would 

qualify under proposed paragraphs (4)(i) 

and (5), so long as the long futures 

positions (meeting the unfilled 

anticipated requirements of paragraph 

(3)(iii)) fix the input price and the short 

futures positions fix a significant 

portion of the price of the expected 

output of petroleum distillate products 

that are not yet sold at a fixed price. The 

refinery’s short position in referenced 

contracts would be an economically 

appropriate cross-commodity hedge, as 

contemplated by paragraph (5), to the 

extent the fluctuations in value of the 

anticipated processed cash commodities 

(that is, the petroleum distillates) are 

substantially related to fluctuations in 

value of the referenced contracts in 

crude oil.365

During the second time period, the 

refinery, for example, contracts for the 

purchase of crude oil at a fixed price (as 

a result of the EFP transaction) or 

subsequently holds crude oil in 

inventory (e.g., through taking delivery 

on the WTI futures contracts). Thus, the 

refinery in the second time period 

initially holds a bona fide hedging 

position under paragraph (3)(A). Once 

the crude oil is processed, the refinery 

also may continue to hold short crude 

oil futures contracts as a cross-hedge of 

distillate products under paragraph (5). 

Proposed paragraph (5) permits a crosscommodity hedge when the fluctuations 

in value of the position in the 

commodity derivative contract are 

substantially related to the fluctuations 

in value of the actual or anticipated cash 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75722 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

366The Commission typically does not publish 

‘‘general statistical information’’ as authorized by 

CEA section 8(a)(1) regarding large trader positions 

in the expiring physical-delivery energy futures 

contracts because of concerns that such data may 

reveal information about the amount of market 

power a person may need to ‘‘mark the close’’ or 

otherwise manipulate the price of an expiring 

contract. Marking the close refers to, among other 

things, the practice of acquiring a substantial 

position leading up to the closing period of trading 

in a futures contract, followed by offsetting the 

position before the end of the close of trading, in 

an attempt to manipulate prices in the closing 

period. The Commission gathers large trader 

position reports on reportable traders in futures 

under part 17 of the Commission’s rules. That data 

generally is confidential pursuant to section 8 of the 

Act. The Commission does, however, publish 

summary statistics for all-months-combined in its 

Commitments of Traders Report, available at http:// 

www.cftc.gov/MarketReports/

CommitmentsofTraders/index.htm. 

367Request Ten is similar to Request Eight, which 

also deals with unfilled anticipated requirements. 

However, Request Eight deals with requirements for 

the same commodity, whereas Request Ten involves 

cross-hedging in a different commodity. 

368Prior to the court’s order vacating part 151, 

§ 1.3(z) was amended to in November 2011 to apply 

only to excluded (i.e., financial, not physical) 

commodities. Therefore, by requesting that this 

particular section of § 1.3(z) be ‘‘reinstated,’’ 

petitioner is asking that it be applied once again to 

physical delivery (exempt and agricultural) 

commodities. However, § 1.3(z)(2)(iv) has never 

permitted a cross-commodity hedge under 

§ 1.3(z)(2)(ii)(C) to be held into the five last trading 

days. 

369The CME Petition also requested that the 

Commission recognize as bona fide hedges 

positions held into the five last trading days in 

physical-delivery referenced contracts that reduce 

the risk of two months unfilled anticipated 

requirements in the same cash commodity, as 

provided in § 1.3(z)(2)(ii)(C). 

position. In this example, the aggregate 

price fluctuations of all of the distillate 

products of crude oil are substantially 

related to the price fluctuations of crude 

oil, with such prices expected to differ 

by refining costs and an expected 

processing margin. Thus, the refinery in 

the second time period holds a short 

futures position that is a bona fide 

inventory hedge or a bona fide crosscommodity hedge permitted under 

existing and proposed rules. 

Summary of Scenario 2: Merchant 

short hedge of CMA price purchase of 

crude oil from producer, and long 

position to cover anticipated re-sale of 

crude oil at CMA. 

In its January 20, 2012, petition, the 

Working Group gives the example of a 

producer that sells oil at the price at 

which it was valued (basis WTI futures) 

on each day it was extracted from the 

earth. The buyer is an aggregator that 

pays each producer for crude oil on a 

CMA basis for the production of the 

prior month. The aggregator seeks to 

ensure the CMA selling price for the oil 

purchased from the producers. 

The aggregator sells the nearby WTI 

futures each trading day over a one 

month period and buys an equivalent 

quantity of WTI futures contracts in the 

subsequent two deferred WTI contract 

months. 

Subsequently, the aggregator intends, 

in an EFP transaction, to exchange long 

futures in the nearby contract month, for 

a sales contract to be delivered ratably 

over the delivery period of that nearby 

contract month. (The long futures from 

the EFP transaction would offset the 

short WTI futures in the nearby contract 

month.) The aggregator would sell the 

long futures contracts each day as oil is 

delivered ratably during the month. By 

ratably selling the long futures as the 

physical barrels are delivered, the 

aggregator effectively realizes the price 

of the prompt barrel on that trading day. 

Alternatively, in its April 17, 2012 

supplement, the Working Group argues 

that it should be sufficient that an 

aggregator wants to lock in CMA pricing 

for a sales commitment by entering into 

the spread position described above, 

regardless of the facts relating to the 

purchase side of the transaction. 

Because the aggregator is selling 

futures daily as the price on the 

aggregator’s contractual purchase 

commitment is being fixed for each 

day’s production, the aggregator builds 

a short futures position to offset the 

crude oil it will eventually purchase 

from the producer under the CMA cash 

contract at a price that is partially fixed 

each day the short position is acquired. 

Once the aggregator is committed at a 

fixed price to take delivery of the oil, 

the aggregator holds a bona fide hedging 

position under paragraph (3)(A), which 

continues to be a bona fide hedging 

position under that rule after the 

aggregator takes delivery of the oil. 

The Commission has not recognized 

as bona fide hedging a long futures 

position (as a synthetic sales price for 

the same commodity), when a person 

holds either inventory or a fixed-price 

purchase contract, the price risk of 

which has been offset using a short 

futures position. From the scenario and 

alternative presented, it is not clear that 

there is a price risk that is being 

reduced. Rather, the aggregator appears 

to seek to establish a sales price, 

without a corresponding uncovered 

price risk in either inventory or fixedprice sales or fixed-price purchase 

contracts. Thus, the transactions do not 

satisfy the requirements of the proposed 

definition of bona fide hedging position. 

In considering the petition, the 

Commission reviewed its historical 

policy position with respect to bona fide 

hedges in light of position information 

regarding physical-delivery energy 

futures contracts. The Commission 

reviewed three years of confidential 

large trader data in cash-settled and 

physical-delivery energy contracts.366

The review covered actual positions 

held in the physical-delivery energy 

futures markets during the three-day 

spot period, among all traders 

(including those who had received 

hedge exemptions from their D.C.M). It 

showed that, historically, there have 

been relatively few positions held in 

excess (and those few not greatly in 

excess) of the spot month limits. 

Accordingly, the Commission does not 

propose to grant the Working Group’s 

requests regarding Scenario 2. 

Nonetheless, the Commission notes 

that a person desiring to establish a 

synthetic sales price may hold a 

position subject to the spot month limit, 

but cautions that such person should 

trade so as not to disrupt the settlement 

price of the physical-delivery contract. 

Working Group Petition Requests Eight, 

Nine, and Ten 

Request Eight. Holding a Hedge Using 

a Physical-Delivery Contract into the 

Spot Month; Generally: The Working 

Group requests that firms that use 

physical-delivery referenced contracts 

(in commodities other than metals or 

agriculture) as bona fide hedging 

transactions or positions be permitted to 

hold these hedges into the spot month. 

Request Nine. Holding a CrossCommodity Hedge Using a Physical 

Delivery Contract into the Spot Month: 

The Working Group requests that firms 

that use physical-delivery referenced 

contracts as a cross-commodity hedge be 

permitted to hold these hedges into the 

spot month. 

Request Ten. Holding a CrossCommodity Hedge Using a PhysicalDelivery Contract to Meet Unfilled 

Anticipated Requirements: 367 The 

Working Group argued that the 

Commission should ‘‘reinstate’’ 

§ 1.3(z)(2)(ii)(C) 368 to permit firms to 

hold cross-commodity hedges involving 

physical-delivery referenced contracts 

into the spot month in order to meet 

their unfilled anticipated requirements. 

The proposed definition of bona fide 

hedging position would permit Request 

Eight under proposed paragraphs (3)(C), 

discussed above, for hedges of unfilled 

anticipated requirements.369

However, the proposed definition 

does not recognize the other requests as 

bona fide hedging positions. As 

discussed above, the Commission 

continues to believe that, as a physicaldelivery commodity derivative contract 

approaches expiration, it is necessary to 

protect orderly trading and the integrity 

of the markets. A person holding a large 

physical-delivery futures position who 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75723 

370The ‘‘enumerated’’ agricultural products refer 

to the list of commodities contained in the 

definition of ‘‘commodity’’ in CEA section 1a; 7 

U.S.C. 1a. This list of agricultural contracts includes 

nine currently traded contracts: Corn (and MiniCorn), Oats, Soybeans (and Mini-Soybeans), Wheat 

(and Mini-wheat), Soybean Oil, Soybean Meal, Hard 

Red Spring Wheat, Hard Winter Wheat, and Cotton 

No. 2. See 17 CFR 150.2. The position limits on 

these agricultural contracts are referred to as 

‘‘legacy’’ limits because these contracts on 

agricultural commodities have been subject to 

federal positions limits for decades. 

371 17 CFR 150.2. Footnote 1 to § 150.2 adds, ‘‘for 

purposes of compliance with these limits, positions 

in the regular sized and mini-sized contracts shall 

be aggregated.’’ Id. 

372See id. 

373See 17 CFR 150.1(f). 

374 75 FR 4142, Jan. 26, 2010. 

375 Id. at 4152–54. 

376 75 FR 50950, Aug. 18, 2010. 

377 7 U.S.C. 6a(a)(1). 

378Section 4a(a)(5) of the Act requires the 

Commission to impose the same limits on ‘‘swaps’’ 

that are ‘‘economically equivalent’’ to futures and 

options contracts. The statute does not define the 

term. But the Commission construes it, consistent 

with the policy objectives of the Dodd-Frank 

amendments, to require the Commission to 

expeditiously impose limits on physical commodity 

swaps that are price-linked to futures contracts, or 

to satisfy other defined equivalence criteria. The 

Commission accordingly construes the term 

‘‘economically equivalent’’ to require swaps to 

satisfy the definition of ‘‘referenced’’ contract in 

proposed § 150.1. It requires that a swap be, among 

other things, ‘‘directly or indirectly linked, 

including being partially or fully settled on, or 

priced at a fixed differential to, the price of that 

particular core referenced futures contract; or . . . 

directly or indirectly linked, including being 

partially or fully settled on, or priced at a fixed 

differential to, the price of the same commodity 

underlying that particular core referenced futures 

contract for delivery at the same location or 

locations as specified in that particular core 

referenced futures contract . . .’’ Other similarities 

or differences that exist between futures and swaps 

are not material to the Commission’s interpretation 

of economic equivalence under 7 U.S.C. 6a(a)(5). 

379 7 U.S.C. 6a(a)(2), (5). 

380 7 U.S.C. 6a(a)(6). The Commission refers to 

this requirement in section 4a(a)(6) of the Act as a 

requirement for position aggregation. 

381The Commission instructed market 

participants to continue to comply with the existing 

position limit regime contained in part 150 and any 

applicable DCM position limits or accountability 

levels until the compliance date for the position 

limits rules in new part 151. After such date, part 

150 would have been revoked and compliance with 

part 151 would have been required. 76 FR 71632. 

382See 887 F. Supp. 2d 259 (D.D.C. 2012). 

383The District Court’s order vacated the final 

rule and the interim final rule promulgated in the 

2011 Position Limits Rulemaking, with the 

exception of the rule’s amendments to 17 CFR 

150.2. 

384 76 FR at 71629. 

has no intention to make or take 

delivery may cause an unwarranted 

price fluctuation by demanding to 

liquidate such position deep into the 

delivery period in a physical-delivery 

agricultural contract or a metal futures 

contract or during the three-day spot 

period in a physical-delivery energy 

futures contract. Further, as noted 

above, a review of large trader positions 

in physical-delivery energy futures 

contracts does not show a current 

practice of traders holding large 

positions in the spot period of the 

physical-delivery energy referenced 

contracts relative to the exchange spot 

month limits. 

The Commission invites comments on 

all aspects of the Working Group’s 

petition and the Commission review. 

2. Section 150.2—Position limits 

i. Current § 150.2 

The Commission currently sets and 

enforces speculative position limits 

with respect to certain enumerated 

agricultural products.370 Current § 150.2 

provides in its entirety that ‘‘[n]o person 

may hold or control positions, 

separately or in combination, net long or 

net short, for the purchase or sale of a 

commodity for future delivery or, on a 

futures-equivalent basis, options 

thereon, in excess of [enumerated 

levels].’’ 371 As such, the speculative 

position limits set forth in current 

§ 150.2 apply only to specific futures 

contracts traded on specific exchanges 

and, on a futures-equivalent basis, to 

specific option contracts thereon.372

‘‘Futures-equivalent’’ is defined in 

current § 150.1(f) as ‘‘an option 

contract,’’ and nothing else.373

Accordingly, current § 150.2 establishes 

federal position limits only for 

specifically enumerated futures 

contracts on ‘‘legacy’’ agricultural 

commodities and options on those 

futures contracts. 

In 2010, the Commission proposed to 

implement additional speculative 

position limits for futures and option 

contracts in certain energy commodities 

(‘‘2010 Energy Proposal’’).374 In the 

2010 Energy Proposal, the Commission 

included a discussion of past and 

present position limits for certain 

agricultural contracts under part 150 

stating that current § 150.2 applies only 

to specific agricultural futures and 

options contracts: 

[t]he current Federal speculative position 

limits of regulation 150.2 apply only to 

specific futures contracts [and] (on a futuresequivalent basis) specific option contracts. 

Historically, all trading volume in a specific 

contract tended to migrate to a single 

[futures] contract on a single exchange. 

Consequently, speculative position limits 

that applied to a single [futures] contract and 

options thereon effectively applied to a single 

market. The current speculative position 

limits of regulation 150.2 for certain 

agricultural contracts follow this 

approach.375

The Commission withdrew the 2010 

Energy Proposal when the Dodd-Frank 

Act became law.376

The limited scope and applicability of 

the speculative position limits in 

current § 150.2, as well as in the 2010 

Energy Proposal, are inconsistent with 

the congressional shift evidenced in the 

Dodd-Frank Act amendments to section 

4a of the Act, upon which the 

Commission relies in this release. 

Amended CEA section 4a(a)(1) 

authorizes the Commission to extend 

position limits beyond futures and 

option contracts to swaps traded on a 

DCM or SEF and swaps not traded on 

a DCM or SEF that perform or affect a 

significant price discovery function 

with respect to regulated entities 

(‘‘SPDF swaps’’).377 Further, new CEA 

section 4a(a)(5) requires that speculative 

position limits apply to swaps that are 

‘‘economically equivalent’’ 378 to DCM 

futures and option contracts for 

agricultural and exempt commodities 

under new CEA section 4a(a)(2).379

Similarly, new CEA section 4a(a)(6) 

requires the Commission to apply 

position limits on an aggregate basis to 

contracts based on the same underlying 

commodity across: (1) DCMs; (2) with 

respect to foreign boards of trade 

(‘‘FBOTs’’), contracts that are pricelinked to a DCM or SEF contract and 

made available from within the United 

States via direct access; and (3) SPDF 

swaps.380

In 2011, the Commission proposed 

and, after comment, adopted rules to 

establish an expanded position limits 

regime pursuant to the mandate 

contained in the Dodd-Frank Act 

amendments to CEA section 4a.381

However, in an Order dated September 

28, 2012, the U.S. District Court for the 

District of Columbia vacated the 2011 

Position Limits Rulemaking, with the 

exception of the revised position limit 

levels in amended § 150.2.382 Therefore, 

part 150 continues to apply, as 

amended, as if part 151 had not been 

finally adopted by the Commission.383

Vacated part 151 would have 

established federal position limits and 

limit formulas for 28 physical 

commodity futures and option 

contracts, or ‘‘Core Referenced Futures 

Contracts,’’ and would have applied 

these limits to all derivatives that are 

directly or indirectly linked to the price 

of a Core Referenced Futures Contract 

(collectively, ‘‘Referenced 

Contracts’’).384 Therefore, the position 

limits in vacated part 151 would have 

applied across different trading venues 

to economically equivalent Referenced 

Contracts (as specifically defined in part 

151) that are based on the same 

underlying commodity, a concept 

known as aggregate limits. Vacated 


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385 Id. at 71685. 

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

387See discussion of proposed § 150.1 above. 

388Section 4a(a)(5) of the Act requires the 

Commission to impose the same limits on ‘‘swaps’’ 

that are ‘‘economically equivalent’’ to futures and 

options contracts. The statute does not define the 

term. But the Commission construes it, consistent 

with the policy objectives of the Dodd-Frank 

amendments, to require the Commission to 

expeditiously impose limits on physical commodity 

swaps that are price-linked to futures contracts, or 

to satisfy other defined equivalence criteria. The 

Commission accordingly construes the term 

‘‘economically equivalent’’ to require swaps to 

satisfy the definition of ‘‘referenced’’ contract in 

proposed § 150.1. It requires that a swap be, among 

other things, ‘‘directly or indirectly linked, 

including being partially or fully settled on, or 

priced at a fixed differential to, the price of that 

particular core referenced futures contract; or . . . 

directly or indirectly linked, including being 

partially or fully settled on, or priced at a fixed 

differential to, the price of the same commodity 

underlying that particular core referenced futures 

contract for delivery at the same location or 

locations as specified in that particular core 

referenced futures contract. . . .’’ Other similarities 

or differences that exist between futures and swaps 

are not material to the Commission’s interpretation 

of economic equivalence under 7 U.S.C. 6a(a)(5). 

389The Commission proposes to adopt an 

amended definition of spot month in proposed 

§ 150.1 (as discussed above), simplified from the 

spot-month definitions listed in vacated § 151.3. 

The term ‘‘spot month’’ does not refer to a month 

of time. 

390The Commission would allow traders to net 

positions in physical-delivery and cash-settled 

contracts outside the spot month because the 

Commission is less concerned about corners and 

squeezes outside the spot month. Permitting such 

netting will significantly reduce the number of 

traders with positions over the levels of non-spot 

month limits. The Commission discusses how many 

traders historically held positions over the levels of 

non-spot month limits below. 391See Revision of Federal Speculative Position 

Limits, Proposed Rules, 57 FR 12766, Apr. 13, 1992. 

392 Id. at 12768. 

393 Id. at 12769. 

394 Id. at 12770. 

395 Indeed, the Commission noted in 1993 when 

it adopted an interim final rule that ‘‘as proposed, 

speculative position limits for both futures and 

options thereon are being combined into a single 

limit.’’ See interim final rule at 58 FR 17973, Apr. 

7, 1993. The Commission noted it ‘‘proposed to 

unify speculative position limits for both futures 

and options thereon, reasoning that, because price 

movements in the two markets are highly related, 

the unified system more readily reflects the 

economic reality of a position in its totality. 

Moreover, unified speculative limits provide the 

trader with greater flexibility. Further, traders 

should find such a unified speculative position 

limit easier to use and to understand. Finally, as a 

consequence of the simpler structure, unified 

speculative position limits would be easier to 

administer, resulting in more accurate and timely 

market surveillance.’’ Id. at 17974. 

In discussing comments on the 1992 proposed 

rule, the Commission noted an objection by a DCM 

to the proposed unified futures and options limits, 

preferring the DCM’s proposed separate futures and 

options limits. Id. at 17976. The Commission 

discussed views of other commenters regarding the 

proposed ‘‘unified limits.’’ Id. at 17977. The 

§ 151.1 defined ‘‘Referenced Contract’’ 

to mean: 

on a futures equivalent basis with respect to 

a particular Core Referenced Futures 

Contract, a Core Referenced Futures Contract 

listed in § 151.2, or a futures contract, 

options contract, swap or swaption, other 

than a basis contract or commodity index 

contract, that is: (1) Directly or indirectly 

linked, including being partially or fully 

settled on, or priced at a fixed differential to, 

the price of that particular Core Referenced 

Futures Contract; or (2) Directly or indirectly 

linked, including being partially or fully 

settled on, or priced at a fixed differential to, 

the price of the same commodity underlying 

that particular Core Referenced Futures 

Contract for delivery at the same location or 

locations as specified in that particular Core 

Referenced Futures Contract.385

In addition to establishing federal 

position limits for all Referenced 

Contracts, vacated part 151 would have, 

among other things, implemented a new 

statutory definition of bona fide hedging 

transactions, revised the standards for 

position aggregation, and established 

position visibility reporting 

requirements.386

ii. Proposed § 150.2 

Proposed § 150.2 would list spot 

month, single month, and all-monthscombined position limits for 28 core 

referenced futures contracts. Consistent 

with section 4a(a)(5) of the Act, 

proposed § 150.2 would apply such 

position limits to all referenced 

contracts (as that term is defined in the 

proposed amendments to § 150.1) 387

including economically equivalent 

swaps.388 Consistent with section 

4a(a)(6) of the Act, proposed § 150.2 

would apply position limits across all 

trading venues subject to the 

Commission’s jurisdiction. Proposed 

§ 150.2 would also specify Commission 

procedures for computing position 

limits levels. 

a. Spot Month Limits 

Proposed § 150.2(a) provides that no 

person may hold or control positions in 

referenced contracts in the spot month, 

net long or net short, in excess of the 

level specified by the Commission for 

physical-delivery referenced contracts 

and, specified separately, for cashsettled referenced contracts.389

Proposed § 150.2(a) requires that a 

trader’s positions in the physicaldelivery referenced contract and cashsettled referenced contract are to be 

calculated separately under the separate 

spot month position limits fixed by the 

Commission. Therefore, a trader may 

hold positions up to the spot month 

limit in the physical-delivery contracts, 

as well as positions up to the applicable 

spot month limit in cash-settled 

contracts (i.e., cash-settled futures and 

swaps), but a trader in the spot month 

may not net across physical-delivery 

and cash-settled contracts. Absent such 

a restriction in the spot month, a trader 

could stand for 100 percent of 

deliverable supply during the spot 

month by holding a large long position 

in the physical-delivery contract along 

with an offsetting short position in a 

cash-settled contract, which effectively 

would corner the market. The 

Commission will closely monitor the 

effects of its spot-month position limits. 

b. Single-Month and All-MonthsCombined Limits 

Proposed § 150.2(b) provides that no 

person may hold or control positions, 

net long or net short, in referenced 

contracts in a single-month or in allmonths-combined in excess of the levels 

specified by the Commission. Proposed 

§ 150.2(b) permits traders to net all 

positions in referenced contracts 

(regardless of whether such referenced 

contracts are physical-delivery or cashsettled) when calculating the trader’s 

positions for purposes of the proposed 

single-month or all-months-combined 

position limits.390

The Commission also proposes to 

amend § 150.2 by deleting the 

potentially ambiguous phrase 

‘‘separately or in combination.’’ The 

Commission first proposed adding the 

phrase ‘‘separately or in combination’’ 

to § 150.2 in 1992.391 While the text of 

current § 150.2 could be read in context 

to apply limits to futures or option 

positions, separately or in combination, 

the preamble to that rulemaking 

proposal stated otherwise, indicating 

the Commission was proposing a 

‘‘unified approach’’ to limits on futures 

and options positions combined.392

When considering at that time whether 

to extend the existing federal position 

limits on futures contracts also to option 

contracts (on a futures equivalent basis), 

the Commission explained that a 

unified futures and options level limit 

was ‘‘more appropriate for several 

reasons’’ than position limits on futures 

that are separate from position limits on 

options.393 Further, the Commission 

noted in the 1992 preamble that 

‘‘proposed Rule 150.2 provides that 

‘[n]o person may hold or control net 

long or net short positions in excess of 

the stated limits.’’ 394 Although the 1992 

preamble stated the limit rule was to 

apply on a net basis to futures and 

options combined, the regulatory text 

could be read to suggest a different 

approach, i.e., applying to futures or 

options on both a separate basis and a 

combined basis. The phrase ‘‘separately 

or in combination’’ was not discussed in 

any subsequent Federal Register 

notice.395


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75725 

Commission concluded that it would adopt the 

unified limits, noting it ‘‘will combine futures and 

option limits.’’ The preamble also made clear the 

limits would not apply separately, noting further 

that ‘‘because such positions would be netted 

automatically under a unified speculative position 

limit, the Commission is removing and reserving 

§ 150.3(a)(2) which exempts from Federal 

speculative position limits positions in option 

contracts which offset the futures positions.’’ Id. at 

17978–79. 

396The 28 core referenced futures contracts are: 

Chicago Board of Trade Corn, Oats, Rough Rice, 

Soybeans, Soybean Meal, Soybean Oil and Wheat; 

Chicago Mercantile Exchange Feeder Cattle, Lean 

Hog, Live Cattle and Class III Milk; Commodity 

Exchange, Inc., Gold, Silver and Copper; ICE 

Futures U.S. Cocoa, Coffee C, FCOJ–A, Cotton No. 

2, Sugar No. 11 and Sugar No. 16; Kansas City 

Board of Trade Hard Winter Wheat (on September 

6, 2013, CBOT and the Kansas City Board of Trade 

(‘‘KCBT’’) requested that the Commission permit 

the transfer to CBOT, effective December 9, of all 

contracts listed on the KCBT, and all associated 

open interest); Minneapolis Grain Exchange Hard 

Red Spring Wheat; and New York Mercantile 

Exchange Palladium, Platinum, Light Sweet Crude 

Oil, NY Harbor ULSD, RBOB Gasoline and Henry 

Hub Natural Gas. 

397Open interest for this purpose is the sum of 

open contracts, as defined in § 1.3(t), in futures 

contracts and in futures option contracts converted 

to a futures-equivalent amount, as defined in 

§ 150.1(f), and open swaps, as defined in § 20.1, on 

a future equivalent basis, as defined in § 20.1, 

where such swaps are significant price discovery 

contracts as determined by the Commission under 

§ 36.3(d). 

398Notional value of open interest for this 

purpose is open interest times the unit of trading 

for the relevant futures contract times the price of 

that futures contract. 

399The Commission, in the vacated part 151 

Rulemaking, selected for what was also intended as 

a first phase, the same 28 core referenced futures 

contracts on the same basis. 76 FR at 71629. As was 

noted when part 151 was adopted, the 28 core 

referenced futures contracts were selected on the 

basis that such contracts: (1) had high levels of open 

interest and significant notional value; or (2) served 

as a reference price for a significant number of cash 

market transactions. Id. 

400 17 CFR 150.2. 

401While cheese has a notional value of open 

interest that is higher than oats, it has an open 

interest that is lower than that of oats (the open 

interest of the cheese contract was less than 10,000 

contracts as of year-end 2012). Furthermore, all 

futures and options contracts in cheese are on the 

same DCM (which currently has a single month 

position limit set at 1,000 contracts) and had no 

Large Trader Reporting for physical commodity 

swaps as reported under part 20 during January 

2013. The Commission intends to address cheese 

when it proposes, in subsequent releases, 

expansions to the list of referenced contracts in 

physical commodities. 

402 17 CFR Part 16. Commission staff computed 

notional values of open interest from data reported 

under § 16.01. Data reported under § 16.01 includes 

significant price discovery contracts in compliance 

with core principle VI for exempt commercial 

markets, app. B to part 36. 

c. Selection of Initial Commodity 

Derivative Contracts in Physical 

Commodities 

As discussed above, the Commission 

interprets the CEA to mandate position 

limits for futures contracts in physical 

commodities other than excluded 

commodities (i.e., position limits are 

required for futures contracts in 

agricultural and exempt commodities). 

The Commission is proposing a 

phased approach to implement the 

statutory mandate. The Commission is 

proposing in this release to establish 

speculative position limits on 28 core 

referenced futures contracts in physical 

commodities.396 The Commission 

anticipates that it will, in subsequent 

releases, propose to expand the list of 

core referenced futures contracts in 

physical commodities. The Commission 

believes that a phased approach will (i) 

reduce the potential administrative 

burden by not immediately imposing 

position limits on all commodity 

derivative contracts in physical 

commodities at once, and (ii) facilitate 

adoption of monitoring policies, 

procedures and systems by persons not 

currently subject to positions limits 

(such as traders in swaps that are not 

significant price discovery contracts). 

The Commission proposes, initially, 

to establish position limits on these 28 

core referenced futures contracts, and 

related swap and futures contracts, on 

the basis that such contracts (i) have 

high levels of open interest 397 and 

significant notional value of open 

interest 398 or (ii) serve as a reference 

price for a significant number of cash 

market transactions.399 Thus, in the first 

phase, the Commission generally is 

proposing limits on those contracts that 

it believes are likely to play a larger role 

in interstate commerce than that played 

by other physical commodity derivative 

contracts. 

In selecting the list of 28 core 

referenced futures contracts in proposed 

§ 150.2(d), the Commission calculated 

the open interest and notional value of 

open interest for all futures, futures 

options, and significant price discovery 

contracts as of December 31, 2012 in all 

agricultural and exempt commodities. 

The Commission identified those 

commodities with the largest notional 

value of open interest and open interest 

for agricultural commodities, energy 

commodities, and metals commodities. 

The Commission then selected 16 

agricultural commodities, 4 energy 

commodities, and 5 metals 

commodities. Once these commodities 

were selected, the Commission 

determined the most important futures 

contract, or contracts, within each 

commodity, generally by selecting the 

physical-delivery contracts with the 

highest levels of open interest, and 

deemed these as the core referenced 

futures contracts for which position 

limits would be established in this 

release. As such, the Commission 

proposes in this release to set position 

limits in 19 core referenced futures 

contracts for agricultural commodities, 4 

core referenced futures contracts for 

energy commodities, and 5 core 

referenced futures contracts for metals 

commodities. The Commission 

currently sets limits for 9 legacy 

agricultural contracts under part 150.400

In selecting the 16 agricultural 

commodities, the Commission used oats 

as its baseline since oats has the lowest 

notional value of open interest and the 

lowest open interest among the 9 legacy 

agricultural contracts. Hence, the 

Commission selected all agricultural 

commodities that have notional value of 

open interest and open interest that 

exceed that of oats.401 The Commission 

has determined to defer consideration of 

speculative position limits on contracts 

in other agricultural commodities 

because the Commission must marshal 

its resources. The Commission 

anticipates that it will consider 

speculative position limits on contracts 

in other agricultural commodities in a 

subsequent rulemaking. 

Table 6 below provides the notional 

value of open interest and open interest 

for agricultural contracts by type of 

commodity contract reported under the 

Commission’s reporting rules.402 With 

respect to the type of commodity, it 

should be noted, for example, that 

‘‘wheat’’ refers to the general type of 

physical commodity, and includes 

contracts listed on three different DCMs. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75726 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

403The open interest in iron ore futures, futures 

options, and significant price discovery contracts as 

of December 31, 2012, was 8,195 contracts and the 

notional value of open interest was $236.63 million. 

404A reportable trader is a trader with a 

reportable position as defined in § 15.00(p). 

TABLE 6—LARGEST AGRICULTURAL COMMODITIES RANKED BY NOTIONAL VALUE OF OPEN INTEREST IN FUTURES, 

FUTURES OPTIONS, AND SIGNIFICANT PRICE DISCOVERY CONTRACTS, AS OF DECEMBER 31, 2012 

Type and rank within type by 

notion value of open interest Commodity Number of contracts Notional value of open interest Open interest 

Agricultural: 

1 ............................................... Soybeans ....................................... 6 $54.07 billion .................................. 765,030 

2 ............................................... Corn ............................................... 6 $51.54 billion .................................. 1,545,135 

3 ............................................... Wheat ............................................. 10 $41.06 billion .................................. 767,006 

4 ............................................... Sugar .............................................. 5 $39.06 billion .................................. 896,082 

5 ............................................... Live Cattle ...................................... 2 $19.91 billion .................................. 394,385 

6 ............................................... Coffee ............................................. 3 $13.89 billion .................................. 211,147 

7 ............................................... Soybean Oil ................................... 4 $11.01 billion .................................. 344,412 

8 ............................................... Soybean Meal ................................ 2 $10.46 billion .................................. 253,361 

9 ............................................... Cotton ............................................. 3 $9.75 billion .................................... 234,367 

10 ............................................. Lean Hogs ...................................... 1 $9.68 billion .................................... 280,451 

11 ............................................. Cocoa ............................................. 1 $5.13 billion .................................... 218,224 

12 ............................................. Feeder Cattle ................................. 1 $2.64 billion .................................... 34,816 

13 ............................................. Milk ................................................. 3 $1.45 billion .................................... 40,690 

14 ............................................. Frozen Orange Juice ..................... 1 $609 million .................................... 29,652 

15 ............................................. Rice ................................................ 1 $445 million .................................... 14,783 

16 ............................................. Cheese ........................................... 2 $282 million .................................... 8,601 

17 ............................................. Oats ................................................ 1 $187 million .................................... 10,755 

For exempt commodity contracts, the 

Commission proposes to initially select 

the commodities in the energy and 

metals markets that have the largest 

open interest and notional value of 

interest. For metals, the Commission 

proposes to initially target the 5 largest 

commodities in terms of notional value 

of open interest, as listed in Table 7 

below, and selected 1 core referenced 

futures contract for each of the 5 metals. 

In selecting these 5 core referenced 

futures contracts, the Commission 

would establish federal position limits 

on ninety-eight percent of the open 

interest in U.S. metals markets. 

The next largest commodity in metals 

after palladium in terms of notional 

value is iron ore, which has open 

interest that is about one-quarter that of 

palladium.403 Furthermore, there are 

less than 50 reportable traders 404 in iron 

ore, while in the 5 selected metals, each 

has more than 200 reportable traders. 

The Commission has determined to 

defer consideration of speculative 

position limits on contracts in iron ore 

and other metal commodities because 

the Commission must marshal its 

resources. The Commission anticipates 

that it will consider speculative position 

limits on contracts in iron ore and other 

metal commodities in a subsequent 

rulemaking. 

TABLE 7—LARGEST METALS COMMODITIES BY NOTIONAL VALUE OF OPEN INTEREST IN FUTURES, FUTURES OPTIONS, AND

SIGNIFICANT PRICE DISCOVERY CONTRACTS, AS OF DECEMBER 31, 2012 

Type and rank within type by 

notion value of open interest Commodity Number of contracts Notional value of open interest Open interest 

Metals: 

1 ............................................... Gold ................................................ 6 $100.41 billion ................................ 604,853 

2 ............................................... Silver .............................................. 5 $27.77 billion .................................. 180,576 

3 ............................................... Copper ........................................... 3 $13.28 billion .................................. 146,865 

4 ............................................... Platinum ......................................... 1 $4.78 billion .................................... 61,467 

5 ............................................... Palladium ....................................... 1 $2.08 billion .................................... 32,293 

For energy commodities, the 

Commission similarly proposes to select 

the 4 largest commodities for this first 

phase of the expansion of speculative 

position limits and selected 1 core 

referenced futures contract in each of 

these 4 commodities. Each of these 

commodities has a notional value of 

open interest in excess of $40 billion. 

The fifth largest commodity in energy 

is electricity, and the Commission has 

determined to defer consideration of 

speculative position limits on contracts 

in electricity and other energy 

commodities because the Commission 

must marshal its resources. The 

Commission anticipates that it will 

consider speculative position limits on 

contracts in electricity and other energy 

commodities in a subsequent 

rulemaking. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75727 

405 DCMs currently set spot-month position limits 

based on their own estimates of deliverable supply. 

Federal spot-month limits can, therefore, be 

implemented by the Commission relatively 

expeditiously. 

406Letter from Terrance A. Duffy, Executive 

Chairman and President, CME Group, to CFTC 

Chairman Gensler, Commissioner Chilton, 

Commissioner Sommers, Commissioner O’Malia, 

Commissioner Wetjen, and Division of Market 

Oversight Director Richard Shilts, dated July 1, 

2013 (available at www.cftc.gov). The Commission 

notes the CME Group did not propose to set the 

level of spot month limits using the 25 percent 

formula in this letter. 

TABLE 8—LARGEST ENERGY COMMODITIES BY NOTIONAL VALUE OF OPEN INTEREST IN FUTURES, FUTURES OPTIONS, 

AND SIGNIFICANT PRICE DISCOVERY CONTRACTS, AS OF DECEMBER 31, 2012 

Type and rank within type by 

notion value of open interest Commodity Number of contracts Notional value of open interest Open interest 

Energy: 

1 ............................................... Crude Oil ........................................ 76 $516.42 billion ................................ 6,188,201 

2 ............................................... Heating Oil/Diesel .......................... 89 $470.69 billion ................................ 1,192,036 

3 ............................................... Natural Gas .................................... 216 $225.74 billion ................................ 21,335,777 

4 ............................................... Gasoline ......................................... 54 $46.13 billion .................................. 402,369 

d. Setting Levels of Spot-Month Limits 

Proposed § 150.2(e)(1) establishes the 

initial levels of speculative position 

limits for each referenced contract at the 

levels listed in appendix D to this part. 

These levels would become effective 60 

days after publication in the Federal 

Register of a final rule adopted by the 

Commission. The Commission proposes 

to set the initial spot month position 

limit levels for referenced contracts at 

the existing DCM-set levels for the core 

referenced futures contracts because the 

Commission believes this approach is 

consistent with the regulatory objectives 

of the Dodd-Frank Act amendments to 

the CEA and many market participants 

are already used to these levels.405

As an alternative to the initial spot 

month limits in proposed appendix D to 

part 150, the Commission is considering 

setting the initial spot month limits 

based on estimated deliverable supplies 

submitted by the CME Group in 

correspondence dated July 1, 2013.406

Under this alternative, the Commission 

would use the exchange’s estimated 

deliverable supplies and apply the 25 

percent formula to set the level of the 

spot month limits in a final rule if the 

Commission verifies the exchange’s 

estimated deliverable supplies are 

reasonable. For purposes of setting 

initial spot month limits in a final rule, 

in the event the Commission is not able 

to verify an exchange’s estimated 

deliverable supply for any commodity 

as reasonable, then the Commission may 

determine to adopt the initial spot 

month limits in proposed appendix D 

for such commodity, or such higher 

level based on the Commission’s 

estimated deliverable supply for such 

commodity, but not greater than would 

result from the exchange’s estimated 

deliverable supply. The Commission 

requests comment on whether the initial 

spot month limits should be based on 

the exchange’s July 1, 2013, estimations 

of deliverable supplies, once verified. 

The spot month limits that would result 

from the CME’s estimated deliverable 

supplies are show in Table 9 below. 

TABLE 9—ALTERNATIVE PROPOSED INITIAL SPOT MONTH LIMIT LEVELS FOR CERTAIN CORE REFERENCED FUTURES CONTRACTS (BASED ON CME GROUP ESTIMATES OF DELIVERABLE SUPPLY SUBMITTED TO THE COMMISSION ON JULY 1, 

2013) 

Contract Current spotmonth limit 

Alternative 

proposed spotmonth limit 

(25% of deliverable supply 

rounded up to 

the next 100 

contracts) 

CME Group deliverable supply estimate 

CME Group 

deliverable 

supply 

estimate in 

contracts 

Legacy Agricultural 

Chicago Board of Trade Corn (C) .................. 600 1,000 19,590,000 bushels ........................................ 3,918 

Chicago Board of Trade Oats (O) .................. 600 1,500 29,470,000 bushels ........................................ 5,894 

Chicago Board of Trade Soybeans (S) .......... 600 1,200 23,900,000 bushels ........................................ 4,780 

Chicago Board of Trade Soybean Meal (SM) 720 4,400 1,753,047 tons ............................................... 17,531 

Chicago Board of Trade Soybean Oil (SO) .... 540 5,300 1,253,000 lbs .................................................. 20,883 

Chicago Board of Trade Wheat (W) ............... 600 3,700 73,790,000 bushels ........................................ 14,757 

Kansas City Board of Trade Hard Winter 

Wheat (KW).

600 4,100 81,710,000 bushels ........................................ 16,342 

Other Agricultural 

Chicago Board of Trade Rough Rice (RR) .... 600 1,800 14,100,000 cwt ............................................... 7,050 

Chicago Mercantile Exchange Class III Milk 

(DA).

1500 5,300 4,170,000,000 lbs ........................................... 20,850 

Energy 

New York Mercantile Exchange Henry Hub 

Natural Gas (NG).

1,000 3,900 154,200,000 mmBtu ....................................... 15,420 


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75728 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

407Federal spot month limits have historically 

been set at one-quarter of estimated deliverable 

supply. See, e.g., 64 FR 24038, 24041, May 5, 1999. 

Further, current guidance on complying with DCM 

core principle 5 calls for spot month levels to be 

set at ‘‘no greater than one-quarter of the estimated 

spot month deliverable supply. . . .’’ 17 CFR 

150.5(c)(1). 

408The timing for submission of such reports 

varies by commodity type—see proposed 

§ 150.2(e)(ii)(A)–(D). 

409See 17 CFR part 38, appendix C, at section 

(b)(1)(i). 

410 In any event, core principle 5 in section 

5(d)(5) of the Act imposes a continuing obligation 

on a DCM, where the DCM has set a position limit 

as necessary and appropriate, to ensure levels of 

position limits are set to reduce the potential threat 

of market manipulation or congestion (especially 

during the spot month). 7 U.S.C. 7(d)(5). Thus, a 

DCM appropriately would reduce the level of its 

exchange-set spot month limit if the level of 

deliverable supply declined significantly. Core 

principle 6 in section 5h(f)(6) of the Act imposes 

a similar obligation on a SEF that is a trading 

facility. 7 U.S.C. 7b–3(f)(6). 

411Proposed § 150.2(e)(3) also provides the 

Commission with flexibility to reset spot month 

position limits more frequently than every two 

years, but the proposed rule would require DCMs 

to submit estimated deliverable supplies only every 

two years. This means, for example, that a DCM 

may with discretion provide the Commission with 

updated estimated deliverable supplies and petition 

the Commission to reset spot month limits more 

frequently than every two years. Similarly, 

proposed § 150.2(e)(4) provides the Commission 

with flexibility to change non-spot month position 

limits more frequently than every two years. This 

means, for example, that a DCM may petition the 

Commission to reset non-spot month position limits 

based on the most recent calendar-year’s open 

interest. 

TABLE 9—ALTERNATIVE PROPOSED INITIAL SPOT MONTH LIMIT LEVELS FOR CERTAIN CORE REFERENCED FUTURES CONTRACTS (BASED ON CME GROUP ESTIMATES OF DELIVERABLE SUPPLY SUBMITTED TO THE COMMISSION ON JULY 1, 

2013)—Continued 

Contract Current spotmonth limit 

Alternative 

proposed spotmonth limit 

(25% of deliverable supply 

rounded up to 

the next 100 

contracts) 

CME Group deliverable supply estimate 

CME Group 

deliverable 

supply 

estimate in 

contracts 

New York Mercantile Exchange Light Sweet 

Crude Oil (CL).

3,000 12,100 48,100,000 barrels ......................................... 48,100 

New York Mercantile Exchange NY Harbor 

ULSD (HO).

1,000 5,500 20,000,000 barrels ......................................... 22,000 

New York Mercantile Exchange RBOB Gasoline (RB).1,000 7,300 29,000,000 barrels ......................................... 29,000 

Metal 

Commodity Exchange, Inc. Copper (HG) ....... 1,200 1,700 161,850,000 lbs .............................................. 6,474 

Commodity Exchange, Inc. Gold (GC) ........... 3,000 27,300 10,911,100 troy ounces ................................. 109,111 

Commodity Exchange, Inc. Silver (SI) ............ 1,500 5,700 113,375,000 troy ounces ............................... 22,675 

New York Mercantile Exchange Palladium 

(PA).

650 1,500 578,900 troy ounces ...................................... 5,789 

New York Mercantile Exchange Platinum (PL) 500 800 152,150 troy ounces ...................................... 3,043 

The Commission is considering a 

further alternative to setting the spot 

month limit at a level based on 25 

percent of estimated deliverable supply. 

This alternative would permit the 

Commission, in its discretion, both for 

setting an initial spot month limit and 

subsequent resets, to use the 

recommended level, if any, of the spot 

month limit as submitted by each DCM 

listing a CRFC (if lower than 25 percent 

of estimated deliverable supply). Under 

this alternative, the Commission would 

have discretion to set the level of any 

spot month limit to the DCM’s 

recommended level, a level 

corresponding to 25 percent of 

estimated deliverable supply, or a level 

in proposed appendix D. The 

Commission requests comment on all 

aspects of this alternative. Specifically, 

is the Commission’s discretion in 

administering levels of spot month 

limits appropriately constrained by the 

choice, in its discretion, of the DCM’s 

recommended level or the level 

corresponding to 25 percent of 

deliverable supply or a level in 

proposed appendix D? 

Proposed § 150.2(e)(3) explains how 

the Commission will calculate spot 

month position limit levels. The 

Commission proposes to fix the levels of 

the spot-month limits for referenced 

contracts based on one-quarter of the 

estimated spot-month deliverable 

supply in the relevant core referenced 

futures contract, no less frequently than 

every two calendar years.407 Under the 

proposal, each DCM listing a core 

referenced futures contract would be 

required to report to the Commission an 

estimate of spot-month deliverable 

supply, accompanied by a description of 

the methodology used to derive the 

estimate and any statistical data 

supporting the estimate.408 Proposed 

§ 150.2(e)(3) provides a cross-reference 

to appendix C to part 38 for guidance on 

how to estimate deliverable supply.409

The Commission proposes to utilize the 

estimated spot-month deliverable 

supply provided by a DCM unless the 

Commission decides to rely on its own 

estimate of deliverable supply. 

The Commission proposes to update 

spot-month limits every two years for 

each of the 28 referenced contracts, and 

to stagger the dates on which DCMs 

must submit estimates of deliverable 

supply. The Commission has reevaluated data on the frequency with 

which DCMs historically have changed 

the levels of spot month limits in the 28 

physical-delivery core referenced 

futures contracts. Given the low 

frequency of changes to DCM spot 

month limits, the Commission has 

reconsidered requiring annual updates 

for referenced contracts in agricultural 

commodities.410 When compared with 

annual updates to the spot month 

position limits, biennial updates would 

reduce the burden on market 

participants in updating speculative 

position limit monitoring systems.411

The term ‘‘estimated deliverable 

supply’’ means the amount of a 

commodity that can reasonably be 

expected to be readily available to short 

traders to make delivery at the 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75729 

412As part of its recently published guidance for 

complying with DCM core principle 3, the 

Commission provided guidance on how to calculate 

deliverable supplies in appendix C to part 38 (at 

paragraph (b)(1)(i)). 77 FR 36612, 36722, Jun. 19, 

2012. Typically, deliverable supply reflects the 

quantity of the commodity that potentially could be 

made available for sale on a spot basis at current 

prices at the contract’s delivery points. For a 

physical-delivery commodity contract, this estimate 

might represent product which is in storage at the 

delivery point(s) specified in the futures contract or 

can be moved economically into or through such 

points consistent with the delivery procedures set 

forth in the contract and which is available for sale 

on a spot basis within the marketing channels that 

normally are tributary to the delivery point(s). 

413 DCM core principle 3 specifies that a board of 

trade shall list only contracts that are not readily 

susceptible to manipulation. See CEA section 

5(d)(3); 7 U.S.C. 7(d)(3). DCM core principle 5 

(discussed in detail below) requires a DCM to 

establish position limits or position accountability 

provisions where necessary and appropriate ‘‘to 

reduce the threat of market manipulation or 

congestion, especially during the delivery month.’’ 

CEA section 5(d)(5); 7 USC 7(d)(5). See also 

guidance and discussion of estimated deliverable 

supply in Core Principles and Other Requirements 

for Designated Contract Markets, Final Rule, 77 FR 

36612, 36722, Jun. 19, 2012. 

414See 17 CFR 150.5(b). 

415 Id. 

416The Commission also has established 

requirements for a DCM to monitor a physicaldelivery contract’s terms and conditions as they 

relate to the convergence between the futures 

contract price and the cash price of the underlying 

commodity. 17 CFR 38.252. See the preamble 

discussion of § 38.252 in the final part 38 

rulemaking. 77 FR 36612, 36635, June 19, 2012. The 

spot month limits will be set at levels that target 

only extraordinarily large traders. For example, the 

spot month limit for CBOT Wheat will be set at 600 

contracts. The contract size for CBOT Wheat is 

5,000 bushels (∼136 metric tons). The current price 

of a bushel of wheat is approximately $7 per bushel. 

Therefore, a speculative trader would be permitted 

to carry a ∼$21 million position in wheat into the 

spot month under the proposed position limits 

regime. 

417See 76 FR at 71635 (n. 100–01) (discussing 

data in CME natural gas contract). 

418The Commission also has established 

requirements for DCMs to monitor the pricing of 

cash-settled contracts. 17 CFR 38.253. 

419Section 4c(a)(5) of the Act lists certain 

unlawful disruptive trading practices, including 

‘‘any trading, practice, or conduct on or subject to 

the rules of a registered entity that . . . 

demonstrates intentional or reckless disregard for 

the orderly execution of transactions during the 

closing period.’’ 7 U.S.C. 6c(a)(5)(B). ‘‘Banging’’ or 

‘‘marking the close’’ is discussed in the 

Commission’s Antidisruptive Practices Authority, 

Interpretive guidance and policy statement, 78 FR 

31890, 31894–96, May 28, 2013. 

420See, e.g., DiPlacido v. CFTC, 364 Fed. Appx. 

657 (2d Cir. 2009) (upholding Commission finding 

that DiPlacido manipulated the market where 

DiPlacido’s closing trades accounted for 14% of the 

market). 

421See 77 FR 36611, 36723, Jun. 12, 2012. DCM 

estimates of deliverable supplies (and the 

supporting data and analysis) will continue to be 

subject to Commission review. 

422The Commission proposes to use the futures 

position limits formula (the 10, 2.5 percent formula) 

to determine non-spot-month position limits for 

referenced contracts. The 10, 2.5 percent formula is 

identified in 17 CFR 150.5(c)(2). 

expiration of a futures contract.412 The 

use of estimated deliverable supply to 

set spot-month limits is wholly 

consistent with DCM core principles 3 

and 5.413 Currently, in determining 

whether a physical-delivery contract 

complies with core principle 3, the 

Commission considers whether the 

specified contract terms and conditions 

may result in an estimated deliverable 

supply that is sufficient to ensure that 

the contract is not readily susceptible to 

price manipulation or distortion. The 

Commission has previously indicated 

that it would be an acceptable practice 

for a DCM to set spot-month limits 

pursuant to core principle 5 based on an 

analysis of estimated deliverable 

supplies.414 Accordingly, the 

Commission is adopting estimated 

deliverable supply as the basis of setting 

spot-month limits. 

The Commission proposes to adopt 

the 25 percent level of estimated 

deliverable supply for setting spotmonth limits because, based on the 

Commission’s surveillance and 

enforcement experience, this formula 

narrowly targets the trading that may be 

most susceptible to, or likely to 

facilitate, price disruptions. The 

Commission believes this spot month 

limit formula best maximizes the 

statutory objectives expressed in CEA 

section 4a(a)(3)(B) of preventing 

excessive speculation and market 

manipulation, ensuring market liquidity 

for bona fide hedgers, and promoting 

efficient price discovery. This formula is 

consistent with the longstanding 

acceptable practices for DCM core 

principle 5 which provide that, for 

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

percent of the estimated deliverable 

supply.415 The Commission believes, 

based on its experience and expertise, 

that the formula would be an effective 

prophylactic tool to reduce the threat of 

corners and squeezes, and promote 

convergence without compromising 

market liquidity.416

Furthermore, the Commission has 

observed generally low usage among all 

traders of the physical-delivery futures 

contract during the spot month, relative 

to the existing exchange spot-month 

position limits. Thus, the Commission 

infers that few, if any, traders offset the 

risk of swaps in physical-delivery 

futures contracts during the spot month 

with positions in excess of the 

exchange’s current spot month limits.417

The Commission invites comments as to 

the extent to which traders actually 

have offset the risk of swaps during the 

spot month in a physical-delivery 

futures contract with a position in 

excess of an exchange’s spot-month 

position limit. 

Additionally, the Commission 

imposes spot-month limits using the 

same formula to restrict the size of 

positions in cash-settled contracts that 

would potentially benefit from a trader’s 

distortion of the price of the underlying 

referenced contract (or other cash price 

series) that serves as the basis of cash 

settlement.418 The Commission has 

found that traders with positions in 

look-alike cash-settled contracts have an 

incentive to manipulate and undermine 

price discovery in the physical-delivery 

contract to which the cash-settled 

contract is linked by price. This practice 

is known as ‘‘banging’’ or ‘‘marking the 

close,’’ 419 a manipulative practice that 

the Commission prosecutes and that this 

proposal seeks to prevent.420

In the final part 38 rulemaking, the 

Commission instructed DCMs, when 

estimating deliverable supplies, to take 

into consideration the individual 

characteristics of the underlying 

commodity’s supply and the specific 

delivery features of the futures 

contract.421 In this regard, the 

Commission notes that DCMs 

historically have set or maintained 

exchange spot month limits at levels 

below 25 percent of deliverable supply. 

Setting such a lower level of a spot 

month limit may also serve the 

objectives of preventing excessive 

speculation, manipulation, squeezes 

and corners, while ensuring sufficient 

market liquidity for bona fide hedgers in 

the view of the listing DCM and 

ensuring the price discovery function of 

the market is not disrupted. Hence, the 

Commission observes that there may be 

a range of spot month limits, including 

limits set at levels below 25 percent of 

deliverable supply, which may serve as 

practicable to maximize these policy 

objectives. 

e. Setting Levels of Single-Month and 

All-Months-Combined Limits 

Proposed § 150.2(e)(4) explains how 

the Commission would calculate nonspot-month position limit levels, which 

the Commission proposes to fix no less 

frequently than every two calendar 

years. In contrast to spot month position 

limits which are set as a function of 

estimated deliverable supply, the 

formula for the non-spot-month position 

limits is based on total open interest for 

all referenced contracts in a commodity. 

The actual position limit level will be 

set based on a formula: 10 percent of the 

open interest for the first 25,000 

contracts and 2.5 percent of the open 

interest thereafter.422 The Commission 

has used the 10, 2.5 percent formula in 

administering the level of the legacy allVerDate Mar<15>2010 18:06 Dec 11, 2013 Jkt 232001 PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 E:\FR\FM\12DEP2.SGM 12DEP2

emcdonald on DSK67QTVN1PROD with PROPOSALS2
75730 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

423See 64 FR 24038, 24039, May 5, 1999. The 

Commission applies the open interest criterion by 

using a formula that specifies appropriate increases 

to the limit level as a percentage of open interest. 

As the total open interest of a futures market 

increases, speculative position limit levels can be 

raised. The Commission proposed using the 10, 2.5 

percent formula in 1992. See Revision of Federal 

Speculative Position Limits, Proposed Rules, 57 FR 

12766, 12770, Apr. 13, 1992. The Commission 

implemented the 10, 2.5 percent formula in two 

steps, the first step in 1993 and the second step in 

1999. See Revision of Federal Speculative Limits, 

Interim Final Rules, 58 FR 17973, 17978, Apr. 7, 

1993. See also Establishment of Speculative 

Position Limits, 46 FR 50938, Oct. 16, 1981 (‘‘[T]he 

prevention of large or abrupt price movements 

which are attributable to the extraordinarily large 

speculative positions is a congressionally endorsed 

regulatory objective of the Commission. Further, it 

is the Commission’s view that this objective is 

enhanced by the speculative position limits since 

it appears that the capacity of any contract to absorb 

the establishment and liquidation of large 

speculative positions in an orderly manner is 

related to the relative size of such positions, i.e., the 

capacity of the market is not unlimited.’’). 

months position limits since 1999.423

The Commission believes the non-spot 

month position limits would restrict the 

market power of a speculator that could 

otherwise be used to cause unwarranted 

price movements. The Commission 

solicits comment on its single-month 

and all-months-combined limits, 

including whether the proposed formula 

has effectively addressed and will 

continue to address the § 4a(a)(3) 

regulatory objectives. 

The Commission also proposes to 

estimate average open interest in 

referenced contracts based on the largest 

annual average open interest computed 

for each of the past two calendar years, 

using either month-end open contracts 

or open contracts for each business day 

in the time period, as the Commission 

finds in its discretion to be reliable. 

(1) Initial Levels 

For setting the levels of initial nonspot month limits, the Commission 

proposes to use open interest for 

calendar years 2011 and 2012 in futures 

contracts, options thereon, and in swaps 

that are significant price discovery 

contracts that are traded on exempt 

commercial markets. 

TABLE 10—OPEN INTEREST AND CALCULATED LIMITS BY CORE FUTURES REFERENCED CONTRACT, JANUARY 1, 2011, TO

DECEMBER 31, 2012 

Legacy Agricultural ........... CBOT Corn (C) ................. 2011 2,063,231 1,987,152 53,500 51,600 53,500 

........................................... 2012 1,773,525 1,726,096 46,300 45,100 

CBOT Oats (O) ................ 2011 15,375 15,149 1,600 1,600 1,600 

........................................... 2012 12,291 11,982 1,300 1,200 

CBOT Soybeans (S) ......... 2011 822,046 798,417 22,500 21,900 26,900 

........................................... 2012 997,736 973,672 26,900 26,300 

CBOT Soybean Meal (SM) 2011 237,753 235,945 7,900 7,800 9,000 

........................................... 2012 283,304 281,480 9,000 9,000 

CBOT Soybean Oil (SO) .. 2011 392,658 382,100 11,700 11,500 11,900 

........................................... 2012 397,549 388,417 11,900 11,600 

CBOT Wheat (W) ............. 2011 565,459 550,251 16,100 15,700 16,200 

........................................... 2012 572,068 565,490 16,200 16,100 

ICE Cotton No. 2 (CT) ...... 2011 275,799 272,613 8,800 8,700 8,800 

........................................... 2012 259,608 261,789 8,400 8,500 

KCBT Hard Winter Wheat 

(KW).

2011 183,400 177,998 6,500 6,400 6,500 

........................................... 2012 155,540 155,074 5,800 5,800 

MGEX Hard Red Spring 

Wheat (MWE).

2011 55,938 54,546 3,300 3,300 3,300 

........................................... 2012 40,577 40,314 2,900 2,900 

Other Agricultural .............. CBOT Rough Rice (RR) ... 2011 21,788 21,606 2,200 2,200 2,200 

........................................... 2012 15,262 14,964 1,600 1,500 

CME Milk Class III (DA) ... 2011 55,567 57,490 3,300 3,400 3,400 

........................................... 2012 47,378 47,064 3,100 3,100 

CME Feeder Cattle (FC) .. 2011 44,611 43,730 3,000 3,000 3,000 

........................................... 2012 44,984 43,651 3,000 3,000 

CME Lean Hog (LH) ......... 2011 284,211 288,281 9,000 9,100 9,400 

........................................... 2012 296,822 297,882 9,300 9,400 

CME Live Cattle (LC) ....... 2011 433,581 440,229 12,800 12,900 12,900 

........................................... 2012 409,501 417,037 12,200 12,400 

ICUS Cocoa (CC) ............. 2011 191,801 198,290 6,700 6,900 7,100 

........................................... 2012 202,886 206,808 7,000 7,100 

ICE Coffee C (KC) ............ 2011 174,845 176,079 6,300 6,300 7,100 

........................................... 2012 204,268 207,403 7,000 7,100 

.

ICE FCOJ–A (OJ) ............. 2011 37,347 36,813 2,900 2,800 2,900 

........................................... 2012 30,788 29,867 2,700 2,700 

ICE Sugar No. 11 (SB) ..... 2011 814,234 806,887 22,300 22,100 23,500 

........................................... 2012 855,375 862,446 23,300 23,500 

ICE Sugar No. 16 (SF) ..... 2011 11,532 11,662 1,200 1,200 1,200 

........................................... 2012 10,485 10,530 1,100 1,100 

Energy ............................... NYMEX Henry Hub Natural Gas (NG).2011 4,831,973 4,821,859 122,700 122,500 149,600 

........................................... 2012 5,905,137 5,866,365 149,600 148,600 

NYMEX Light Sweet 

Crude Oil (CL).

2011 4,214,770 4,291,662 107,300 109,200 109,200 

........................................... 2012 3,720,590 3,804,287 94,900 97,000 

NYMEX NY Harbor ULSD 

(HO).

2011 559,280 566,600 15,900 16,100 16,100 

........................................... 2012 473,004 485,468 13,800 14,100 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75731 

424A review of preliminary swap open interest 

reported under part 20 indicates that open interest 

in swap referenced contracts is low, in comparison 

to futures open interest. Any open interest in swap 

referenced contracts would serve to increase the 

levels of the positions limits. 

TABLE 10—OPEN INTEREST AND CALCULATED LIMITS BY CORE FUTURES REFERENCED CONTRACT, JANUARY 1, 2011, TO

DECEMBER 31, 2012—Continued 

NYMEX RBOB Gasoline 

(RB).

2011 362,349 370,207 11,000 11,200 11,800 

........................................... 2012 388,479 393,219 11,600 11,800 

Metals ............................... COMEX Copper (HG) ....... 2011 134,097 131,688 5,300 5,200 5,600 

........................................... 2012 148,767 147,187 5,600 5,600 

COMEX Gold (GC) ........... 2011 782,793 746,904 21,500 20,600 21,500 

........................................... 2012 685,618 668,751 19,100 18,600 

COMEX Silver (SI) ........... 2011 179,393 172,567 6,400 6,200 6,400 

........................................... 2012 165,670 164,064 6,100 6,000 

NYMEX Palladium (PA) .... 2011 22,327 22,244 2,300 2,300 5,000 

........................................... 2012 23,869 24,265 2,400 2,500 

NYMEX Platinum (PL) ...... 2011 40,988 40,750 2,900 2,900 5,000 

........................................... 2012 54,838 54,849 3,300 3,300 

Given the levels of open interest for 

the calendar years of 2011 and 2012 for 

futures contracts and for swaps that are 

significant price discovery contracts 

traded on exempt commercial markets, 

this formula would result in levels for 

non-spot month position limits that are 

high in comparison to the size of 

positions typically held in futures 

contracts.424 Few persons held positions 

over the levels of the proposed position 

limits in the past two calendar years, as 

illustrated in Table 11 below. To 

provide the public with additional 

information regarding the number of 

large position holders in the past two 

calendar years, the table also provides 

counts of persons over 60, 80, 100, and 

500 percent of the levels of the proposed 

position limits. Note that the 500 

percent line is omitted from Table 11 

where no person held a position over 

that level. 

TABLE 11—UNIQUE PERSONS OVER PERCENTAGES OF PROPOSED POSITION LIMIT LEVELS, JANUARY 1, 2011, TO

DECEMBER 31, 2012 

Commodity type/core referenced futures contract Percent of 

level 

Unique persons over level 

Spot month 

(physicaldelivery) 

Spot month 

(cash-settled) Single month All months 

Legacy Agricultural 

CBOT Corn (C) .................................................................... 60 243 4 9 16 

80 167 * 6 8 

100 53 * * 5 

500 7 ........................ ........................ ........................

CBOT Oats (O) .................................................................... 60 5 ........................ 15 15 

80 4 ........................ 8 9 

100 * ........................ 6 8 

CBOT Soybeans (S) ............................................................ 60 119 ........................ 14 17 

80 88 ........................ 9 12 

100 27 ........................ 6 8 

500 9 ........................ ........................ ........................

CBOT Soybean Meal (SM) .................................................. 60 52 * 20 35 

80 32 * 9 16 

100 12 * 6 9 

CBOT Soybean Oil (SO) ..................................................... 60 114 ........................ 31 37 

80 70 ........................ 15 20 

100 20 ........................ 10 12 

500 * ........................ ........................ ........................

CBOT Wheat (W) ................................................................. 60 46 ........................ 22 32 

80 31 ........................ 14 16 

100 14 ........................ 9 12 

500 * ........................ ........................ ........................

ICE Cotton No. 2 (CT) ......................................................... 60 12 ........................ 16 19 

80 7 ........................ 11 14 

100 6 ........................ 9 11 

500 * ........................ ........................ ........................

KCBT Hard Winter Wheat (KW) .......................................... 60 33 ........................ 36 40 

80 18 ........................ 13 21 

100 14 ........................ 9 13 

500 * ........................ ........................ ........................

MGEX Hard Red Spring Wheat (MWE) .............................. 60 11 ........................ 17 24 

80 10 ........................ 11 15 

100 6 ........................ 9 9 


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75732 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

TABLE 11—UNIQUE PERSONS OVER PERCENTAGES OF PROPOSED POSITION LIMIT LEVELS, JANUARY 1, 2011, TO

DECEMBER 31, 2012—Continued 

Commodity type/core referenced futures contract Percent of 

level 

Unique persons over level 

Spot month 

(physicaldelivery) 

Spot month 

(cash-settled) Single month All months 

Other Agricultural 

CBOT Rough Rice (RR) ...................................................... 60 9 ........................ 7 9 

80 6 ........................ 5 5 

100 ........................ ........................ * * 

CME Milk Class III (DA) ....................................................... 60 NA 6 * 19 

80 NA 4 ........................ 14 

100 NA * ........................ 7 

CME Feeder Cattle (FC) ...................................................... 60 NA 76 4 13 

80 NA 55 * 7 

100 NA 16 * * 

CME Lean Hog (LH) ............................................................ 60 NA 52 20 30 

80 NA 41 11 18 

100 NA 28 7 13 

500 NA * ........................ ........................

CME Live Cattle (LC) ........................................................... 60 37 ........................ 13 27 

80 * ........................ 7 17 

100 * ........................ 4 12 

ICUS Cocoa (CC) ................................................................ 60 * ........................ 24 29 

80 * ........................ 14 18 

100 * ........................ 10 12 

ICE Coffee C (KC) ............................................................... 60 14 ........................ 19 24 

80 13 ........................ 8 14 

100 8 ........................ 5 6 

500 2 ........................ ........................ ........................

ICE FCOJ–A (OJ) ................................................................ 60 8 ........................ 13 16 

80 7 ........................ 9 9 

100 6 ........................ 6 7 

ICE Sugar No. 11 (SB) ........................................................ 60 33 ........................ 28 31 

80 23 ........................ 20 24 

100 15 ........................ 12 18 

500 * ........................ ........................ ........................

ICE Sugar No. 16 (SF) ........................................................ 60 6 ........................ 10 16 

80 5 ........................ 7 14 

100 5 ........................ 7 13 

Energy 

NYMEX Henry Hub Natural Gas (NG) ................................ 60 177 221 * 5 

80 131 183 ........................ ........................

100 61 148 ........................ ........................

500 ........................ 35 ........................ ........................

NYMEX Light Sweet Crude Oil (CL) ................................... 60 98 89 ........................ 4 

80 72 62 ........................ * 

100 39 33 ........................ * 

500 ........................ ........................ ........................ ........................

NYMEX NY Harbor ULSD (HO) .......................................... 60 76 45 9 18 

80 53 35 6 15 

100 33 24 5 8 

500 ........................ * ........................ ........................

NYMEX RBOB Gasoline (RB) ............................................. 60 71 45 21 30 

80 48 32 12 16 

100 30 22 7 11 

500 ........................ * ........................ ........................

Metals 

COMEX Copper (HG) .......................................................... 60 14 ........................ 29 28 

80 13 ........................ 21 22 

100 * ........................ 16 16 

COMEX Gold (GC) .............................................................. 60 13 ........................ 24 21 

80 9 ........................ 19 19 

100 5 ........................ 12 12 

COMEX Silver (SI) ............................................................... 60 5 ........................ 25 21 

80 * ........................ 15 13 

100 * ........................ 10 9 

NYMEX Palladium (PA) ....................................................... 60 6 ........................ 5 5 

80 * ........................ * * 


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425Table notes: (1) Aggregation exemptions were 

not used in computing the counts of unique 

persons; (2) the position data was for futures, futures options and swaps that are significant price 

discovery contracts (SPDCs). 

TABLE 11—UNIQUE PERSONS OVER PERCENTAGES OF PROPOSED POSITION LIMIT LEVELS, JANUARY 1, 2011, TO

DECEMBER 31, 2012—Continued 

Commodity type/core referenced futures contract Percent of 

level 

Unique persons over level 

Spot month 

(physicaldelivery) 

Spot month 

(cash-settled) Single month All months 

100 * ........................ * * 

NYMEX Platinum (PL) ......................................................... 60 11 ........................ 15 18 

80 5 ........................ 11 12 

100 * ........................ 9 10 

Legend: 

* means fewer than 4 unique owners exceeded the level. 

— means no unique owners exceeded the level. 

NA means not applicable.425

The Commission has also reviewed 

preliminary data submitted to it under 

part 20. The Commission preliminarily 

has decided not to use the data 

currently reported under part 20 for 

purposes of setting the initial levels of 

the proposed single month and allmonths-combined positions limits. 

Instead, the Commission is proposing to 

set initial levels based on open interest 

in futures, options on futures, and SPDC 

swaps. Thus, the proposed initial levels 

represent lower bounds for the initial 

levels the Commission may establish in 

final rules. The Commission is 

providing the public with average open 

positions reported under part 20 for the 

month of January 2013, in the table 

below. As discussed below, the data 

reported during the month of January 

2013, reflected improved data reporting 

quality. However, the Commission is 

concerned that the longer time series of 

this data has been less reliable and thus 

has not used it for purposes of setting 

proposed initial position limit levels. 

TABLE 12—SWAPS REPORTED UNDER PART 20—AVERAGE DAILY OPEN POSITIONS, FUTURES EQUIVALENT, JANUARY

2013 

Covered swap contract Uncleared 

swaps Cleared swaps 

Chicago Board of Trade (‘‘CBOT’’) Corn ................................................................................................................ 110,533 3,060 

CBOT Ethanol .......................................................................................................................................................... * 15,905 

CBOT Oats .............................................................................................................................................................. ........................ ........................

CBOT Rough Rice ................................................................................................................................................... ........................ ........................

CBOT Soybean Meal ............................................................................................................................................... 20,594 ........................

CBOT Soybean Oil .................................................................................................................................................. 35,760 ........................

CBOT Soybeans ...................................................................................................................................................... 39,883 1,306 

CBOT Wheat ........................................................................................................................................................... 64,805 2,856 

Chicago Mercantile Exchange (‘‘CME’’) Butter ....................................................................................................... ........................ ........................

CME Cheese ........................................................................................................................................................... ........................ ........................

CME Dry Whey ........................................................................................................................................................ ........................ ........................

CME Feeder Cattle .................................................................................................................................................. * ........................

CME Hardwood Pulp ............................................................................................................................................... ........................ ........................

CME Lean Hog ........................................................................................................................................................ 12,809 ........................

CME Live Cattle ....................................................................................................................................................... 17,617 ........................

CME Milk Class III ................................................................................................................................................... ........................ ........................

CME Non Fat Dry Milk ............................................................................................................................................ ........................ ........................

CME Random Length Lumbar ................................................................................................................................. ........................ ........................

CME Softwood Pulp ................................................................................................................................................ ........................ ........................

Commodity Exchange, Inc. (‘‘COMEX’’) Copper Grade No. 1 ............................................................................... 9,259 ........................

COMEX Gold ........................................................................................................................................................... 38,295 ........................

COMEX Silver .......................................................................................................................................................... 5,753 ........................

ICE Futures U.S. (‘‘ICE’’) Cocoa ............................................................................................................................. 8,933 ........................

ICE Coffee C ........................................................................................................................................................... 3,465 ........................

ICE Cotton No. 2 ..................................................................................................................................................... 14,627 ........................

ICE Frozen Concentrated Orange Juice ................................................................................................................. * ........................

ICE Sugar No. 11 .................................................................................................................................................... 287,434 ........................

ICE Sugar No. 16 .................................................................................................................................................... ........................ ........................

Kansas City Board of Trade (‘‘KCBT’’) Wheat ........................................................................................................ 2,565 ........................

Minneapolis Grain Exchange (‘‘MGEX’’) Wheat ...................................................................................................... 2,419 ........................

NYSE LIFFE (‘‘NYL’’) Gold, 100 Troy Oz. .............................................................................................................. ........................ ........................

NYL Silver, 5000 Troy Oz. ...................................................................................................................................... ........................ ........................

New York Mercantile Exchange (‘‘NYMEX’’) Cocoa ............................................................................................... ........................ ........................

NYMEX Brent Financial ........................................................................................................................................... 93,825 ........................

NYMEX Central Appalachian Coal .......................................................................................................................... ........................ ........................

NYMEX Coffee ........................................................................................................................................................ 2,320 ........................

NYMEX Cotton ........................................................................................................................................................ 8,315 ........................


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75734 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

426Further, other firms have begun to report 

under part 20 after March 1, 2013, following 

registration as swap dealers. 427For example, reported total open interest in 

swaps, both cleared and uncleared, linked to or 

based on NYMEX Natural Gas futures contracts 

averaged approximately 1.2 million contracts 

between January 1, 2013 and March 1, 2013 and 

approximately 97 million contracts between March 

1 and May 31, 2013 (with a peak value close to 300 

million contracts). 

428Several reporting entities have submitted data 

that contained stark errors. For example, certain 

reporting entities submitted position sizes that the 

Commission determined to be 1000 times, or even 

10,000 times, too large. 

429Options listed on DCMs would be adjusted 

using an option delta reported to the Commission 

pursuant to 17 CFR part 16; swaps would be 

counted on a futures equivalent basis, equal to the 

economically equivalent amount of core referenced 

futures contracts reported pursuant to 17 CFR part 

20 or as calculated by the Commission using swap 

data collected pursuant to17 CFR part 45. 

430While the Commission has access to some data 

on physical-commodity swaps from swaps data 

repositories, the Commission continues to work 

with SDRs and other market participants to fully 

implement the swaps data reporting regime. 

431Such pre-existing positions that are in excess 

of the proposed position limits would not cause the 

trader to be in violation based solely on those 

positions. To the extent a trader’s pre-existing 

positions would cause the trader to exceed the nonspot-month limit, the trader could not increase the 

directional position that caused the positions to 

exceed the limit until the trader reduces the 

positions to below the position limit. As such, 

persons who established a net position below the 

speculative limit prior to the enactment of a 

regulation would be permitted to acquire new 

positions, but the Commission would calculate the 

combined position of a person based on pre-existing 

positions with any new position. 

TABLE 12—SWAPS REPORTED UNDER PART 20—AVERAGE DAILY OPEN POSITIONS, FUTURES EQUIVALENT, JANUARY

2013—Continued 

Covered swap contract Uncleared 

swaps Cleared swaps 

NYMEX Crude Oil, Light Sweet .............................................................................................................................. 507,710 ........................

NYMEX Gasoline Blendstock (RBOB). ................................................................................................................... 10,110 ........................

NYMEX Hot Rolled Coil Steel ................................................................................................................................. * ........................

NYMEX Natural Gas ................................................................................................................................................ 1,060,468 96,057 

NYMEX No. 2 Heating Oil, New York Harbor ......................................................................................................... 35,126 ........................

NYMEX Palladium ................................................................................................................................................... * ........................

NYMEX Platinum ..................................................................................................................................................... * ........................

Legend: 

* means fewer than 1,000 futures equivalent contracts reported in the category. 

Leaders mean no contracts reported. 

The part 20 data are comprised of 

positions resulting from cleared and 

uncleared swaps, which are reported by 

different reporting entities. Clearing 

members of derivative clearing 

organizations (‘‘DCOs’’) have reported 

paired swap positions in cleared swaps 

since November 11, 2011, and paired 

swap positions in uncleared swaps 

since January 20, 2012. DCOs have also 

reported aggregate positions of each 

clearing member’s house and customer 

accounts for each paired swap since 

November 11, 2011. Data reports 

submitted by clearing members have 

had various errors (e.g., duplicate 

records, inconsistent reporting of data 

fields)—Commission staff continues to 

work with these reporting entities to 

improve data reporting. 

Beginning March 1, 2013, swap 

dealers that were not clearing members 

were required to submit data reports 

under § 20.4(c). Additionally, some 

swap dealers began reporting such data 

voluntarily prior to March 1, 2013.426

As these new reporters submitted 

position data reports, the Commission 

observed a substantial increase in open 

interest for uncleared swaps that 

appeared unreasonable; it became 

apparent that part of this increase was 

caused by data reporting errors.427 The 

Commission believes it would be 

difficult to distinguish the true level of 

open interest because some reporting 

errors may cause open interest to be 

underestimated while others may cause 

open interest to be overestimated. 

Alternatively, the Commission is 

considering using part 20 data, should 

it determine such data to be reliable, in 

order to establish higher initial levels in 

a final rule.428 Further, the Commission 

is considering using data from swaps 

data repositories, as practicable. In 

either case, the Commission is 

considering excluding inter-affiliate 

swaps, since such swaps would tend to 

inflate open interest. 

Based on the forgoing, the 

Commission believes the initial levels 

proposed herein should ensure adequate 

liquidity for hedges yet nevertheless 

prevent a speculative trader from 

acquiring excessively large positions 

above the limits, and thereby help to 

prevent excessive speculation and to 

deter and prevent market manipulation. 

(2) Subsequent Levels 

For setting subsequent levels of nonspot month limits, the Commission 

proposes to estimate average open 

interest in referenced contracts using 

data reported by DCMs and SEFs 

pursuant to parts 16, 20, and/or 45.429

While the Commission does not 

currently possess all data needed to 

fully enforce the position limits 

proposed herein, the Commission 

believes that it should have adequate 

data to reset the overall concentrationbased percentages for the position limits 

two years after initial levels are set.430

The Commission intends to use 

comprehensive positional data on 

physical commodity swaps once such 

data is collected by swap data 

repositories under part 45, and would 

convert such data to futures-equivalent 

open positions in order to fix numerical 

position limits through the application 

of the proposed open-interest-based 

position limit formula. The resultant 

limits are purposely designed to be high 

enough to ensure sufficient liquidity for 

bona fide hedgers and to avoid 

disrupting the price discovery process 

given the limited information the 

Commission has with respect to the size 

of the physical commodity swap 

markets, including preliminary data 

collected under part 20 as of January 

2013. The Commission further proposes 

to publish on the Commission’s Web 

page such estimates of average open 

interest in referenced contracts on a 

monthly basis to make it easier for 

market participants to estimate changes 

in levels of position limits. 

f. Grandfather of Pre-Existing Positions 

The Commission proposes in new 

§ 150.2(f)(2) to conditionally exempt 

from federal non-spot-month 

speculative position limits any 

referenced contract position acquired by 

a person in good faith prior to the 

effective date of such limit, provided 

that such pre-existing referenced 

contract position is attributed to the 

person if such person’s position is 

increased after the effective date of such 

limit.431 This conditional exemption for 

pre-existing positions is consistent with 

the provisions of CEA section 4a(b)(2) in 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75735 

432Nothing in proposed § 150.2(f) would override 

the exemption set forth in proposed § 150.3(d) for 

pre-enactment and transition period swaps from 

speculative position limits. See discussion of 

proposed § 150.3(d) below. 

433Proposed § 150.2(g) is identical in substance to 

vacated § 151.8. Compare 76 FR 71693. 

434See supra discussion of CEA section 4a(a)(6) 

concerning aggregate position limits and the 

treatment of FBOT contracts. 

435 7 U.S.C. 6a(c)(1). 

436Bona fide hedging transactions and positions 

for excluded commodities are currently defined at 

17 CFR § 1.3(z). As discussed above, the 

Commission has proposed a new comprehensive 

definition of bona fide hedging positions in 

proposed § 150.1. 

437 7 U.S.C. 6a(a)(7). Section 4a(a)(7) of the CEA 

provides the Commission plenary authority to grant 

exemptive relief from position limits. Specifically, 

under Section 4a(a)(7), the Commission ‘‘by rule, 

regulation, or order, may exempt, conditionally or 

unconditionally, any person, or class of persons, 

any swap or class of swaps, any contract of sale of 

a commodity for future delivery or class of such 

contracts, any option or class of options, or any 

transaction or class of transactions from any 

requirement it may establish . . . with respect to 

position limits.’’ 

438 17 CFR 150.3(a)(1). The current definition of 

bona fide hedging transactions and positions in 

1.3(z) is discussed above. 

439The Commission clarifies that a spread or 

arbitrage position in this context means a short 

position in a single month of a futures contract and 

a long position in another contract month of that 

same futures contract, outside of the spot month, in 

the same crop year. The short and/or long positions 

may also be in options on that same futures 

contract, on a futures equivalent basis. Such spread 

or arbitrage positions, when combined with any 

other net positions in the single month, must not 

exceed the all-months limit set forth in current 

§ 150.2, and must be in the same crop year. 17 CFR 

150.3(a)(3). 

440 ‘‘Eligible entity’’ is defined in current 17 CFR 

150.1(d). 

441 ‘‘Independent account controller’’ is defined 

in 17 CFR 150.1(e). 

442See 17 CFR 150.3(a)(4). See also discussion of 

the IAC exemption in the Aggregation NPRM. 

443See Aggregation NPRM. 

444See supra discussion of the Commission’s 

revised definition of bona fide hedging position in 

proposed § 150.1. 

445See infra discussion of proposed revisions of 

17 CFR part 19. 

446See 17 CFR part 19. 

447See infra discussion of proposed revisions of 

17 CFR part 19. 

that it is designed to phase in position 

limits without significant market 

disruption, while attributing such preexisting positions to the person if such 

person’s position is increased after the 

effective date of a position limit is 

consistent with the provisions of CEA 

section 22(a)(5)(B). Notwithstanding this 

exemption for pre-existing positions in 

non-spot months, proposed § 150.2(f)(1) 

would require a person holding a preexisting referenced contract position (in 

a commodity derivative contract other 

than a pre-enactment and transition 

period swaps as defined in proposed 

§ 150.1) to comply with spot month 

speculative position limits.432 The 

Commission remains particularly 

concerned about protecting the spot 

month in physical-delivery futures 

contracts from squeezes and corners. 

Proposed § 150.2(g) would apply 

position limits to foreign board of trade 

(‘‘FBOT’’) contracts that are both: (1) 

Linked contracts, that is, a contract that 

settles against the price (including the 

daily or final settlement price) of one or 

more contracts listed for trading on a 

DCM or SEF; and (2) direct-access 

contracts, that is, the FBOT makes the 

contract available in the United States 

through direct access to its electronic 

trading and order matching system 

through registration as an FBOT or via 

a staff no action letter.433 Proposed 

§ 150.2(g) is consistent with CEA section 

4a(a)(6)(B), which directs the 

Commission to apply aggregate position 

limits to FBOT linked, direct-access 

contracts.434

3. Section 150.3—Exemptions 

i. Current § 150.3 

CEA section 4a(c)(1) exempts bona 

fide hedging transactions or positions, 

which terms are to be defined by the 

Commission, from any rule promulgated 

by the Commission under CEA section 

4a concerning speculative position 

limits.435 Current § 150.3, adopted by 

the Commission before the Dodd-Frank 

Act was enacted, contains an exemption 

from federal position limits for bona 

fide hedging transactions.436

Additionally, Dodd-Frank added section 

4a(a)(7) to the CEA, which gives the 

Commission authority to provide 

exemptions from any requirement the 

Commission establishes under section 

4a with respect to speculative position 

limits.437

The existing exemptions promulgated 

under pre-Dodd-Frank CEA section 4a 

and set forth in current § 150.3 are 

fundamental to the Commission’s 

regulatory framework for speculative 

position limits. Current § 150.3 specifies 

the types of positions that may be 

exempted from, and thus may exceed, 

the federal speculative position limits. 

First, the exemption for bona fide 

hedging transactions and positions as 

defined in current § 1.3(z) permits a 

commercial enterprise to exceed 

positions limits to the extent the 

positions are reducing price risks 

incidental to commercial operations.438

Second, the exemption for spread or 

arbitrage positions between single 

months of a futures contract (and/or, on 

a futures-equivalent basis, options) 

outside of the spot month, permits any 

trader’s spread position to exceed the 

single month limit.439 Third, positions 

carried for an eligible entity 440 in the 

separate account of an independent 

account controller (‘‘IAC’’) 441 that 

manages customer positions need not be 

aggregated with the other positions 

owned or controlled by that eligible 

entity (the ‘‘IAC exemption’’).442

ii. Proposed § 150.3 

In this release, the Commission 

proposes organizational and substantive 

amendments to § 150.3, generally 

resulting in an increase in the number 

of exemptions to speculative position 

limits. First, the Commission proposes 

to amend the three exemptions from 

federal speculative limits currently 

contained in § 150.3. These 

amendments would update cross 

references, relocate the IAC exemption 

and consolidate it with the 

Commission’s separate proposal to 

amend the aggregation requirements of 

§ 150.4,443 and delete the calendar 

month spread provision which is 

unnecessary under proposed changes to 

§ 150.2 that would increase the level of 

the single month position limits. 

Second, the Commission proposes to 

add exemptions from the federal 

speculative position limits for financial 

distress situations, certain spot-month 

positions in cash-settled referenced 

contracts, and grandfathered pre-DoddFrank and transition period swaps. 

Third, the Commission proposes to 

revise recordkeeping and reporting 

requirements for traders claiming any 

exemption from the federal speculative 

position limits. 

a. Proposed Amendments to Existing 

Exemptions 

(1) New Cross-References 

Because the Commission proposes to 

replace the definition of bona fide 

hedging in 1.3(z) with the definition in 

proposed § 150.1, proposed 

§ 150.3(a)(1)(i) updates the crossreferences to reflect this change.444

Proposed § 150.3(a)(3) would add a new 

cross-reference to the reporting 

requirements proposed to be amended 

in part 19.445 As is currently the case for 

bona fide hedgers, persons who wish to 

claim any exemption from federal 

position limits, including hedgers, 

would need to satisfy the reporting 

requirements in part 19.446 As discussed 

elsewhere in this release, the 

Commission is proposing amendments 

to update part 19 reporting.447 For 

purposes of simplicity, the Commission 

is retaining the current placement of 

many reporting requirements, including 

those related to claimed exemptions 

from the federal position limits, within 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75736 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

448The Commission notes this is a change from 

the organization of vacated § 151.5, that included 

both exemptions and related reporting requirements 

in a single section. 

449See Aggregation NPRM. 

450See Aggregation NPRM. The Commission 

clarifies that whether it is economically appropriate 

for one entity to offset the cash market risk of an 

affiliate depends, in part, upon that entity’s 

ownership interest in the affiliate. It would not be 

economically appropriate for an entity to offset all 

the risk of an affiliate’s cash market exposure unless 

that entity held a 100 percent ownership interest in 

the affiliate. For less than a 100 percent ownership 

interest, it would be economically appropriate for 

an entity to offset no more than a pro rata amount 

of any cash market risk of an affiliate, consistent 

with the entity’s ownership interest in the affiliate. 

451 In its entirety, 17 CFR 150.3(a)(3) sets forth an 

exemption from federal position limits for [s]pread 

or arbitrage positions between single months of a 

futures contract and/or, on a futures-equivalent 

basis, options thereon, outside of the spot month, 

in the same crop year; provided however, that such 

spread or arbitrage positions, when combined with 

any other net positions in the single month, do not 

exceed the all-months limit set forth in § 150.2. 

452See id. 

453As discussed above. 

454For purposes of simplicity, the IAC exemption 

would be placed within the regulatory section 

providing for aggregation of positions. See 

Aggregation NPRM. 

455See Release 5551–08, ‘‘CFTC Update on Efforts 

Underway to Oversee Markets,’’ September 19, 2008 

(available at http://www.cftc.gov/PressRoom/

PressReleases/pr5551-08). 

456See, for example, the guidance for DCMs to 

establish a spot month limit in physical-delivery 

futures contracts that is no greater than 25 percent 

of estimated deliverable supply in 17 CFR 150.5(b). 

457See Antidisruptive Practices Authority, 

Interpretive guidance and policy statement, 78 FR 

31890, 31894, May 28, 2013. See also the 

discussion above of ‘‘banging the close’’ and the 

DiPlacido case. 

458For example, this is the same methodology for 

spot-month speculative position limits that applies 

to cash-settled Henry Hub natural gas contracts on 

NYMEX and ICE, beginning with the February 2010 

contract months (with the exception of the 

exchange-set requirement that a trader not hold 

large cash commodity positions). In response to 

concerns regarding increasing trading volumes in 

standardized swaps, in 2008 Congress amended 

section 2(h) of the Act to establish core principles 

for exempt commercial markets (‘‘ECMs’’) trading 

swap contracts that the Commission determined to 

be significant price discovery contracts (‘‘SPDCs’’). 

7 U.S.C. 2(h)(7) (2009). See also section 13201 of 

the Food, Conservation and Energy Act of 2008, 

H.R. 2419 (May 22, 2008). Core principle (IV) 

directed ECMs to ‘‘adopt, where necessary and 

appropriate, position limitations or position 

accountability for speculators . . . to reduce the 

parts 15–21 of the Commission’s 

regulations.448 Lastly, proposed 

§ 150.3(i) would add a cross-reference to 

the updated aggregation rules in 

proposed § 150.4.449 The Commission 

proposes to retain the current practice of 

considering entities required to 

aggregate accounts or positions under 

proposed § 150.4 to be the same person 

when determining whether they are 

eligible for a bona fide hedging position 

exemption.450

(2) Deleting Exemption for Calendar 

Spread or Arbitrage Positions 

The Commission proposes to delete 

the exemption in current § 150.3(a)(3) 

for spread or arbitrage positions 

between single months of a futures 

contract or options thereon, outside the 

spot month.451 The Commission has 

proposed to maintain the current 

practice in § 150.2, which the district 

court did not vacate, of setting singlemonth limits at the same levels as allmonths limits, rendering the ‘‘spread’’ 

exemption unnecessary. The spread 

exemption set forth in current 

§ 150.3(a)(3) permits a spread trader to 

exceed single month limits only to the 

extent of the all months limit.452 Since 

proposed § 150.2 sets single month 

limits at the same level as all months 

limits, the spread exemption no longer 

provides useful relief. Furthermore, as 

discussed below in this release, the 

Commission would codify guidance in 

proposed § 150.5(a)(2)(B) that would 

allow a DCM or SEF to grant exemptions 

for intramarket and intermarket spread 

positions (as those terms are defined in 

proposed § 150.1) involving commodity 

derivative contracts subject to the 

federal limits.453

(3) Relocating Independent Account 

Controller (‘‘IAC’’) Exemption to 

proposed § 150.4 

In a separate rulemaking, the 

Commission has proposed § 150.4(b)(5) 

to replace the existing IAC exemption in 

current § 150.3(a)(4).454 Proposed 

§ 150.4(b)(5) sets forth an exemption for 

accounts carried by an IAC that is 

substantially similar to current 

§ 150.3(a)(4). Thus, the Commission is 

proposing to delete the IAC exemption 

in current § 150.3(a)(4) because it is 

duplicative. 

b. Proposed Additional Exemptions 

From Position Limits 

As discussed above, CEA section 

4a(a)(7) provides that the Commission 

may ‘‘by rule, regulation, or order . . . 

exempt . . . any person or class of 

persons’’ from any requirement that the 

Commission may establish under 

section 4a of the Act. Pursuant to this 

authority, the Commission proposes to 

add new exemptions in § 150.3 for 

financial distress situations and 

qualifying positions in cash-settled 

referenced contracts. The Commission 

also proposes to add guidance to 

persons seeking exemptive relief for 

certain qualifying non-enumerated riskreducing transactions. Additionally, the 

Commission proposes to grandfather 

pre-Dodd-Frank enactment swaps and 

transition swaps entered into before 

from position limits. 

(1) Financial Distress Exemption 

The Commission proposes to add an 

exemption from position limits for 

certain market participants in certain 

financial distress scenarios to § 150.3(b). 

During periods of financial distress, it 

may be beneficial for a financially 

sound entity to take on the positions 

(and corresponding risk) of a less stable 

market participant. The Commission 

historically has provided for an 

exemption from position limits in these 

types of situations, to avoid sudden 

liquidations that could potentially 

reduce liquidity, disrupt price 

discovery, and/or increase systemic 

risk.455 Therefore, the Commission now 

proposes to codify in regulation its prior 

exemptive practices to accommodate 

situations involving, for example, a 

customer default at a FCM, or in the 

context of potential bankruptcy. The 

Commission historically has not granted 

such an exemption by Commission 

Order due to concerns regarding 

timeliness and flexibility. Furthermore, 

the Commission clarifies that this 

exemption for financial distress 

situations is not a hedging exemption. 

(2) Conditional Spot-Month Limit 

Exemption 

Proposed § 150.3(c) would provide a 

conditional spot-month limit exemption 

that permits traders to acquire positions 

up to five times the spot-month limit if 

such positions are exclusively in cashsettled contracts. This conditional 

exemption would only be available to 

traders who do not hold or control 

positions in the spot-month physicaldelivery referenced contract. 

Historically, the Commission and 

Congress have been particularly 

concerned about protecting the spot 

month in physical-delivery futures 

contracts.456 For example, new CEA 

section 4c(a)(5)(B) makes it unlawful for 

any person to engage in any trading, 

practice, or conduct on or subject to the 

rules of a registered entity that 

demonstrates intentional or reckless 

disregard for the orderly execution of 

transactions during the closing period. 

The Commission interprets the closing 

period to be defined generally as the 

period in the contract or trade when the 

settlement price is determined under 

the rules of a trading facility such as a 

DCM or SEF, and may include the time 

period in which a daily settlement price 

is determined and the expiration day for 

a futures contract.457

This proposed conditional exemption 

for cash-settled contracts generally 

tracks exchange-set position limits 

currently implemented for certain cashsettled energy futures and swaps.458 The 


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potential threat of market manipulation or 

congestion, especially during trading in the delivery 

month.’’ 7 U.S.C. 2(h)(7)(C)(ii)(IV)(2009). Under the 

Commission’s rules for ECMs trading SPDCs, the 

Commission provided an acceptable practice that 

an ECM trading a SPDC that is economicallyequivalent to a contract traded on a DCM should 

set the spot-month limit at the same level as that 

specified for the economically-equivalent DCM 

contract. 17 CFR part 36 (2010). In practice, for 

example, ICE complied with this requirement by 

establishing a spot month limit for its natural gas 

SPDC at the same level as the spot month limit in 

the economically-equivalent NYMEX Henry Hub 

Natural Gas futures contract. Both ICE and NYMEX 

established conditional spot month limits in their 

cash-settled natural gas contracts at a level five 

times the level of the spot month limit in the 

physical-delivery futures contract. 

459See 76 FR 71635 (n. 100–01)(discussing data 

for the CME natural gas contract). 

460With respect to cash-settled contracts, 

proposed § 151.4 incorporated a conditional spotmonth limit permitting traders without a hedge 

exemption to acquire position levels that are five 

times the spot-month limit if such positions are 

exclusively in cash-settled contracts (i.e., the trader 

does not hold positions in the physical-delivery 

referenced contract) and the trader holds physical 

commodity positions that are less than or equal to 

25 percent of the estimated deliverable supply. See 

Proposed Rule, 76 FR 4752, 4758, Jan. 26, 2011. 

461See infra discussion of proposed revisions to 

part 19. 

462Under vacated § 151.4, the Commission would 

have applied spot-month position limits for cashsettled contracts using the same methodology as 

applied to the physical-delivery core referenced 

futures contracts, with the exception of natural gas 

contracts, which would have a class limit and 

aggregate limit of five times the level of the limit 

for the physical-delivery Core Referenced Futures 

Contract. 76 FR 71635. 

463Once the price of a physical-delivery contract 

has converged adequately to cash market prices, 

long and short position holders typically offset 

physical-delivery contracts. Prior to such adequate 

convergence, the Commission has observed when a 

physical-delivery contract is trading at a price 

above prevailing cash market prices, commercials 

with inventory tend to sell contracts with the intent 

of making delivery, causing physical-delivery prices 

to converge to cash market prices. Similarly, the 

Commission has observed when a physical-delivery 

contract is trading at a price below prevailing cash 

market prices, commercials with a need for the 

commodity or merchants active in the cash market 

tend to buy the contract with the intent of taking 

delivery, causing physical-delivery prices to 

converge to cash market prices. 

Commission has examined market data 

on the effectiveness of conditional spotmonth limits for cash-settled energy 

futures swaps, including the data 

submitted as part of the prior position 

limits rulemaking,459 and preliminarily 

believes that the conditional approach 

effectively addresses the § 4a(a)(3) 

regulatory objectives. Since spot-month 

limit levels for cash-settled referenced 

contracts will be set at no more than 

25% of the estimated spot-month 

deliverable supply in the relevant core 

referenced futures contract, the 

proposed conditional exemption would 

therefore permit a speculator to own 

positions in cash-settled referenced 

contracts equivalent to no more than 

125% of the estimated deliverable 

supply. 

As proposed, this broad conditional 

spot month limit exemption for cashsettled contracts would be similar to the 

conditional spot month limit for cashsettled contracts in proposed § 151.4.460

However, unlike proposed § 151.4, 

proposed § 150.3(c) would not require a 

trader to hold physical commodity 

inventory of less than or equal to 25 

percent of the estimated deliverable 

supply in order to qualify for the 

conditional spot month limit 

exemption. Rather, the Commission 

proposes to require enhanced reporting 

of cash market holdings of traders 

availing themselves of the conditional 

spot month limit exemption, as 

discussed in the proposed changes to 

part 19, below.461 The Commission 

preliminarily believes that an enhanced 

reporting regime may serve to provide 

sufficient information to conduct an 

adequate surveillance program to detect 

and potentially deter excessively large 

positions or manipulative schemes 

involving the cash market. 

The Commission notes that the 

proposed conditional spot month limit 

is a change of course from the expanded 

spot month limit that was only for 

natural gas referenced contracts in 

vacated § 151.4.462 In proposing to 

expand the scope of derivatives 

contracts for which the conditional spot 

month limit is available, the 

Commission has reconsidered the risks 

to the market of permitting a speculative 

trader to hold an expanded position in 

a cash-settled contract when that 

speculative trader also is active in the 

underlying physical-delivery contract. 

The Commission preliminarily believes 

the conditional natural gas spot month 

limits of the exchanges generally have 

served to further the purposes Congress 

articulated for positions limits in 

sections 4a(a)(3)(B) and 4c(a)(5)(B) of 

the Act, such as deterring market 

manipulation, ensuring the price 

discovery function of the underlying 

market is not disrupted, and deterring 

disruptive trading during the closing 

period. The Commission notes those 

exchange-set conditional limits, as is the 

case for the proposed rule, prohibit a 

speculative trader who is holding an 

expanded position in a cash-settled 

contract from also holding any position 

in the physical-delivery contract. 

The proposed conditional exemption 

would satisfy the goals set forth in CEA 

section 4a(a)(3)(B) by: Eliminating all 

speculation in a physical-delivery 

contract during the spot period by a 

trader availing herself of the conditional 

spot month limit exemption; ensuring 

sufficient market liquidity in the cashsettled contract for bona fide hedgers, in 

light of the typically rapidly decreasing 

levels of open interest in the physicaldelivery contract during the spot month 

as hedgers exit the physical-delivery 

contract; and protecting the price 

discovery process in the physicaldelivery contract from the risk that 

traders with leveraged positions in cashsettled contracts (in comparison to the 

level of the limit in the physicaldelivery contract) would otherwise 

attempt to mark the close or distort 

physical-delivery prices to benefit their 

leveraged cash-settled positions. Thus, 

the exemption would establish a higher 

conditional limit for cash-settled 

contracts than for physical delivery 

contracts, so long as such positions are 

decoupled from positions in physical 

delivery contracts which set or affect the 

value of such cash-settled positions. 

The Commission preliminarily 

believes this proposed exemption would 

not encourage price discovery to migrate 

to the cash-settled contracts in a way 

that would make the physical-delivery 

contract more susceptible to sudden 

price movements near expiration. The 

Commission has observed, repeatedly, 

that open interest in physical-delivery 

contracts typically declines markedly in 

the period immediately preceding the 

spot month. Open interest typically 

declines to minimal levels prior to the 

close of trading in physical-delivery 

contracts. The Commission notes a 

hedger with a long position need not 

stand for delivery when the price of a 

physical-delivery contract has 

adequately converged to the underlying 

cash market price; rather, such long 

position holder may offset and purchase 

needed commodities in the cash market 

at a comparable price that meets the 

hedger’s specific location and quality 

needs. Similarly, the Commission notes 

a hedger with a short position need not 

give notice of intention to deliver and 

deliver when the price of a physicaldelivery contract has adequately 

converged to the underlying cash 

market price; rather, such short position 

holder may offset and sell commodities 

held in inventory or current production 

in the cash market at a comparable price 

that is consistent with the hedger’s 

specific storage location and quality of 

inventory or production.463 Concerns 

regarding corners and squeezes are most 

acute in the markets for physical 

contracts in the spot month, which is 

why speculative limits in physical 

delivery markets are generally set at 

levels that are stricter during the spot 

month. The Commission seeks comment 

on whether a conditional spot-month 


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464See infra discussion of proposed revisions of 

part 19. 

465This second alternative would effectively 

adopt for all commodity derivative contract limits 

certain provisions of vacated § 151.4 (that would 

have been applicable only to contracts in natural 

gas). As noted above, under vacated § 151.4, the 

Commission would have applied a spot-month 

position limit for cash-settled contracts in natural 

gas at a level of five times the level of the limit for 

the physical-delivery Core Referenced Futures 

Contract in natural gas. Id. 

466This exemption is consistent with CEA section 

4a(b)(2). The time period for transition swaps for 

purposes of position limits differs from the time 

period for transition swaps for purposes of swap 

data recordkeeping and reporting requirements. In 

both cases, the time periods for transition swaps 

begins on the date of enactment of the Dodd-Frank 

Act. However, the time periods for transition swaps 

end prior to the compliance date for each relevant 

rule. Swap data recordkeeping and reporting 

requirements for pre-enactment and transition 

period swaps are listed in 17 CFR part 46. 

limit exemption adequately protects the 

price discovery function of the 

underlying physical-delivery market. 

Further, the Commission solicits 

comment on its conditional spot month 

limit, including whether it is advisable 

to expand this conditional limit to all 

contracts. Additionally, the Commission 

solicits comment on whether the 

conditional spot-month limit has 

effectively addressed and will continue 

to address the CEA section 4a(a)(3) 

regulatory objectives. Are there other 

concerns or issues regarding the 

proposed conditional spot month limit 

exemption that the Commission has not 

addressed? 

While traders who avail themselves of 

a conditional spot month limit 

exemption could not directly influence 

particular settlement prices by trading 

in the physical-delivery referenced 

contract, the Commission remains 

concerned about such traders’ activities 

in the underlying cash commodity. 

Accordingly, the Commission proposes 

new reporting requirements in part 19, 

as discussed below.464 The Commission 

invites comment and empirical analysis 

as to whether these reporting 

requirements adequately address 

concerns regarding: (1) Protecting the 

price discovery function of the physicaldelivery market, including deterring 

attempts to mark the close in the 

physical-delivery contract; and (2) 

providing adequate liquidity for bona 

fide hedgers in the physical-delivery 

contracts. In light of these two concerns, 

the Commission is also proposing 

alternatives to the conditional spotmonth limit exemption, as discussed 

below, including the possibility that it 

would not adopt the proposed 

conditional spot-month limit 

exemption. 

As one alternative to the proposed 

conditional spot month limit, the 

Commission is considering whether to 

restrict a trader claiming the conditional 

spot-month limit exemption to positions 

in cash-settled contracts that settle to an 

index based on cash-market transactions 

prices. This would prohibit traders from 

claiming a conditional exemption if the 

trader held positions in the spot-month 

of cash-settled contracts that settle to 

prices based on the underlying physicaldelivery futures contract. If the 

Commission adopted this alternative 

instead of the proposal, would the 

physical-delivery futures contract 

market be better protected? Why or why 

not? 

The Commission is also considering a 

second alternative to the proposed 

conditional spot month limit: Setting an 

expanded spot-month limit for cashsettled contracts at five times the level 

of the limit for the physical-delivery 

core referenced futures contract, 

regardless of positions in the underlying 

physical-delivery contract. This 

alternative would not prohibit a trader 

from carrying a position in the spotmonth of the physical-delivery contract. 

Consequently, this alternative would 

give more weight to protecting liquidity 

for bona fide hedgers in the physicaldelivery contract in the spot month, and 

less weight to protecting the price 

discovery function of the underlying 

physical-delivery contract in the spot 

month.465 Given Congressional concerns 

regarding disruptive trading practices in 

the closing period, as discussed above, 

would this second alternative 

adequately address the policy factors in 

CEA section 4a(a)(3)(B)? 

The Commission is also considering a 

third alternative: Limiting application of 

an expanded spot-month limit to a 

trader holding positions in cash-settled 

contracts that settle to an index based 

on cash-market transactions prices. 

Under this third alternative, cash-settled 

contracts that settle to the underlying 

physical-delivery contract would be 

restricted by a spot-month limit set at 

the same level as that of the underlying 

physical-delivery contract. The 

Commission is considering an aggregate 

spot-month limit on all types of cashsettled contracts set at five times the 

level of the limit of the underlying 

physical-delivery contract for this 

alternative to the proposed conditional 

spot month limit. Would this third 

alternative adequately address the 

policy factors in CEA section 

4a(a)(3)(B)? Would this third alternative 

better address such policy factors than 

the second alternative? 

The Commission requests comment 

on all aspects of the proposed 

conditional spot limit and the three 

alternatives discussed above, including 

whether conditional spot month limit 

exemptions should vary based on the 

underlying commodity. Should the 

Commission consider any other 

alternatives? If yes, please describe any 

alternative in detail. Would any of the 

proposed conditional spot month limit 

or the alternatives be more or less likely 

to increase or decrease liquidity in 

particular products? Would anticompetitive behavior be more or less 

likely to result from any of the proposed 

conditional spot month limit or the 

alternatives? Does any of the proposed 

conditional spot month limit or the 

alternatives increase the potential for 

manipulation? If yes, please provide 

detailed arguments and analyses. 

(3) Exemption for Pre-Dodd-Frank 

Enactment Swaps and Transition Period 

Swaps 

Proposed § 150.3(d) would provide an 

exemption from federal position limits 

for (1) swaps entered into prior to July 

21, 2010 (the date of the enactment of 

the Dodd-Frank Act of 2010), the terms 

of which have not expired as of that 

date, and (2) swaps entered into during 

the period commencing July 22, 2010, 

the terms of which have not expired as 

of that date, and ending 60 days after 

the publication of final § 150.3 in the 

Federal Register.466 However, the 

Commission would allow both preenactment and transition swaps to be 

netted with commodity derivative 

contracts acquired more than 60 after 

publication of final § 150.3 in the 

Federal Register for the purpose of 

complying with any non-spot-month 

position limit. 

(4) Other Exemptions for NonEnumerated Risk-Reducing Practices 

The Commission notes that the 

enumerated list of bona fide hedging 

positions as set forth in proposed 

§ 150.1 represents an expanded list of 

exemptions that has evolved over many 

years of the Commission’s experience in 

administering speculative position 

limits. The Commission has carefully 

expanded the list of exemptions in light 

of the statutory directive to define a 

bona fide hedging position in section 

4a(c)(2) of the Act. 

The Commission previously 

permitted a person to file an application 

seeking approval for a non-enumerated 

position to be recognized as a bona fide 

hedging position under § 1.47. The 

Commission proposes to delete § 1.47 

for several reasons. First, § 1.47 did not 

provide guidance as to the standards the 

Commission would use to determine 

whether a position was a bona fide 


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467All the exemptions granted by the 

Commission pursuant to § 1.47 involving swaps 

were restricted to recognition of the futures offset 

as a bona fide hedging position only outside of the 

spot month. 

468 17 CFR 140.99 defines three types of staff 

letters—exemptive letters, no-action letters, and 

interpretative letters—that differ in scope and 

effect. An interpretative letter is written advice or 

guidance by the staff of a division of the 

Commission or its Office of the General Counsel. It 

binds only the staff of the division that issued it (or 

the Office of the General Counsel, as the case may 

be), and third-parties may rely upon it as the 

interpretation of that staff. See description of CFTC 

Staff Letters, available at http://www.cftc.gov/

lawregulation/cftcstaffletters/index.htm. 

469See supra discussion of CEA section 4a(a)(7). 

470On May 29, 2008, the Commission announced 

a number of initiatives to increase transparency of 

the energy futures markets. In particular, the 

Commission would review the trading practices of 

index traders in the futures markets. CFTC Press 

Release 5503–08, May 29, 2008, available at 

http://www.cftc.gov/PressRoom/PressReleases/

pr5503-08. On June 3, 2008, the Commission 

announced policy initiatives aimed at addressing 

concerns raised at an April 22, 2008 roundtable 

regarding events affecting the agricultural futures 

markets. Among other things, the Commission 

withdrew proposed rulemakings that would have 

increased the Federal speculative position limits on 

certain agricultural futures contracts and created a 

risk-management hedge exemption from the Federal 

speculative position limits for agricultural futures 

and options contracts. At the time, Acting Chairman 

Lukken and Commissioners Dunn, Sommers and 

Chilton said, ‘‘. . . the Commission will be cautious 

and guarded before granting additional exemptions 

in this area.’’ CFTC Press Release 5504–08, June 3, 

2008, available at http://www.cftc.gov/PressRoom/

PressReleases/pr5504-08. 

471 17 CFR 140.97. 

472Almost all requests pursuant to § 1.47 have 

been for ‘‘risk-management’’ exemptions. See 

generally Risk Management Exemptions from 

Speculative Position Limits Approved under 

Commission Regulation 1.61, 52 FR 34633, Sep. 14, 

1987; Clarification of Certain Aspects of the 

Hedging Definition, 52 FR 27195, Jul. 20, 1987. The 

Commission first approved a request for a riskmanagement exemption in 1991. The Commission 

has also approved a request by a foreign 

government to recognize certain positions 

associated with a governmental agricultural support 

program that would be consistent with the 

examples of bona fide hedging positions in 

proposed appendix B to part 150. 

473Section 1.3(z)(1) includes the language, 

‘‘economically appropriate to the reduction of risks 

in the conduct and management of a commercial 

enterprise.’’ 17 CFR 1.3(z)(1). Section 1.47(b)(2) 

includes the language, ‘‘economically appropriate 

to the reduction of risk exposure attendant to the 

conduct and management of a commercial 

enterprise.’’ 17 CFR 1.47(b)(2). 

474The Commission notes that both the filings 

received by the Commission requesting such 

exemptions and the responding exemption letters 

issued by the Division are confidential in light of 

section 8 of the Act since, as noted above, the 

filings included information that described 

transactions and positions in order to demonstrate, 

among other things, that the transactions and 

positions were economically appropriate to the 

reduction of risk exposure attendant to the conduct 

and management of a commercial enterprise, while 

the Division’s responding letters included 

information regarding the nature of the price risks 

that the transactions would entail. 

475Staff Report, S. Permanent Subcomm. on 

Investigations, ‘‘Excessive Speculation in the Wheat 

Market,’’ S. Hrg. 111–155 (Jul. 21, 2009) at 13 

(‘‘Wheat Report’’). The Wheat Report was issued 

before the Dodd-Frank Act became law. 

hedging position. Second, in the 

Commission’s experience, the 

overwhelming number of applications 

filed under § 1.47 were from swap 

intermediaries seeking to offset the risk 

of swaps. Section 4a(c)(2) of the Act 

addresses the application of the bona 

fide hedging definition to certain 

positions that reduce risks attendant to 

a position resulting from certain swaps. 

As discussed in the definitions section 

above, those statutory provisions have 

been incorporated into the proposed 

definition of a bona fide hedging 

position under § 150.1; further, as 

discussed in the position limits section 

above, the provisions of proposed 

§ 150.2 include relief outside of the spot 

month to permit automatic netting of 

swaps that are referenced contracts with 

futures contracts that are referenced 

contracts and, where appropriate, to 

recognize as a bona fide hedging 

position the offset of certain nonreferenced contract swaps with futures 

that are referenced contracts.467 Third, 

§ 1.47 provided specific, limited 

timeframes (of 30 days or 10 days) for 

the Commission to determine whether 

the position may be classified as bona 

fide hedging. The Commission 

preliminarily believes it should not 

constrain itself to such limited 

timeframes for review of potentially 

complex and novel risk-reducing 

transactions. 

Nevertheless, the Commission 

proposes in § 150.3(e) to provide 

guidance to persons seeking exemptive 

relief. A person that engages in riskreducing practices commonly used in 

the market that the person believes may 

not be included in the list of 

enumerated bona fide hedging 

transactions may apply to the 

Commission for an exemption from 

position limits. As proposed, market 

participants would be guided in 

§ 150.3(e) first to consult proposed 

appendix C to part 150 to see whether 

their practices fall within a nonexhaustive list of examples of bona fide 

hedging positions as defined under 

proposed § 150.1. 

A person engaged in risk-reducing 

practices that are not enumerated in the 

revised definition of bona fide hedging 

in proposed § 150.1 may use two 

different avenues to apply to the 

Commission for relief from federal 

position limits: The person may request 

an interpretative letter from 

Commission staff pursuant to 

§ 140.99 468 concerning the applicability 

of the bona fide hedging position 

exemption, or the person may seek 

exemptive relief from the Commission 

under section 4a(a)(7) of the Act.469

(5) Previously Granted Risk 

Management Exemptions 

Until about mid-2008, the 

Commission accepted and approved 

filings pursuant to § 1.3(z) and § 1.47 for 

recognition of transactions and 

positions described in such filings as 

bona fide hedging for purposes of 

compliance with Federal position 

limits. Since then, the Division of 

Market Oversight (the ‘‘Division’’), on 

behalf of the Commission, has only 

considered revisions to previously 

recognized filings.470 Prior to the DoddFrank Act and pursuant to authority 

delegated to it under § 140.97,471 the 

Division recognized a broad range of 

transactions and positions as bona fide 

hedges based on facts and 

representations contained in such 

filings.472 In seeking these 

determinations and exemptions from 

Federal position limits, filers would 

furnish information to demonstrate, 

among other things, that the described 

transactions and positions were 

economically appropriate to the 

reduction of risk exposure attendant to 

the conduct and management of a 

commercial enterprise.473 On this basis, 

the Division provided relief to dealers, 

market makers and ‘‘risk 

intermediaries’’ facing not only 

producers and consumers of 

commodities but hedge funds, pension 

funds and other financial institutions 

who lacked the capacity to make or take 

delivery of, or otherwise handle, a 

physical commodity.474 The exemptions 

granted by the Division were not limited 

to futures to offset price risks associated 

with commodity index swaps that could 

be hedged in the component futures 

contracts. Filers obtained exemptions 

for futures transactions used to hedge 

price risks from transactions involving 

options, warrants, certificates of deposit, 

structured notes and various other 

structured products and hybrid 

instruments referencing commodities or 

embedding transactions linked to the 

payout or performance of a commodity 

or basket of commodities (collectively, 

‘‘financial products’’). In sum, the 

Division provided relief to ‘‘persons 

using the futures markets to manage 

risks associated with financial 

investment portfolios’’ and granted 

exemptions from speculative position 

limits to a broad range of ‘‘trading 

strategies to reduce financial risks, 

regardless of whether a matching 

transaction ever took place in a cash 

market for a physical commodity.’’ 475 In 


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476See generally CFTC Staff Report on 

Commodity Swap Dealers & Index Traders with 

Commission Recommendations (Sep. 2008) at 13– 

15 (‘‘Index Trading Report’’). 477 7 U.S.C. 6a(c)(1). 

478Section 1.3(z), the definition of bona fide 

hedging transactions and positions for excluded 

commodities, was revised (but retained as 

amended) by the vacated part 151 Rulemaking. 

Section 1.47 of the Commission’s regulations was 

removed and reserved by the vacated part 151 

Rulemaking. On September 28, 2012, the District 

Court for the District of Columbia vacated the part 

151 Rulemaking with the exception of the 

amendments to § 150.2. 887 F. Supp. 2d 259 (D.D.C. 

2012). Vacating the part 151 Rulemaking, with the 

exception of the amendments to § 150.2, means that 

as things stand now, it is as if the Commission had 

never adopted any part of the part 151 Rulemaking 

other than the amendments to § 150.2. That is, the 

definition of bona fide hedging transactions and 

positions in § 1.3(z) remains unchanged, and § 1.47 

is still in effect. As discussed above, the new 

definition of bona fide hedging positions in 

proposed § 150.1 is different from the changes to 

§ 1.3(z) adopted by the Commission in the vacated 

part 151 Rulemaking. See 76 FR 71683–84. The 

Commission proposes to delete § 1.47 for several 

reasons, as discussed above. Proposed § 150.3(e) 

would provide guidance for persons seeking nonenumerated hedging exemptions through filing of a 

petition under section 4a(a)(7) of the Act, 7 U.S.C. 

6a(a)(7), replacing the current process, as discussed 

above, under § 1.3(z)(3) and § 1.47 of the 

Commission’s regulations. 479This approach is consistent with the limited 

exemption to provide for transition into position 

limits for persons with existing § 1.47 exemptions 

under vacated § 151.9(d) adopted in the vacated 

part 151 Rulemaking. See 76 FR 71655–56. This 

limited grandfather is similarly designed to limit 

market disruption. 

480Section 4a(c)(1) of the CEA authorizes the 

Commission to define bona fide hedging 

transactions or positions ‘‘consistent with the 

purposes of this Act.’’ 7 U.S.C. 6a(c)(1). 

481Section 4a(c)(2)(A)(i) of the Act provides that 

the Commission shall define what constitutes a 

bona fide hedging position as a position that 

represents a substitute for transactions made or to 

be made or positions taken or to be taken at a later 

time in a physical marketing channel. 7 U.S.C. 

6a(c)(2)(A)(i). The proposed definition of bona fide 

hedging position requires that, for a position in a 

commodity derivative contracts in a physical 

contract to be a bona fide hedging position, such 

position must represent a substitute for transactions 

made or to be made or positions taken or to be 

taken, at a later time in a physical marketing 

channel. See supra discussion of the temporary 

substitute test. 

482See discussion above. 

483 Index trading activities have emerged as an 

area of special concern to both Congress and the 

Commission. See generally the Wheat Report and 

the Index Trading Report. The Commission 

continues to consider the concerns of commenters 

who argue that some transactions and positions 

recognized before the Dodd-Frank Act as bona fide 

hedging may, in fact, facilitate excessive 

speculation. See, e.g., Testimony of Michael W. 

Masters before the Commodity Futures Trading 

Commission, Aug. 5, 2009, available at http:// 

www.cftc.gov/ucm/groups/public/@newsroom/ 

documents/file/hearing080509_masters.pdf; 

Comment Letter from Better Markets, Inc., Mar. 28, 

2013, available at http://comments.cftc.gov/Public

Comments/ViewComment.aspx?id=34010&Search

Text=Better%20Markets. The speculative position 

limits that the Commission now proposes do not 

directly address these concerns as they relate to 

commodity index funds, commodity index 

speculation and passive investment in the 

commodity derivatives markets. The speculative 

position limits that the Commission proposes apply 

only to transactions involving one commodity or 

the spread between two commodities (e.g., the 

purchase of one delivery month of one commodity 

against the sale of that same delivery month of a 

different commodity). They do not apply to 

diversified commodity index contracts involving 

more than two commodities. This means that index 

speculators remain unconstrained on the size of 

positions in diversified commodity index contracts 

that they can accumulate so long as they can find 

someone with the capacity to take the other side of 

their trades. These commenters assert that such 

contracts, which this proposal does not address, 

consume liquidity and damage the price discovery 

function of the market. Contra Bessembinder et al., 

‘‘Predatory or Sunshine Trading? Evidence from 

Crude Oil Rolls’’ (working paper, 2012) available at 

http://business.nd.edu/uploadedFiles/ 

Faculty_and_Research/Finance/Finance_Seminar_

Series/2012%20Fall%20Finance%20Seminar%20

Series%20-%20Hank%20Bessembinder

%20Paper.pdf. 

484 In the vacated part 151 Rulemaking Proposal, 

the Commission proposed to create two classes of 

contracts for non-spot month limits: (1) Futures and 

options on futures contracts and (2) swaps. The 

proposed part 151 rule would have applied singlemonth and all-months-combined position limits to 

each class separately. The aggregate position limits 

across contract classes would have been in addition 

to the position limits within each contract class. 

The class limits were designed to diminish the 

possibility that a trader could have market power 

as a result of a concentration in any one submarket 

and to prevent a trader that had a flat net aggregate 

position in futures and swap from establishing 

extraordinarily large offsetting positions. 76 FR at 

71642. In response to comments received on the 

proposed part 151 rule, the Commission determined 

to eliminate class limits from the final rule. This is 

because the Commission believed that comments 

regarding the ability of market participants to net 

swaps and futures positions that are economically 

equivalent had merit. The Commission believed 

that concerns regarding the potential for market 

abuses through the use of futures and swaps 

positions could be addressed adequately, for the 

time being, by the Commission’s large trader 

surveillance program. The Commission stated in the 

vacated part 151 Rulemaking that it would closely 

monitor speculative positions in Referenced 

recognizing such trading strategies as 

bona fide hedges, the Commission was 

responding to Congressional 

direction476 to update its approach at a 

time when many sought to encourage 

what was then thought to be benign or 

beneficial financial innovation. In 

hindsight, the sum of these 

determinations may have exceeded 

what would be appropriate ‘‘to permit 

producers, purchasers, sellers, 

middlemen, and users of a commodity 

or product derived therefrom to hedge 

their legitimate anticipated business 

needs’’ and adequate ‘‘to prevent 

unwarranted price pressures by large 

hedgers.’’ 477

The Commission now proposes a 

definition of bona fide hedging position 

that would apply to all referenced 

contracts, and proposes to remove 

§ 1.47.478 The Commission is also 

proposing in § 150.3(f) that riskmanagement exemptions granted by the 

Commission under § 1.47 shall not 

apply to swap positions entered into 

after the effective date of a final position 

limits rulemaking, i.e., revoking the 

exemptions for new swap positions.479

This means that certain transactions and 

positions (and, by extension, persons 

party to such transactions or holding 

such positions) heretofore exempt from 

Federal position limits may be subject to 

Federal position limits. This is because 

some transactions and positions 

previously characterized as ‘‘riskmanagement’’ and recognized as bona 

fide hedges are inconsistent with the 

revised definition of bona fide hedging 

positions proposed in this release and 

the purposes of the Dodd-Frank Act 

amendments to the CEA.480 As noted 

above, some pre-Dodd-Frank Act 

exemptions recognized offsets of risks 

from financial products. But the 

Commission now proposes to 

incorporate the ‘‘temporary substitute’’ 

test of section 4a(c)(2)(A)(i) of the Act in 

paragraph (2)(i) of the proposed 

definition of bona fide hedging 

position.481 Financial products are not 

substitutes for positions taken or to be 

taken in a physical marketing channel. 

Thus, the offset of financial risks arising 

from financial products is inconsistent 

with the proposed definition of bona 

fide hedging for physical commodities. 

Moreover, the Commission interprets 

CEA section 4a(c)(2)(B) as a direction 

from Congress to narrow the scope of 

what constitutes a bona fide hedge.482

Other things being equal, a narrower 

definition of bona fide hedging would 

logically subject more speculative 

positions to Federal limits. 

Many of the Commission’s bona fide 

hedging exemptions prior to the DoddFrank Act provided relief from Federal 

speculative position limits for persons 

acting as intermediaries in connection 

with index trading activities.483 For 

example, a pension fund enters into a 

swap to receive the rate of return on a 

particular commodity index (such as the 

Standard & Poor’s–Goldman Sachs 

Commodity Index or the Dow Jones– 

UBS Commodity Index) with a swap 

dealer. The pension fund thus has a 

synthetic long position in the index. 

The swap dealer, in turn, must pay the 

rate of return on the index to the 

pension fund, and purchases 

commodity futures contracts to hedge 

its short exposure to the index. Prior to 

the Dodd-Frank Act, the swap dealer 

might have obtained a bona fide hedge 

exemption for its position. This would 

no longer be the case. 

The effect of revoking these 

exemptions for intermediaries may be 

mitigated in part by the absence of class 

limits in the proposed rules.484 The 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75741 

Contracts and may revisit this issue as appropriate. 

76 FR 71643. The Commission has determined to 

omit class limits from the rules proposed in this 

release for the same reasons that it eliminated class 

limits in the vacated part 151 Rulemaking. 

485Netting of commodity index contracts with 

referenced contracts would not be permitted 

because a commodity index contract is not a 

substitute for a position taken or to be taken in a 

physical marketing channel. 

486For example, a swap intermediary seeking to 

manage price risk on its books from serving as a 

counterparty to swap clients in commodity index 

swap contracts or commodity swap contracts could 

establish a portfolio of long futures positions in the 

commodities in the index or the commodity 

underlying the swap above applicable speculative 

limits if it had obtained a risk-management 

exemption. If the Commission adopts this proposal, 

the intermediary would not be able to hedge above 

the limits pursuant to the exemption, but could net 

economically equivalent contracts, which would 

have the effect of reducing the size of the position 

below applicable speculative limits. 

487Such positions and transactions include 

anticipated requirements, production and royalties, 

contracts for services, cash commodity products 

and by-products, and cross-commodity hedges. 

488 In order to capture information relating to 

swaps positions, the term ‘‘futures, options’’ in 17 

CFR 150.3(e) would be replaced in proposed 

§ 150.3(g) with the broader term ‘‘commodity 

derivative contracts’’ (defined in proposed § 150.1). 

489 17 CFR parts 15–21. 

490See CEA section 4g(a); 7 U.S.C. 6g(a). 

491See CEA section 4i; 7 U.S.C. 6i. 

492See 17 CFR part 19. Current part 19 crossreferences a provision of the definition of reportable 

position in 17 CFR 15.00(p)(2). As discussed below, 

that provision would be incorporated into proposed 

§ 19.00(a). 

493Current CFTC Form 204: Statement of Cash 

Positions in Grains is available at http:// 

www.cftc.gov/ucm/groups/public/@forms/ 

documents/file/cftcform204.pdf. 

494Current CFTC Form 304 Report: Statement of 

Cash Positions in Cotton is available at http:// 

www.cftc.gov/ucm/groups/public/@forms/ 

documents/file/cftcform304.pdf. 

495 In addition, in the cotton market, merchants 

and dealers file a weekly CFTC Form 304 Report of 

their unfixed-price cash positions, which is used to 

publish a weekly Cotton On-call report, a service to 

the cotton industry. The Cotton On-Call Report 

shows how many unfixed-price cash cotton 

purchases and sales are outstanding against each 

cotton futures month. 

absence of class limits means that 

market participants will be able to net 

economically equivalent derivatives 

contracts that are referenced contracts, 

i.e., futures against swaps, outside of the 

spot month, which would have the 

effect of reducing the size of a net 

position, perhaps below applicable 

speculative limits, in the case of an 

intermediary who enters into multiple 

swap positions in individual 

commodities to replicate a desired 

commodity index exposure in lieu of 

executing a swap on the commodity 

index.485 Netting would also permit 

larger speculative positions in futures 

alone outside of the spot month for 

traders who did not previously have a 

bona fide hedge exemption, but who 

have positions in swaps in the same 

commodity that would be netted against 

futures in the same commodity.486

Declining to impose class limits might 

seem to be at cross-purposes with 

narrowing the scope of the bona fide 

hedging definition. However, the 

Commission is concerned that class 

limits could impair liquidity in futures 

or swaps, as the case may be. For 

example, a speculator with a large 

portfolio of swaps near a particular class 

limit would be assumed to have a strong 

preference for executing futures 

transactions in order to maintain a 

swaps position below the class limit. If 

there were many similarly situated 

speculators, the market for such swaps 

could become less liquid. The absence 

of class limits should decrease the 

possibility of illiquid markets for 

contracts subject to Federal speculative 

position limits. Economically equivalent 

swaps and futures contracts outside of 

the spot month are close substitutes for 

each other. The absence of class limits 

should allow greater integration 

between the swaps and futures markets 

for contracts subject to Federal 

speculative position limits, and should 

also provide market participants with 

more flexibility when both hedging and 

speculating. 

c. Proposed Recordkeeping 

Requirements 

Proposed § 150.3(g) specifies 

recordkeeping requirements for persons 

who claim any exemption set forth in 

proposed § 150.3. Persons claiming 

exemptions under proposed § 150.3 

must maintain complete books and 

records concerning all details of their 

related cash, forward, futures, options 

and swap positions and transactions.487

Furthermore, such persons must make 

such books and records available to the 

Commission upon request under 

proposed § 150.3(h), which would 

preserve the ‘‘special call’’ rule set forth 

in current § 150.3(e). This ‘‘special call’’ 

rule sets forth that any person claiming 

an exemption under § 150.3 must, upon 

request, provide to the Commission 

such information as specified in the call 

relating to the positions owned or 

controlled by that person; trading done 

pursuant to the claimed exemption; the 

commodity derivative contracts or cash 

market positions which support the 

claim of exemption; and the relevant 

business relationships supporting a 

claim of exemption.488

The proposed rules concerning 

detailed recordkeeping and special calls 

would help to ensure that any person 

who claims any exemption set forth in 

§ 150.3 can demonstrate a legitimate 

purpose for doing so. 

4. Part 19—Reports by Persons Holding 

Bona Fide Hedge Positions Pursuant to 

§ 150.1 of This Chapter and by 

Merchants and Dealers in Cotton 

i. Current Part 19 

The market and large trader reporting 

rules are contained in parts 15 through 

21 of the Commission’s regulations.489

Collectively, these reporting rules 

effectuate the Commission’s market and 

financial surveillance programs by 

providing information concerning the 

size and composition of the commodity 

futures, options, and swaps markets, 

thereby permitting the Commission to 

monitor and enforce the speculative 

position limits that have been 

established, among other regulatory 

goals. The Commission’s reporting rules 

are implemented pursuant to the 

authority of CEA sections 4g and 4i, 

among other CEA sections. Section 4g of 

the Act imposes reporting and 

recordkeeping obligations on registered 

entities, and obligates FCMs, 

introducing brokers, floor brokers, and 

floor traders to file such reports as the 

Commission may require on proprietary 

and customer positions executed on any 

board of trade.490 Section 4i of the Act 

requires the filing of such reports as the 

Commission may require when 

positions equal or exceed Commissionset levels.491

Current part 19 of the Commission’s 

regulations sets forth reporting 

requirements for persons holding or 

controlling reportable futures and 

option positions which constitute bona 

fide hedge positions as defined in 

§ 1.3(z) and for merchants and dealers in 

cotton holding or controlling reportable 

positions for future delivery in 

cotton.492 In the several markets with 

federal speculative position limits— 

namely those for grains, the soy 

complex, and cotton—hedgers that hold 

positions in excess of those limits must 

file a monthly report pursuant to part 19 

on CFTC Form 204: Statement of Cash 

Positions in Grains,493 which includes 

the soy complex, and CFTC Form 304 

Report: Statement of Cash Positions in 

Cotton.494 These monthly reports, 

collectively referred to as the 

Commission’s ‘‘series ’04 reports,’’ must 

show the trader’s positions in the cash 

market and are used by the Commission 

to determine whether a trader has 

sufficient cash positions that justify 

futures and option positions above the 

speculative limits.495

ii. Proposed Amendments to Part 19 

The Commission proposes to amend 

part 19 so that it conforms with the 

Commission’s proposed changes to part 


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75742 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

496See discussion above. 

497See 17 CFR part 19. Current part 19 crossreferences the definition of reportable position in 17 

CFR 15.00(p). 

498Furthermore, anyone exceeding the federal 

limits who has received a special call must file a 

series ’04 form. 

499 17 CFR 15.02. 

500Forms 404, 404A and 404S were required 

under provisions of vacated part 151. 501See supra discussion of proposed § 150.3(c). 502Proposed Form 604 would replace Form 404S 

(as contemplated in vacated part 151). 503The updated definition of bona fide hedging 

in proposed § 150.1 incorporates several specific 

types of anticipatory transactions: unfilled 

anticipated requirements, unsold anticipated 

production, anticipated royalties, anticipated 

services contract payments or receipts, and 

anticipatory cross-commodity hedges. See, 

paragraphs (3)(iii), (4)(i), (iii), and (iv), and (5), 

respectively, of the Commission’s amended 

definition of bona fide hedging transactions in 

proposed § 150.1 as discussed above. 

504See 17 CFR 19.00(b)(1) (providing that ‘‘[i]f the 

regular business practice of the reporting trader is 

to exclude certain products or byproducts in 

determining his cash position for bona fide hedging 

. . ., the same shall be excluded in the report’’). 

505See supra discussion of the ‘‘economically 

appropriate test’’ as it relates to the definition of 

bona fide hedging position. 

150. First, the Commission proposes to 

amend part 19 by adding new and 

modified cross-references to proposed 

part 150, including the new definition 

of bona fide hedging position in 

proposed § 150.1. Second, the 

Commission proposes to amend 

§ 19.00(a) by extending reporting 

requirements to any person claiming 

any exemption from federal position 

limits pursuant to proposed § 150.3. The 

Commission proposes to add three new 

series ’04 reporting forms to effectuate 

these additional reporting requirements. 

Third, the Commission proposes to 

update the manner of part 19 reporting. 

Lastly, the Commission proposes to 

update both the type of data that would 

be required in series ’04 reports, as well 

as the time allotted for filing such 

reports. 

For purposes of clarity and simplicity, 

the Commission seeks to retain the 

current organization of grouping many 

reporting requirements, including those 

related to claimed exemptions from the 

federal position limits, within parts 15– 

21 of the Commission’s regulations. The 

Commission notes this is a change from 

the organization of vacated § 151.5, 

which included both exemptions and 

related reporting requirements within a 

single section. 

a. Amended Cross-References 

As discussed above, the Commission 

has proposed to replace the definition of 

bona fide hedging transaction found in 

§ 1.3(z) with a new proposed definition 

of bona fide hedging position in 

proposed § 150.1. Therefore, proposed 

part 19 would replace cross-references 

to § 1.3(z) with cross-references to the 

new definition of bona fide hedging 

positions in proposed § 150.1. 

Proposed part 19 will be expanded to 

include reporting requirements for 

positions in swaps, in addition to 

futures and options positions, for any 

part of which a person relies on an 

exemption. Therefore, positions in 

‘‘commodity derivative contracts,’’ as 

defined in proposed § 150.1, would 

replace ‘‘futures and option positions’’ 

throughout amended part 19 as 

shorthand for any futures, option, or 

swap contract in a commodity (other 

than a security futures product as 

defined in CEA section 1a(45)).496 This 

amendment would harmonize the 

reporting requirements of part 19 with 

proposed amendments to part 150 that 

encompass swap transactions. 

Proposed § 19.00(a) would eliminate 

the cross-reference to the definition of 

reportable position in § 15.00(p)(2). In 

this regard, the current reportable 

position definition essentially identifies 

futures and option positions in excess of 

speculative position limits. Proposed 

§ 19.00(a) simply makes clear that the 

reporting requirement applies to 

commodity derivative contract positions 

(including swaps) that exceed 

speculative position limits, as discussed 

below. 

b. List of Persons Who Must File Series 

’04 Reports Extended To Include Any 

Person Claiming an Exemption Under 

Proposed § 150.3 

The reporting requirements of current 

part 19 apply only to persons holding 

bona fide hedge positions and 

merchants and dealers in cotton holding 

or controlling reportable positions for 

future delivery in cotton.497 The 

Commission proposes to extend the 

reach of part 19 by requiring all persons 

who wish to avail themselves of any 

exemption from federal position limits 

under proposed § 150.3 to file 

applicable series ’04 reports.498

Collection of this information would 

facilitate the Commission’s surveillance 

program with respect to detecting and 

deterring trading activity that may tend 

to cause sudden or unreasonable 

fluctuations or unwarranted changes in 

the prices of the referenced contracts 

and their underlying commodities. By 

broadening the scope of persons who 

must file series ’04 reports, the 

Commission seeks to ensure that any 

person who claims any exemption from 

federal speculative position limits can 

demonstrate a legitimate purpose for 

doing so. The list of positions set forth 

in proposed § 150.3 that are eligible for 

exemption from the federal position 

includes, but is not limited to, bona fide 

hedging positions (including passthrough swaps and anticipatory bona 

fide hedge positions), qualifying spot 

month positions in cash-settled 

referenced contracts, and qualifying 

non-enumerated risk-reducing 

transactions. 

Series ’04 reports currently refers to 

Form 204 and Form 304, which are 

listed in current § 15.02.499 The 

Commission proposes to add three new 

series ’04 reporting forms to effectuate 

the expanded reporting requirements of 

part 19. The Commission will avoid 

using any form numbers with ‘‘404’’ to 

avoid confusion with the part 151 

Rulemaking.500 Proposed Form 504 

would be added for use by persons 

claiming the conditional spot month 

limit exemption pursuant to proposed 

§ 150.3(c).501 Proposed Form 604 would 

be added for use by persons claiming a 

bona fide hedge exemption for either of 

two specific pass-through swap position 

types, as discussed further below.502

Proposed Form 704 would be added for 

use by persons claiming a bona fide 

hedge exemption for certain 

anticipatory bona fide hedging 

positions.503

c. Manner of Reporting 

(1) Excluding Certain Source 

Commodities, Products or Byproducts of 

the Cash Commodity Hedged 

For purposes of reporting cash market 

positions under current part 19, the 

Commission historically has allowed a 

reporting trader to ‘‘exclude certain 

products or byproducts in determining 

his cash positions for bona fide 

hedging’’ if it is ‘‘the regular business 

practice of the reporting trader’’ to do 

so.504 The Commission has determined 

to clarify the meaning of ‘‘economically 

appropriate’’ in light of this reporting 

exclusion of certain cash positions.505 In 

order for a position to be economically 

appropriate to the reduction of risks in 

the conduct and management of a 

commercial enterprise, the enterprise 

generally should take into account all 

inventory or products that the enterprise 

owns or controls, or has contracted for 

purchase or sale at a fixed price. For 

example, in line with its historical 

approach to the reporting exclusion, the 

Commission does not believe that it 

would be economically appropriate to 

exclude large quantities of a source 

commodity held in inventory when an 

enterprise is calculating its value at risk 

to a source commodity and it intends to 

establish a long derivatives position as 


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506Proposed § 19.00(b)(1) adds a caveat to the 

alternative manner of reporting: when reporting for 

the cash commodity of soybeans, soybean oil, or 

soybean meal, the reporting person shall show the 

cash positions of soybeans, soybean oil and soybean 

meal. This proposed provision for the soybean 

complex is included in the current instructions for 

preparing Form 204. 

507 43 FR 45825, 45827, Oct. 4, 1978 (explaining 

that the allowance for eggs not kept in cold storage 

to be excluded from reporting a cash position in 

eggs under part 19 ‘‘was appropriate when the only 

futures contract being traded in fresh shell eggs 

required delivery from cold storage warehouses.’’). 

508Prior to the Commission revising the part 19 

reporting exclusion for eggs, see id., the exclusion 

allowed ‘‘eggs not in cold storage or certain egg 

products’’ not to be reported as a cash position. 26 

FR 2971, Apr. 7, 1961 (emphasis added). 

Additionally, the title to the revised exclusion 

reads: ‘‘Excluding products or byproducts of the 

cash commodity hedged.’’ See 43 FR 45825, 45828, 

Oct. 4, 1978. So, in addition to a commodity itself 

that was not deliverable under any derivative 

contract, the Commission also recognized a separate 

class of ‘‘products and byproducts’’ that resulted 

from the processing of a commodity that it did not 

believe at the time was capable of being hedged by 

any derivative contract for purposes of a bona fide 

hedge. 

509See 42 FR 42748, Aug. 24, 1977. Crosscommodity hedging is discussed as an enumerated 

hedge, below. 

510Proposed § 19.00(b)(2) would add the term 

commodity derivative contracts (as defined in 

proposed § 150.1). The proposed definition of crosscommodity hedge in proposed § 150.1 is discussed 

above. 

511 Vacated § 151.5(g) would have required the 

filing of a Form 404, 404A, or 404S by persons 

availing themselves of cross-commodity hedges. 

512See 76 FR at 71692. 

513See discussion below. 

514For example, the Commission is considering 

requiring that series ’04 reports should be sent to 

the Commission via FTP, unless otherwise 

specifically authorized by the Commission or its 

designee. Prior to submitting series ’04 reports, 

persons would contact the CFTC at (312) 596–0700 

to obtain the CFTC trader identification code 

required by such reports. Further instructions on 

Continued 

a hedge of unfilled anticipated 

requirements. Therefore, under 

proposed § 19.00(b)(1), a source 

commodity itself can only be excluded 

from a calculation of a cash position if 

the amount is de minimis, impractical 

to account for, and/or on the opposite 

side of the market from the market 

participant’s hedging position.506

Originally, the Commission intended 

for the optional part 19 reporting 

exclusion to cover only cash positions 

that were not capable of being delivered 

under the terms of any derivative 

contract.507 The Commission 

differentiated between ‘‘products and 

byproducts’’ of a commodity and the 

underlying commodity itself, the former 

capable of exclusion from part 19 

reporting under normal business 

practices due to the absence of any 

derivative contract in such product or 

byproduct.508 This intention ultimately 

evolved to allow cross-commodity 

hedging of products and byproducts of 

a commodity that were not necessarily 

deliverable under the terms of any 

derivative contract.509 The instructions 

to current Form 204 go a step further 

than current § 19.00(b)(1) by allowing 

for a reporting trader to exclude ‘‘certain 

source commodities, products, or 

byproducts in determining [ ] cash 

positions for bona fide hedging.’’ 

(Emphasis added.) 

The Commission’s proposed 

clarification of the § 19.00(b)(1) 

reporting exclusion would prevent the 

definition of bona fide hedging 

positions in proposed § 150.1 from 

being swallowed by this reporting rule. 

For it would not be economically 

appropriate behavior for a person who 

is, for example, long derivative contracts 

to exclude inventory when calculating 

unfilled anticipated requirements. Such 

behavior would call into question 

whether an offset to unfilled anticipated 

requirements is, in fact, a bona fide 

hedging position, since such inventory 

would fill the requirement. As such, a 

trader can only underreport cash market 

activities on the opposite side of the 

market from her hedging position as a 

regular business practice, unless the 

unreported inventory position is de 

minimis or impractical to account for. 

By way of example, the alternative 

manner of reporting in proposed 

§ 19.00(b)(1) would permit a person who 

has a cash inventory of 5 million 

bushels of wheat, and is short 5 million 

bushels worth of commodity derivative 

contracts, to underreport additional 

cash inventories held in small silos in 

disparate locations that are 

administratively difficult to count. This 

person could instead opt to calculate 

and report these hard-to-count 

inventories and establish additional 

short positions in commodity derivative 

contracts as a bona fide hedge against 

such additional inventories. 

(2) Cross-Commodity Hedges 

Proposed § 19.00(b)(2) sets forth 

instructions, which are consistent with 

the provisions in the current section, for 

reporting a cash position in a 

commodity that is different from the 

commodity underlying the futures 

contract used for hedging.510 A person 

who is unsure of whether a commodity 

may serve as the basis of a crosscommodity hedge should refer to the 

deliverable commodities listed by the 

relevant DCM under the terms of a 

particular core referenced futures 

contract. Persons who wish to avail 

themselves of cross-commodity hedges 

are required to file an appropriate series 

’04 form.511

Under vacated § 151.5(g), traders 

engaged in hedging commercial activity 

(or hedging swaps that in turn hedge 

commercial activity) that did not 

involve the same quantity or commodity 

as the quantity or commodity associated 

with positions in referenced contracts 

that are used to hedge would have been 

obligated to submit a description of the 

conversion methodology each time they 

cross-hedged.512 In lieu of that, the 

Commission proposes to instead 

maintain the special call status 

concerning such information as set forth 

in current § 19.00(b)(3).513 Furthermore, 

since proposed § 19.00(b)(3) would 

maintain the requirement that crosshedged positions be shown both in 

terms of the equivalent amount of the 

commodity underlying the commodity 

derivative contract used for hedging and 

in terms of the actual cash commodity 

(as provided for on the appropriate 

series ’04 form), the Commission will be 

able to determine the hedge ratio used 

merely by comparing the reported 

positions. Thus, the Commission will be 

positioned to review whether a hedge 

ratio appears reasonable in comparison 

to, for example, other similarly situated 

traders, without requiring reporting of 

the conversion methodology. 

(3) Standards and Conversion Factors 

Proposed § 19.00(b)(3) maintains the 

requirement that standards and 

conversion factors used in computing 

cash positions for reporting purposes 

must be made available to the 

Commission upon request. Proposed 

§ 19.00(b)(3) would clarify that such 

information would include hedge ratios 

used to convert the actual cash 

commodity to the equivalent amount of 

the commodity underlying the 

commodity derivative contract used for 

hedging, and an explanation of the 

methodology used for determining the 

hedge ratio. 

(4) Examples of Completed ’04 Forms 

To assist filers in completing Forms 

204, 304, 504, 604 and 704, illustrative 

examples are provided in appendix A to 

part 19, adjacent to the blank forms and 

instructions. Once finalized, filers 

would be able to contact Commission 

staff in the Office of Data and 

Technology (ODT) and/or surveillance 

staff in the Division of Market Oversight 

for additional guidance. 

d. Information Required and Timing 

Proposed § 19.01(b)(3) would require 

series ‘04 reports to be transmitted using 

the format, coding structure, and 

electronic data transmission procedures 

approved in writing by the Commission 

or its designee.514


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75744 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

submitting ’04 reports may be found at http://

www.cftc.gov/Forms/index.htm. If submission 

through FTP is impractical, the reporting trader 

would contact the Commission at (312) 596–0700 

for further instruction. 

CFTC Form 204 reports with respect to 

transactions in wheat, corn, oats, soybeans, soybean 

meal and soybean oil would no longer be sent to 

the Commission’s office in Chicago, IL. 

Similarly, CFTC Form 304 reports with respect to 

transactions in cotton would no longer be sent to 

the Commission’s office in New York, NY. 

515 Vacated § 151.5 would have set forth the 

application procedure for bona fide hedgers and 

counterparties to bona fide hedging swap 

transactions that seek an exemption from the 

Commission-set Federal position limits for 

Referenced Contracts. Under vacated § 151.5, had a 

bona fide hedger sought to claim an exemption from 

position limits because of cash market activities, 

then the hedger would have submitted a Form 404 

filing pursuant to vacated § 151.5(b). The Form 404 

filing would have been submitted when the bona 

fide hedger exceeded the applicable position limit 

and claimed an exemption or when its hedging 

needs increased. Similarly, parties to bona fide 

hedging swap transactions would have been 

required to submit a Form 404S filing to qualify for 

a hedging exemption, which would also have been 

submitted when the bona fide hedger exceeded the 

applicable position limit and claimed an exemption 

or when its hedging needs increased. 

516The list of data required for persons filing on 

Forms 204 and 304 would be relocated from current 

§ 19.01(a) to proposed § 19.01(a)(3). 

517Compare proposed § 19.01(b) with 17 CFR 

19.01(b). Additionally, compare proposed § 19.01(b) 

with vacated § 151.5(c) which would have required 

that any person holding a derivatives position in 

excess of a position limit record and ultimately 

report information about such person’s cash 

positions in the relevant commodity for each day 

that its derivatives position exceeds the applicable 

position limit. 

518Additionally, data under this provision may 

be required by way of special call, in addition to 

special commodity reporting. 

519The Commission has observed dramatic 

instances of disruptive trading practices in the 

natural gas markets. See United States CFTC v. 

Amaranth Advisors, LLC, 2009 U.S. Dist. LEXIS 

101406 (S.D.N.Y. Aug. 12, 2009). The Commission 

endeavors to balance the cost of similar enhanced 

reporting for the other 27 commodities against its 

experience with observing disruptive trading 

practices. 

520See proposed § 19.03. 

521See supra discussion of the proposed 

definition of bona fide hedging position. 

522Persons holding pass-through swap positions 

that are offset with referenced contracts outside the 

spot month (whether such contracts are for physical 

delivery or are cash-settled) need not report on 

(1) Bona Fide Hedgers and Cotton 

Merchants and Dealers 

Current § 19.01(a) sets forth the data 

that must be provided by bona fide 

hedgers (on Form 204) and by 

merchants and dealers in cotton (on 

Form 304).515 The Commission 

proposes to continue using Forms 204 

and 304, which will feature only minor 

changes to the types of data to be 

reported.516 To accommodate open 

price pairs, proposed § 19.01(a)(3) 

would remove the modifier ‘‘fixed 

price’’ from ‘‘fixed price cash position’’ 

and would add a specific request for 

data concerning open price contracts. 

The Commission would maintain 

additional reporting requirements for 

cotton but will incorporate the monthly 

reporting, including the granularity of 

equity, certificated and non-certificated 

cotton stocks, on Form 204. Weekly 

reporting for cotton will be retained as 

a separate report made on Form 304 for 

the collection of data required by the 

Commission to publish its weekly 

public cotton ‘‘on call’’ report on 

www.cftc.gov. 

Proposed § 19.01(b) would maintain 

the requirement that reports on Form 

204 be submitted to the Commission on 

a monthly basis, as of the close of 

business on the last Friday of the 

month.517 Accordingly, commercial 

firms would measure their respective 

cash positions on one day a month, as 

they currently do for Form 204, and 

submit a monthly report, as currently 

provided in § 19.01. Proposed § 19.02 

provides that Form 304, but not Form 

204, must be filed weekly to provide 

data for the Commission’s weekly cotton 

‘‘on call’’ report. The Commission 

would continue to utilize its special call 

authority in addition to the regular 

reporting on ’04 forms to ensure that it 

has sufficient information. 

(2) Conditional Spot-Month Limit 

Exemption 

Proposed § 19.01(a)(1) would require 

persons availing themselves of the 

conditional spot month limit exemption 

(pursuant to proposed § 150.3(c)) to 

report certain detailed information 

concerning their cash market activities 

for any commodity specially designated 

by the Commission for reporting under 

§ 19.03 of this part. While traders who 

avail themselves of this exemption 

could not directly influence particular 

settlement prices by trading in the 

physical-delivery referenced contract, 

the Commission remains concerned 

about such traders’ activities in the 

underlying cash commodity. 

Accordingly, proposed § 19.01(b) would 

require that persons claiming a 

conditional spot month limit exemption 

must report on new Form 504 daily, by 

9 a.m. Eastern Time on the next 

business day, for each day that a person 

is over the spot month limit in certain 

special commodity contracts specified 

by the Commission.518 The scope of 

reporting—purchase and sales contracts 

through the delivery area for the core 

referenced futures contract and 

inventory in the delivery area—differs 

from the scope of reporting for bona fide 

hedgers, since the person relying on the 

conditional spot month limit exemption 

may not be hedging any position. 

Initially, the Commission would 

require reporting on new Form 504 for 

conditional spot month limit 

exemptions in the natural gas 

commodity derivative contracts only. 

Based on its experience in surveillance 

of natural gas commodity derivative 

contracts, the Commission believes that 

enhanced reporting is warranted.519 The 

Commission would wait to impose 

similar reporting requirements for 

persons claiming conditional spot 

month limit exemptions in other 

commodity derivative contracts until 

the Commission gains additional 

experience with the limits in proposed 

§ 150.2. In this regard, the Commission 

will closely monitor the reporting 

associated with conditional spot month 

limit exemptions in natural gas and may 

require reporting on Form 504 for other 

commodity derivative contracts in the 

future in response to market 

developments and to facilitate 

surveillance.520

(3) Pass-Through Swap Exemption 

Under the definition of bona fide 

hedging position in proposed § 150.1, a 

person who uses a swap to reduce risks 

attendant to a position that qualifies as 

a bona fide hedging position may passthrough those bona fides to the 

counterparty, even if the person’s swap 

position is not in excess of a position 

limit.521 As such, positions in 

commodity derivative contracts that 

reduce the risk of pass-through swaps 

would qualify as bona fide hedging 

positions. 

Proposed § 19.01(a)(2) would require 

a person relying on the pass-through 

swap exemption who holds either of 

two position types to file a report with 

the Commission on new Form 604. The 

first type of position is a swap executed 

opposite a bona fide hedger that is not 

a referenced contract and for which the 

risk is offset with referenced contracts. 

The second type of position is a cashsettled swap executed opposite a bona 

fide hedger that is offset with physicaldelivery referenced contracts held into a 

spot month, or, vice versa, a physicaldelivery swap executed opposite a bona 

fide hedger that is offset with cashsettled referenced contracts held into a 

spot month. 

These reports on Form 604 would 

explain hedgers’ needs for large 

referenced contract positions and would 

give the Commission the ability to verify 

the positions were a bona fide hedge, 

with heightened daily surveillance of 

spot month offsets. Persons holding any 

type of pass-through swap position 

other than the two described above 

would report on Form 204.522


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Form 604 because swap positions will be netted 

with referenced contract positions outside the spot 

month pursuant to proposed § 150.2(b). 523As defined in 17 CFR 20.1, a commodity 

reference price is the price series used by the 

parties to a swap or swaption to determine 

payments made, exchanged, or accrued under the 

terms of that swap or swaption.’’ 524 In contrast to vacated § 151.5(f) and (g), 

proposed § 19.01(a)(2)(i) would not require the 

person to submit a description of the conversion 

methodology each time he or she cross-hedged. 525See supra discussion of proposed § 150.2(a). 526To provide clarity in filings, a person may 

report cash-settled referenced contracts used for 

bona fide hedging in a separate filing from physicaldelivery referenced contracts used for bona fide 

hedging. 

527See paragraphs (3)(iii), (4)(i), (iii), and (iv), and 

(5), respectively, of the Commission’s amended 

definition of bona fide hedging transactions in 

proposed § 150.1 as discussed above. 

528See 17 CFR 1.48. See also definition of bona 

fide hedging transactions in current 17 CFR 

1.3(z)(2)(i)(B) and (ii)(C), respectively. 

529See Hedging Anticipated Requirements for 

Processing or Manufacturing under Section 4a(3) of 

the Commodity Exchange Act, 21 FR 6913, Sep. 12, 

1956. 530 Id. The statutory definition also provided an 

anticipatory production hedge for twelve months 

agricultural production. 7 U.S.C. 6a(3)(A) (1940) 

(1970). The statutory definition was deleted in 

1974, as discussed above in the definition of bona 

fide hedging position. 531See Definition of Bona Fide Hedging 

Requirements and Related Reporting Requirements, 

42 FR 42748, Aug. 24, 1977. The Commission stated 

at that time that this amended reporting 

requirement was intended to conform § 1.48 to the 

updated definition of bona fide hedging in § 1.3(z), 

and to limit the potential for market disruption. Id. 

at 42750. 

532See generally 76 FR 71626, November 18, 

2011. Prior to compliance dates, the rule was 

vacated, as discussed below. 

533Proposed Rule, 76 FR 4752, Jan. 26, 2011. The 

final rulemaking for new Part 151 required DCMs 

to comply with Part 150 until such time that the 

Commission replaces Part 150 with the new Part 

151. See 76 FR 71632. 

534 76 FR 71643. 

535 76 FR 71644. 

(A) Non-Referenced Contract Swap 

Offset 

Proposed § 19.01(a)(2)(i) lists the 

types of data that a person who executes 

a pass-through swap that is not a 

referenced contract and for which the 

risk is offset with referenced contracts 

must report on new Form 604. Such 

data requirements include details 

concerning the non-referenced contract 

in terms of commodity reference 

price,523 notional quantity, gross long or 

short position in terms of futuresequivalents in the core referenced 

futures contract, and gross long or short 

position in the referenced contract used 

to offset risk.524 Under proposed 

§ 19.01(b), persons holding a nonreferenced contract swap offset would 

submit reports to the Commission on a 

monthly basis, as of the close of 

business of the last Friday of the month. 

This data collection would permit staff 

to identify offsets of non-referencedcontract pass-through swaps on an 

ongoing basis for further analysis. The 

Commission believes collection of this 

data will be less burdensome on 

reporting entities than complying with 

special calls. 

(B) Spot Month Swap Offset 

Under proposed § 150.2(a), a trader in 

the spot month may not net across 

physical-delivery and cash-settled 

contracts for the purpose of complying 

with federal position limits.525 If a 

person executes a cash-settled passthrough swap that is offset with 

physical-delivery contracts held into a 

spot month (or vice versa), then, 

pursuant to proposed § 19.01(a)(2)(ii), 

that person must report additional 

information concerning the swap and 

offsetting referenced contract position 

on new Form 604. A person need not 

file a Form 604 if he or she executes a 

cash-settled pass-through swap that is 

offset with cash-settled referenced 

contracts, or, vice versa, a physical 

delivery pass-through swap offset with 

physical delivery referenced 

contracts.526 Pursuant to proposed 

§ 19.01(b), a person holding a spot 

month swap offset would need to file on 

Form 604 as of the close of business on 

each day during a spot month, and not 

later than 9 a.m. Eastern Time on the 

next business day following the date of 

the report. The Commission notes that 

pass-through swap offsets would not be 

permitted during the lesser of the last 

five days of trading or the time period 

for the spot month. However, the 

Commission remains concerned that a 

trader could hold an extraordinarily 

large position early in the spot month in 

the physical-delivery contract along 

with an offsetting short position in a 

cash-settled contract, which may 

disrupt the price discovery function of 

the underlying physical delivery core 

referenced futures contract. Hence, the 

Commission proposes to introduce this 

new daily reporting requirement within 

the spot month to identify and monitor 

such offsetting positions. 

5. Section 150.7—Reporting 

Requirements for Anticipatory Hedging 

Positions 

For reasons discussed above, the 

revised definition of bona fide hedging 

in proposed § 150.1 incorporates hedges 

of five specific types of anticipated 

transactions: unfilled anticipated 

requirements, unsold anticipated 

production, anticipated royalties, 

anticipated services contract payments 

or receipts, and anticipatory crosshedges.527 The Commission proposes 

reporting requirements in new § 150.7 

for traders seeking an exemption from 

position limits for any of these five 

enumerated anticipated hedging 

transactions. Proposed § 150.7 would 

build on, and replace, the special 

reporting requirements for hedging of 

unsold anticipated production and 

unfilled anticipated requirements in 

current § 1.48.528

i. Current § 1.48 

Current § 1.48 provides a procedure 

for persons to file for bona fide hedging 

exemptions for anticipated production 

or unfilled requirements when that 

person has not covered the anticipatory 

need with fixed-price commitments to 

sell a commodity, or inventory or fixedprice commitments to purchase a 

commodity. The Commission has long 

been concerned that distinguishing 

between what is the reduction of risk 

arising from anticipatory needs, and 

what is speculation, may be exceedingly 

difficult if anticipatory transactions are 

not well defined. Therefore, for more 

than fifty years, the position limit rules 

have set discrete reporting requirements 

in § 1.48 for persons wishing to avail 

themselves of certain anticipatory bona 

fide hedging position exemptions.529

When first promulgated in 1956, § 1.48 

set forth reporting requirements for 

persons hedging anticipated 

requirements for processing or 

manufacturing.530 In 1977, § 1.48 was 

amended to include similar reporting 

requirements for a second type of 

anticipatory hedge transaction: unsold 

anticipated production.531 Thereafter, 

the Commission did not substantively 

amend § 1.48 until it adopted a new 

position limits regime in 2011.532

In January 2011, the Commission 

published a notice of proposed 

rulemaking to replace existing part 150, 

in its entirety, with a new federal 

position limits rules regime in the form 

of new part 151.533 Proposed § 151.5 

would have established exemptions 

from position limits for bona fide 

hedging transactions or positions in 

exempt and agricultural 

commodities.534 The referenced 

contracts subject to the proposed 

position limit framework would have 

been subject to the bona fide hedge 

provisions of proposed § 151.5 and 

would have no longer been subject to 

the definition of bona fide hedging 

transactions in § 1.3(z), which would 

have been retained only for excluded 

commodities.535 Proposed § 151.5(c) 

specified reporting and approval 

requirements for traders seeking an 

anticipatory hedge exemption, 

incorporating the current requirements 

of § 1.48 (and thereby rendering § 1.48 


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536 Id. This rulemaking would have removed and 

reserved § 1.48. 

537See 887 F. Supp. 2d 259 (D.D.C. 2012). 

538See Georgetown Univ. Hosp. v. Bowen, 821 

F.2d 750, 757 (D.C. Cir. 1987) (‘‘This circuit has 

previously held that the effect of invalidating an 

agency rule is to ‘reinstate the rules previously in 

force.’ ’’). 

539See current definition of bona fide hedging 

transactions at 17 CFR 1.3(z)(2)(i)(B) and (ii)(C), 

respectively. Cross-commodity hedges are 

permitted under 17 CFR 1.3(z)(2)(iv). Compare with 

paragraphs (3)(iii) and (4)(i), respectively, of the 

definition of bona fide hedging positions in 

proposed § 150.1, discussed above. 

540See sections (4)(iii) and (iv) and (5), 

respectively, of the definition of bona fide hedging 

positions in proposed § 150.1, discussed above. 

541Further, advance filing may serve to reduce 

the burden on a person who exceeds position limits 

and who may then otherwise be issued a special 

call to determine whether the underlying 

requirements for the exemption have been met. If 

the Commission were to reject such an exemption, 

such a person would have already violated position 

limits. 

542Proposed 150.7(d)(2) would require additional 

information for cross hedges, for reasons discussed 

above. 

duplicative).536 However, in an Order 

dated September 28, 2012, the United 

States District Court for the District of 

Columbia vacated part 151.537 The 

District Court decision had the effect of 

reinstating §§ 1.3(z) and 1.48.538

Therefore, §§ 1.3(z) and 1.48 continue to 

apply as if part 151 had not been finally 

adopted by the Commission. 

ii. Proposed § 150.7 

a. Reporting Requirements for 

Anticipatory Hedging Positions 

The Commission’s revised definition 

of bona fide hedging in proposed § 150.1 

would enumerate two new types of 

anticipatory bona hedging positions. 

Two existing types of anticipatory 

hedges would be carried forward from 

the existing definition of bona fide 

hedging in current § 1.3(z): hedges of 

unfilled anticipated requirements and 

hedges of unsold anticipated 

production, as well as anticipatory 

cross-commodity hedges of such 

requirements or production.539

Proposed § 150.1 would expand the list 

of enumerated anticipatory bona fide 

hedging positions to include hedges of 

anticipated royalties and hedges of 

anticipated services contract payments 

or receipts, as well as anticipatory crosscommodity hedges of such contracts.540

As discussed above, § 1.48 has long 

required special reporting for hedges of 

unfilled anticipated requirements and 

hedges of unsold anticipated production 

because the Commission remains 

concerned about distinguishing between 

anticipatory reduction of risk and 

speculation. Such concerns apply 

equally to any position undertaken to 

reduce the risk of anticipated 

transactions. Hence, the Commission 

proposes to extend the special reporting 

requirements in proposed § 150.7 for all 

types of enumerated anticipatory hedges 

that appear in the definition of bona fide 

hedging positions in proposed § 150.1. 

For purposes of simplicity, the 

proposed special reporting requirements 

for anticipatory hedges would be placed 

within the Commission’s position limits 

regime in part 150, and alongside the 

Commission’s updated definition of 

bona fide hedging positions in proposed 

§ 150.1. Thus, the Commission is 

proposing to delete the reporting 

requirements for anticipatory hedges in 

current § 1.48 because that section is 

duplicative. 

b. New Form 704 

The Commission proposes to add a 

new series ’04 reporting form, Form 704, 

to effectuate these additional and 

updated reporting requirements for 

anticipatory hedges. Persons wishing to 

avail themselves of an exemption for 

any of the anticipatory hedging 

transactions enumerated in the updated 

definition of bona fide hedging in 

proposed § 150.1 would be required to 

file an initial statement on Form 704 

with the Commission at least ten days 

in advance of the date that such 

positions would be in excess of limits 

established in proposed § 150.2. 

Advance notice of a trader’s intended 

maximum position in commodity 

derivative contracts to offset 

anticipatory risks would allow the 

Commission to review a proposed 

position before a trader exceeds the 

position limits and, thereby, would 

allow the Commission to prevent 

excessive speculation in the event that 

a trader were to misconstrue the 

purpose of these limited exemptions.541

The trader’s initial statement on Form 

704 would provide a detailed 

description of the person’s anticipated 

activity (i.e., unfilled anticipated 

requirements, unsold anticipated 

production, etc.).542 Under proposed 

§ 150.7(b), the Commission may reject 

all or a portion of the position as not 

meeting the requirements for bona fide 

hedging positions under proposed 

§ 150.1. To support this determination, 

proposed § 150.7(c) would allow the 

Commission to request additional 

specific information concerning the 

anticipated transaction to be hedged. 

Otherwise, Form 704 filings that 

conform to the requirements set forth in 

proposed § 150.7 would become 

effective ten days after submission. 

Proposed § 150.7(e) would require an 

anticipatory hedger to file a 

supplemental report on Form 704 

whenever the anticipatory hedging 

needs increase beyond that in its most 

recent filing. 

c. Annual and Monthly Reporting 

Requirements 

Proposed § 150.7(f) would add a 

requirement for any person who files an 

initial statement on Form 704 to provide 

annual updates that detail the person’s 

actual cash market activities related to 

the anticipated exemption. With an eye 

towards distinguishing bona fide 

hedging of anticipatory risks from 

speculation, annual reporting of actual 

cash market activities and estimates of 

remaining unused anticipated 

exemptions beyond the past year would 

enable the Commission to verify 

whether the person’s anticipated cash 

market transactions closely track that 

person’s real cash market activities. 

Proposed § 150.7(g) would similarly 

enable the Commission to review and 

compare the actual cash activities and 

the remaining unused anticipated hedge 

transactions by requiring monthly 

reporting on Form 204. Absent monthly 

filing, the Commission would need to 

issue a special call to determine why a 

person’s commodity derivative contract 

position is, for example, larger than the 

pro rata balance of her annually 

reported anticipated production. 

As is the case under current § 1.48, 

proposed § 150.7(h) requires that a 

trader’s maximum sales and purchases 

must not exceed the lesser of the 

approved exemption amount or the 

trader’s current actual anticipated 

transaction. 

d. Delegation 

The Commission is proposing to 

delete current § 140.97, which delegates 

to the Director of the Division of Market 

Oversight or his designee authority 

regarding requests for classification of 

positions as bona fide hedging under 

current §§ 1.47 and 1.48. For purposes 

of simplicity, this delegation of 

authority would be placed in proposed 

§ 150.7(j), within the Commission’s 

position limits regime in part 150. 

6. Miscellaneous Regulatory 

Amendments 

i. Proposed § 150.6—Ongoing 

Application of the Act and Commission 

Regulations 

The Commission is proposing to 

amend existing § 150.6 to conform the 

provision with the general applicability 

of part 150 to SEFs that are trading 

facilities, and concurrently making nonsubstantive changes to clarify the 

provision. The provision, as amended 

and clarified, provides this part shall 

only be construed as having an effect on 


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543The Commission notes that amended § 150.6 

matches vacated § 151.11(h). 

544The Commission notes that proposed § 150.8 

matches vacated § 151.13. 

545See discussion of new and amended series ’04 

reports above. 546 In a separate proposal approved on the same 

date as this proposal, the Commission is proposing 

amendments to § 150.4—aggregation of positions. 

See Aggregation NPRM (Nov. 5, 2013). 

547 In a separate final rulemaking (Oct. 30, 2013), 

the Commission adopted amendments to § 17.03; 

the current proposal would amend § 17.03 further 

by adding proposed § 17.03(h). 548See 17 CFR Part 150. 549See Establishment of Speculative Position 

Limits, 46 FR 50938, Oct. 16, 1981, and 17 CFR 1.61 

(removed and reserved May 5, 1999). Section 1.61 

permitted exchanges to adopt and enforce their own 

speculative position limits for those contracts that 

were covered by Commission-set speculative 

position limits, as long as the exchange limits were 

not higher than those set by the Commission. 

Furthermore, CEA section 4a(e) provides that a 

violation of a speculative position limit established 

by a Commission-approved exchange rule is also a 

violation of the Act. Thus, the Commission can 

enforce directly violations of exchange-set 

speculative position limits as well as those 

provided under Commission rules. 

550 Initially, for example, the Commission 

redefined ‘‘hedging’’ (see 42 FR 42748, Aug. 24, 

1977), and raised speculative position limits in 

wheat (see 41 FR 35060, Aug. 19, 1976). 

Subsequently, for example, the Commission 

solicited public comment on, and subsequently 

approved, exchange requests for exemptions for 

futures and option contracts on certain financial 

instruments from the requirement specified by 

former § 1.61 that speculative position limits be 

specified for all contracts. See 56 FR 51687, Oct. 15, 

1991. 

551See 17 CFR 150.5. See also Revision of Federal 

Speculative Position Limits and Associated Rules, 

Final Rules, 64 FR 24038, 24040–42, May 5, 1999. 

As noted in the notice of proposed rulemaking for 

§ 150.5, promulgating these policies within a single 

section of the Commission’s rules would increase 

significantly their accessibility and clarify their 

terms. See 63 FR 38537, Jul. 17, 1998. 

position limits and that nothing in part 

150 shall affect any provision 

promulgated under the Act or 

Commission regulations including but 

not limited to those relating to 

manipulation, attempted manipulation, 

corners, squeezes, fraudulent or 

deceptive conduct, or prohibited 

transactions.543 For example, by 

requiring DCMs and SEFs that are 

trading facilities to impose and enforce 

exchange-set speculative position limits, 

the Commission does not intend for the 

fulfillment of such requirements alone 

to satisfy any other legal obligations 

under the Act and Commission 

regulations of DCMs and SEFs that are 

trading facilities to detect and deter 

market manipulation and corners. In 

another example, a market participant’s 

compliance with position limits or an 

exemption does not confer any type of 

safe harbor or good faith defense to a 

claim that he had engaged in an 

attempted manipulation, a perfected 

manipulation or deceptive conduct. 

ii. Proposed § 150.8—Severability 

The Commission is proposing to add 

§ 150.8 to address the severability of 

individual provisions of part 150. 

Should any provision(s) of part 150 be 

declared invalid, including the 

application thereof to any person or 

circumstance, § 150.8 provides that all 

remaining provisions of part 150 shall 

not be affected to the extent that such 

remaining provisions, or the application 

thereof, can be given effect without the 

invalid provisions.544 The Commission 

believes it is prudent to include a 

severability clause to avoid any further 

delay, as practicable, in carrying out 

Congress’ mandate to impose position 

limits in a timely manner. 

iii. Part 15—Reports—General 

Provisions 

The Commission is proposing to 

amend the definition of the term 

‘‘reportable position’’ in current 

§ 15.00(p)(2) by clarifying that: (1) Such 

positions include swaps; (2) issued and 

stopped positions are not included in 

open interest against a position limit; 

and (3) special calls may be made for 

any day a person exceeds a limit. 

Additionally, the Commission is 

proposing to amend § 15.01(d) by 

adding language to reference swaps 

positions. Lastly, the Commission is 

proposing to amend the list of reporting 

forms in current § 15.02 to account for 

new and updated series ’04 reporting 

forms, as discussed above.545

iv. Part 17—Reports by Reporting 

Markets, Futures Commission 

Merchants, Clearing Members, and 

Foreign Brokers 

The Commission is proposing to 

amend current § 17.00(b) to delete 

aggregation provisions, since those 

provisions are duplicative of aggregation 

provisions in § 150.4.546 Proposed 

§ 17.00(b) would provide that ‘‘[e]xcept 

as otherwise instructed by the 

Commission or its designee and as 

specifically provided in § 150.4 of this 

chapter, if any person holds or has a 

financial interest in or controls more 

than one account, all such accounts 

shall be considered by the futures 

commission merchant, clearing member 

or foreign broker as a single account for 

the purpose of determining special 

account status and for reporting 

purposes.’’ In addition, proposed 

§ 17.03(h) would delegate to the Director 

of the Division of Market Oversight or 

his designee the authority to instruct 

persons pursuant to proposed 

§ 17.03.547

II. Revision of Rules, Guidance, and 

Acceptable Practices Applicable to 

Exchange-Set Speculative Position 

Limits—§ 150.5 

A. Background 

Pursuant to 17 CFR part 150, the 

Commission administers speculative 

position limits on futures contracts for 

certain agricultural commodities.548

Prior to the CEA’s amendment in 1974, 

which expanded its jurisdiction to all 

‘‘services, rights and interests’’ in which 

futures contracts are traded, only certain 

designated agricultural commodities 

could be regulated. Both prior to and 

after the 1974 amendments to the Act, 

futures markets that traded commodities 

not so enumerated applied speculative 

position limits by exchange rule, if at 

all. In 1981, the Commission 

promulgated § 1.61, which required 

that, absent an exemption, exchanges 

must adopt and enforce speculative 

position limits for all contracts that are 

not subject to the Commission-set 

limits.549 The Commission has 

periodically reviewed and updated its 

policies and rules pertaining to each of 

the three basic elements of the 

regulatory framework for speculative 

position limits, namely, the levels of the 

limits, the exemptions from them (in 

particular, for hedgers), and the policy 

on aggregating accounts.550

In 1999, the Commission relocated 

several of the rules and policies 

concerning exchange-set-position limits 

from § 1.61 to current § 150.5, thereby 

incorporating within part 150 most 

Commission rules relating to 

speculative position limits. The 

Commission codified as rules within 

§ 150.5 various staff policies and 

administrative practices that had 

developed over time. These policies and 

practices related to the speculative 

position limit levels that the staff had 

routinely recommended for approval by 

the Commission for newly designated 

futures and option contracts, as well as 

the magnitude of increases to the limit 

levels that it would approve for alreadytraded contracts. The Commission also 

codified within § 150.5 various 

exemptions from the general 

requirement that exchanges must set 

speculative position limits for all 

contracts. The exemptions included 

permitting exchanges to substitute 

position accountability rules for 

position limits for physical commodity 

derivatives outside the spot month in 

high volume and liquid markets.551

Less than two years after the 

Commission promulgated § 150.5, the 

Commodity Futures Modernization Act 


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552Commodity Futures Modernization Act of 

2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21, 

2000). By enacting the CFMA, Congress intended 

‘‘[t]o reauthorize and amend the Commodity 

Exchange Act to promote legal certainty, enhance 

competition, and reduce systemic risk in markets 

for futures and over-the-counter derivatives . . . .’’ 

Id. 

553See CEA section 5(d); 7 U.S.C. 7(d). The CEA, 

as amended by the CFMA, required a DCM 

applicant to demonstrate its ability to comply with 

18 core principles. 

554CEA section 5(d)(5); 7 U.S.C. 7(d)(5). 

555 DCM core principle 1 states, among other 

things, that boards of trade ‘‘shall have reasonable 

discretion in establishing the manner in which they 

comply with the core principles.’’ This ‘‘reasonable 

discretion’’ provision underpinned the 

Commission’s use of core principle guidance and 

acceptable practices. See former CEA section 

5(d)(1)(amended in 2010); U.S.C. 7(d)(1). As 

discussed above, the Dodd-Frank Act subsequently 

amended DCM core principle 1 to specifically 

provide the Commission with discretion to 

determine, by rule or regulation, the manner in 

which boards of trade comply with the core 

principles. 

556See CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B). 

557See id. Congress limited the exercise of 

reasonable discretion by DCMs only where the 

Commission has acted by regulation. 

558See CEA section 5(d)(5)(B) (amended 2010); 7 

U.S.C. 7(d)(5)(B). 

559See CEA section 5h; 7 U.S.C. 7b–3. 

560CEA section 5h(f)(6); 7 U.S.C. 7b–3(f)(6). 

561 Id. 

562CEA section 4a, as amended by the DoddFrank Act, provides the Commission with broad 

authority to set position limits. 7 U.S.C. 6a. See 

supra discussion of CEA section 4a. 

563The position limits on these agricultural 

contracts are referred to as ‘‘legacy’’ limits, and the 

listed commodities are referred to as the 

‘‘enumerated’’ agricultural commodities. This list of 

agricultural contracts includes Corn (and MiniCorn), Oats, Soybeans (and Mini-Soybeans), Wheat 

(and Mini-wheat), Soybean Oil, Soybean Meal, Hard 

Red Spring Wheat, Hard Winter Wheat, and Cotton 

No. 2. See 17 CFR 150.2. 

564 46 FR 50938, Oct. 16, 1981. The Commission 

stated the purpose of such limits was to prevent 

‘‘excessive speculation . . . arising from those 

extraordinarily large positions which may cause 

sudden or unreasonable fluctuations or 

unwarranted changes in the price’’ of commodity 

futures. Id. at 50945. Former § 1.61(a)(2) specified 

that limits shall be based on ‘‘such factors that will 

accomplish the purposes of this section. As 

appropriate, these factors shall include position 

sizes customarily held by speculative traders in the 

market . . . , which shall not be extraordinarily 

large relative to total open positions in the contract 

market . . . [or] breadth and liquidity of the cash 

market underlying each delivery month and the 

opportunity for arbitrage between the futures 

market and cash market in the commodity 

underlying the futures contract.’’ 17 CFR 1.61 

(removed and reserved on May 5, 1999). 

565 46 FR 50938, 50939–40, Oct. 16, 1981. 

566 Id. at 50940. 

567 Id. at 50945. 

568 Id. at 50940. 

of 2000 (‘‘CFMA’’) 552 amended the CEA 

to include a set of core principles that 

DCMs must comply with at the time of 

application, and on an ongoing basis 

after designation,553 including DCM 

core principle 5, which requires 

exchanges to adopt position limits or 

position accountability levels where 

necessary and appropriate to reduce the 

threat of market manipulation or 

congestion.554 The CFMA further 

amended the CEA to provide DCMs 

with ‘‘reasonable discretion’’ in 

determining how to comply with each 

core principle, including core principle 

5 regarding exchange-set position 

limits.555 Since 2000, the Commission 

has continued to maintain § 150.5, but 

only as guidance on, and acceptable 

practices for, compliance with DCM 

core principle 5. The Commission did 

not amend § 150.5 following passage of 

the CFMA. 

In 2010, the Dodd-Frank Act amended 

the CEA to explicitly provide that the 

Commission may mandate the manner 

in which DCMs must comply with the 

core principles.556 Specifically, the 

Dodd-Frank Act amended DCM core 

principle 1 to include the condition that 

‘‘[u]nless otherwise determined by the 

Commission by rule or regulation,’’ 

boards of trade shall have reasonable 

discretion in establishing the manner in 

which they comply with the core 

principles.557

Additionally, the Dodd-Frank Act 

amended DCM core principle 5 to 

require that, for any contract that is 

subject to a position limitation 

established by the Commission pursuant 

to CEA section 4a(a), the DCM ‘‘shall set 

the position limitation of the board of 

trade at a level not higher than the 

position limitation established by the 

Commission.’’ 558 Furthermore, the 

Dodd-Frank Act added CEA section 5h 

to provide a regulatory framework for 

Commission oversight of SEFs.559 Under 

SEF core principle 6, which parallels 

DCM core principle 5, Congress 

required that SEFs adopt for each swap, 

as is necessary and appropriate, position 

limits or position accountability.560 In 

addition, Congress required that, for any 

contract that is subject to a Federal 

position limit under CEA Section 4a(a), 

the SEF shall set its position limits at a 

level no higher than the position 

limitation established by the 

Commission.561

In view of these Dodd-Frank Act 

amendments, the Commission proposes 

several amendments to update and 

streamline the part 150 regulations. 

First, the Commission proposes new 

and amended clarifying definitions in 

§ 150.1 that relate particularly to 

position limits. Second, the Commission 

proposes to amend § 150.5 to include 

SEFs and swaps. Third, the Commission 

proposes to codify rules and acceptable 

practices for compliance with DCM core 

principle 5 and SEF core principle 6 

within amended § 150.5(a) for 

commodity derivative contracts that are 

subject to the federal position limits set 

forth in § 150.2. Lastly, the Commission 

proposes to codify rules and revise 

guidance and acceptable practices for 

compliance with DCM core principle 5 

and SEF core principle 6 within 

amended § 150.5(b) for commodity 

derivative contracts that are not subject 

to the Federal position limits set forth 

in § 150.2. 

B. The Current Regulatory Framework 

for Exchange-Set Position Limits 

1. Section 150.5 

The Commission currently sets and 

enforces position limits pursuant to its 

broad authority under CEA section 

4a 562 and does so only with respect to 

certain enumerated agricultural 

products.563 In 1981, the Commission 

promulgated what was then 17 CFR 1.61 

(re-codified in 1999 as 17 CFR 150.5), 

which required that, absent an 

exemption, exchanges must adopt and 

enforce speculative position limits for 

all futures contracts that were not 

subject to Commission-set limits.564

The Commission’s 1981 rule requiring 

that exchanges set position limits was a 

watershed in its approach to position 

limits. The Commission first concluded 

that multiple provisions of the CEA 

vested it with authority to direct that 

exchanges impose position limits.565

The Commission explained that section 

4a ‘‘represents an express Congressional 

finding that excessive speculation is 

harmful to the market, and a finding 

that speculative limits are an effective 

prophylactic measure.’’ 566 Relying on 

those Congressional findings, the 

Commission directed exchanges to 

impose speculative position limits on 

all futures contracts subject to their 

jurisdiction.567

In adopting this prophylactic 

approach, the Commission explained 

that comments it had received during 

the rulemaking that questioned ‘‘the 

general desirability of [position] limits 

[were] contrary to Congressional 

findings in sections 3 and 4a of the Act 

and considerable years of Federal and 

contract market regulatory 

experience.’’ 568 The Commission also 

explained that: 

the prevention of large and/or abrupt price 

movements which are attributable to 

extraordinarily large speculative positions is 

a Congressionally endorsed regulatory 

objective of the Commission. Further . . . 

this objective is enhanced by speculative 

position limits since it appears that the 

capacity of any contract market to absorb the 

establishment and liquidation of large 

speculative positions in an orderly manner is 

related to the relative size of the positions, 


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569 Id. 

570 Id. at 50940–41. The Commission stated it 

would consider the particular characteristics of the 

cash markets in setting limit levels, but required 

that all futures contracts have position limits. Id. at 

50941. 

571 Id. at 50941. 

572 Id. at 50939. 

573See 17 CFR 1.61(a)(1) (1982). In addition, 

§ 1.61 permitted exchanges to adopt and enforce 

their own speculative position limits for those 

contracts that have federal speculative position 

limits, as long as the exchange limits were not 

higher than those set by the Commission. 

574The Futures Trading Act of 1982, Public Law 

97–444, 96 Stat. 2294 (1983). 

575See id; see also 7 U.S.C. 6a(e). 

576See Speculative Position Limits—Exemptions 

from Commission Rule 1.61, 56 FR 51687, Oct. 15, 

1991; and Speculative Position Limits—Exemptions 

from Commission Rule 1.61, 57 FR 29064, Jun. 30, 

1992. 

577See 57 FR 29064, Jun. 30, 1992. 

578 64 FR 24038, 24040, May 5, 1999. As noted 

in the notice of proposed rulemaking for § 150.5, 

promulgating these policies within a single section 

of the Commission’s rules would increase 

significantly their accessibility and clarify their 

terms. See Revision of Federal Speculative Position 

Limits and Associated Rules, Proposed Rules, 63 FR 

38537, Jul. 17, 1998. 

579 64 FR at 24040–42. As the Commission 

explained, the open-interest criterion and numeric 

formula used by the Commission in its 1991 

proposed amendment of Commission-set 

speculative position limits provided the most 

definitive guidance by the Commission on 

acceptable levels for speculative position limits for 

tangible commodities and, along with several other 

commonly accepted measures, had been widely 

followed as a matter of administrative practice 

when reviewing proposed exchange speculative 

position limits under Commission rule 1.61. Id. at 

24040. Additionally, in reviewing new contracts for 

tangible commodities, the staff had relied upon the 

Commission’s formulation providing for a 

minimum level of 1,000 contracts for non-spot 

month speculative position limits. Id. Moreover, the 

Commission had routinely approved a level of 

5,000 contracts in non-spot months for designation 

of financial futures and energy contracts, and that 

level had become a rule of thumb as a matter of 

administrative practice. Id. 

580 Id. 

581 17 CFR 150.5(a). 

582 Id. 

583 Id. 

584See 17 CFR 150.5(b). The Commission 

explained that the proposed limit levels for new 

contracts, which were based upon the formula and 

associated minimum levels used by the 

Commission in its 1992 proposed rulemaking, had 

long been used as a matter of informal 

administrative practice. 64 FR 24040. 

585 17 CFR 150.5(b)(1). 

586 Id. 

587 17 CFR 150.5(b)(2). 

588 17 CFR 150.5(b)(3). 

589 17 CFR 150.5(c). 

590 64 FR at 24041 (citing 62 FR 60831, 60838, 

Nov. 13, 1997). A spot month speculative position 

Continued 

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

unlimited.569

Citing the recent disruption in the 

silver market, the Commission insisted 

that position limits be imposed 

prophylactically for all futures and 

options contracts, irrespective of the 

unique features of the cash market 

underlying a particular derivative.570

Thus, the Commission concluded that 

‘‘speculative limits are appropriate for 

all contract markets,’’ 571 and directed 

exchanges to impose them on an 

‘‘omnibus basis,’’ 572 that is, on all 

futures contracts.573

Congress ratified the Commission’s 

construction of section 4a and its 

promulgation of § 1.61 in the Futures 

Trading Act of 1982 574 when it enacted 

section 4a(e) of the Act, which provides 

that limits set by exchanges and 

approved by the Commission are subject 

to Commission enforcement.575

During the 1990s, the Commission 

allowed exchanges to replace position 

limits with position accountability 

levels with respect to certain derivatives 

outside the spot month.576 Position 

accountability levels are not fixed 

limits, but rather position sizes that 

trigger an exchange review of a trader’s 

position and at which an exchange may 

remediate perceived problems, such as 

preventing a trader from increasing his 

position or forcing a reduction in a 

position. In January 1992, the 

Commission approved the CME’s 

request for an exemption from the 

position limits requirements and 

permitted the CME to establish position 

accountability for a variety of financial 

contracts. Initially, the Commission 

limited its approval of position 

accountability to financial instruments 

(i.e., excluded commodities) that had a 

high degree of liquidity. Six months 

later, the Commission determined it 

would also allow position 

accountability to be used for highly 

liquid energy and metals contracts.577

In 1999, the Commission simplified 

and reorganized its rules relating to 

speculative position limits by removing 

and reserving § 1.61 and relocating 

several of its rules and policies 

concerning exchange-set-position limits 

to new § 150.5, thereby incorporating 

within part 150 most Commission rules 

relating to speculative position 

limits.578 The Commission codified 

within § 150.5 various staff policies and 

administrative practices that had 

developed over time relating to: (1) The 

speculative position limit levels that the 

staff routinely had recommended for 

approval by the Commission for newly 

designated futures and option contracts; 

(2) the magnitude of increases to the 

limit levels that it would approve for 

traded contracts; and (3) various 

exemptions from the general 

requirement that exchanges set 

speculative position limits for all 

contracts, such as permitting exchanges 

to substitute position accountability 

rules for position limits for high volume 

and liquid markets.579 The Commission 

explained that codifying the prior 

administrative practices as part of new 

§ 150.5 would make the applicable 

standard for exchange-set position 

limits more transparent and thereby 

make compliance easier for exchanges 

to achieve.580

Under § 150.5(a), the Commission 

required each exchange to ‘‘limit the 

maximum number of contracts a person 

may hold or control, separately or in 

combination, net long or net short, for 

the purchase or sale of a commodity for 

future delivery or, on a futuresequivalent basis, options thereon.’’ 581

The Commission noted that this 

provision does not apply to contracts for 

which position limits are set forth in 

§ 150.2 or to a futures or option contract 

on a major foreign currency.582

Furthermore, nothing in § 150.5(a) was 

to be construed to prohibit an exchange 

from setting different limits for different 

futures contracts or delivery months, or 

from exempting positions normally 

known in the trade as spreads, 

straddles, or arbitrage.583

In § 150.5(b), the Commission 

presented explicit numeric formulas 

and descriptive standards for the 

speculative position limit levels that it 

found to be appropriate for new 

contracts.584 For physical delivery 

contracts, the spot month limit level 

must be no greater than one-quarter of 

the estimated spot month deliverable 

supply, calculated separately for each 

month to be listed.585 For cash-settled 

contracts, the Commission presented a 

descriptive standard: ‘‘the spot month 

limit level must be no greater than 

necessary to minimize the potential for 

manipulation or distortion of the 

contract’s or the underlying 

commodity’s price.’’ 586 Individual nonspot-month or all-months-combined 

levels for such newly-designated 

contracts must be no greater than 1,000 

contracts for tangible commodities other 

than energy products,587 and no greater 

than 5,000 contracts for energy products 

and non-tangible commodities, 

including contracts on financial 

products.588 In § 150.5(c), the 

Commission codified mandatory 

numeric formulas and descriptive 

standards for subsequent adjustments to 

spot, individual and all-monthscombined position limit levels.589

The Commission explained that these 

explicit numeric formulas grew from 

administrative practices that had long 

required a deliverable supply of at least 

four times the spot month speculative 

position limit.590 The Commission 


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limit that exceeds this amount enhances the 

susceptibility of the contract to market 

manipulation, price distortion or congestion. Except 

for cash-settled contracts, Commission staff had 

used this standard to review every new contract, or 

proposals to increase existing exchange speculative 

position limits, since 1981, when § 1.61 was issued. 

Id. 591 64 FR at 24041. For other commodities, 

however, especially commodities having strong 

seasonal characteristics, spot month speculative 

position limits are required to be set at a level lower 

than the individual month limit for all or some 

trading months. Id. Accordingly, codification of the 

standard only made explicit the standard which, 

since 1981, had been applied to, and met by, every 

physical delivery futures contract at the time of 

initial review and upon subsequent increases to the 

spot month speculative position limit. Id. 

592 17 CFR 150.5(d)(1); 17 CFR 1.3(z). 593 17 CFR 150.5(d)(1). 594 17 CFR 150.5(d)(2). In considering whether to 

grant such an application for exemption, exchanges 

must take into account whether the hedging 

position is not in accord with sound commercial 

practices or exceeds an amount which may be 

established and liquidated in an orderly fashion. 

See id. 595 17 CFR 150.5(f). This exemption also applies 

to positions acquired in good faith prior to the 

effective date of any exchange position limits rule 

by a person that is registered as a futures 

commission merchant or as a floor broker under 

authority of the Act except to the extent that 

transactions made by such person are made for or 

on behalf of the account or benefit of such person. 

596 Id. 

597 17 CFR 150.5(e). Position accountability rules 

impose a level that triggers distinct reporting 

responsibilities by a trader at the request of the 

applicable exchange. 

598 Id. The Commission explained that a trading 

history of at least 12 months must first be 

established before a futures contract can meet the 

proposed rule’s liquidity requirements. See 

Proposed Rule, 63 FR 38525, 38529, Jul. 17, 1998. 

599Revision of Federal Position Limits and 

Associated Rules, Proposed Rule, 63 FR 38525, 

38530, Jul. 17, 1998. The Commission explained 

that a liquid market is one which has sufficient 

trading activity to enable individual trades coming 

to a market to be transacted without significantly 

affecting the price. Id. A high degree of liquidity in 

the futures and option markets better enables 

traders to arbitrage these markets with the 

underlying cash markets. Id. Where the underlying 

cash markets in turn are very liquid and have 

extremely large deliverable supplies, the threat of 

market manipulation or distortions caused by large 

speculative positions is lessened. Id. 

600See 17 CFR 150.5(e)(1)–(3); see also Proposed 

Rule, 63 FR 38525, 38530, Jul. 17, 1998. 

601 17 CFR 150.5(e)(4). 

602To determine whether any person has 

exceeded the limits established under this section, 

all positions in accounts for which such person by 

power of attorney or otherwise directly or indirectly 

controls trading shall be included with the 

positions held by such person; such limits upon 

positions shall apply to positions held by two or 

more person acting pursuant to an express or 

implied agreement or understanding, the same as if 

the positions were held by a single person. 17 CFR 

150.5(g). 

603CFMA, Public Law 106–554, 114 Stat. 2763. 

By enacting the CFMA, Congress intended ‘‘[t]o 

reauthorize and amend the Commodity Exchange 

Act to promote legal certainty, enhance 

competition, and reduce systemic risk in markets 

for futures and over-the-counter derivatives, and for 

other purposes.’’ Id. 

604See CEA section 5(d); 7 U.S.C. 7(d). DCMs 

were first established under the CFMA as one of 

two forms of Commission-regulated markets for the 

trading of contracts for sale of a commodity for 

future delivery or commodity options (the other 

being registered DTEFs). In addition, the CFMA 

provided for two markets exempt from regulation: 

Exempt boards of trade (‘‘EBOTs’’) and exempt 

commercial markets (‘‘ECMs’’). See A New 

Regulatory Framework for Trading Facilities, 

Intermediaries and Clearing Organizations, Notice 

of Proposed Rulemaking, 66 FR 14262, Mar. 9, 

2001; Final Rulemaking, 66 FR 42256, Aug. 10, 

2001. 

605CEA sections 5(d)(1), (5); 7 U.S.C. 7(d)(1), (5). 

606CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B). The 

Commission also undertakes due diligence reviews 

of each exchange’s compliance with the core 

principles during rule and product certification 

reviews and periodic examinations of DCMs’ 

compliance with the core principles under Rule 

Enforcement Reviews. As discussed above, DCM 

core principle 1 was amended by the Dodd-Frank 

Act to give the Commission authority to determine, 

by rule or regulation, the manner in which boards 

of trade must comply with the core principles. 

further explained that the descriptive 

standards for exchange-set limits in 

§ 150.5 grew from staff experience that 

had demonstrated that many 

commodities, particularly intangible 

commodities, have sufficiently large 

deliverable supplies to meet this 

standard without requiring a spot month 

level that is lower than the individual 

month level.591

In § 150.5(d), the Commission 

explicitly precluded exchanges from 

applying exchange-set speculative 

position limits rules to bona fide 

hedging positions as defined by an 

exchange in accordance with 

§ 1.3(z)(1).592 However, that section also 

provided an exchange with the 

discretion to limit bona fide hedging 

positions that it determines are ‘‘not in 

accord with sound commercial practices 

or [that] exceed an amount which may 

be established and liquidated in an 

orderly fashion.’’ 593 Under 

§ 150.5(d)(2), the Commission explicitly 

required traders to apply to the 

exchange for any exemption from its 

speculative position limit rules.594

Furthermore, under § 150.5(f), an 

exchange is compelled to grant 

additional exemptions to positions 

acquired in good faith prior to the 

effective date of any exchange position 

limits rule.595 In addition to the express 

exemptions specified in § 150.5, 

§ 150.5(f) permitted an exchange to 

propose other exemptions consistent 

with the purposes of § 150.5.596

In § 150.5(e), the Commission codified 

its existing policies concerning the 

classes of contracts for which an 

exchange could replace the required 

speculative position limit with a 

position accountability rule.597 Under 

§ 150.5(e), at least twelve months after a 

contract’s initial listing for trading, an 

exchange could apply to the 

Commission to substitute for the 

position limits required under part 150 

an exchange rule requiring traders to be 

accountable for large positions.598 The 

Commission explained that the type of 

position accountability rule that applies 

to a particular contract under § 150.5(e) 

is determined by the liquidity of the 

futures market, the liquidity of the cash 

market and the Commission’s oversight 

experience.599 The Commission further 

explained that it used § 150.5(e) to 

restate these criteria with greater clarity 

and precision, particularly in measuring 

the necessary levels of liquidity of the 

futures and option markets.600

Furthermore, for purposes of § 150.5(e), 

trading volume and open interest must 

be calculated by combining the monthend futures and its related option 

contract, on a delta-adjusted basis, for 

all months listed during the most recent 

calendar year.601

Lastly, the Commission codified its 

aggregation policy relating to exchangeset position limits in § 150.5(g).602

2. The Commodity Futures 

Modernization Act of 2000 Caused 

Commission § 150.5 To Become 

Guidance on and Acceptable Practices 

for Compliance With DCM Core 

Principle 5 

Just over a year after the Commission 

promulgated § 150.5, the Commodity 

Futures Modernization Act of 2000 603

amended the CEA to establish DCMs as 

a registration category and create a set 

of 18 core principles with which DCMs 

must comply.604 DCM core principle 5 

requires exchanges to adopt position 

limits or position accountability levels 

‘‘where necessary and appropriate to 

reduce the threat of market 

manipulation or congestion.’’ 605 Under 

the CFMA, DCM core principle 1 gave 

DCMs ‘‘reasonable discretion’’ in 

determining how to comply with the 

core principles.606 The CFMA, however, 

did not change the treatment of the 

enumerated agricultural commodities, 

which remain subject to Federal 

speculative position limits. Moreover, 

the CFMA did not alter the 

Commission’s authority in CEA section 

4a to establish position limits. The core 

principles regime set forth in the CFMA 

had the effect of undercutting the 

prescriptive rules of § 150.5 because 

DCMs were afforded ‘‘reasonable 

discretion’’ in determining how to 

comply with the position limits or 

accountability requirements of core 

principle 5. Nevertheless, the 

Commission has retained current 

§ 150.5 as guidance on, and acceptable 

practices for, compliance with DCM 


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607 Guidance provides DCMs and DCM applicants 

with contextual information regarding the core 

principles, including important concerns which the 

Commission believes should be taken into account 

in complying with specific core principles. In 

contrast, the acceptable practices are more specific 

than guidance and provide examples of how DCMs 

may satisfy particular requirements of the core 

principles; they do not, however, establish 

mandatory means of compliance. Acceptable 

practices are intended to assist DCMs by 

establishing non-exclusive safe harbors. The safe 

harbors apply only to compliance with specific 

aspects of the core principle, and do not protect the 

exchange with respect to charges of violations of 

other sections of the CEA or other aspects of the 

core principle. In applying § 150.5 as guidance and 

acceptable practices, most exchanges, in exercising 

their ‘‘reasonable discretion,’’ have continued to 

impose strict position limits in the spot month and 

to apply position accountability standards in nonspot months. 

608 17 CFR 38.2 (amended June 19, 2012); see also 

A New Regulatory Framework for Trading 

Facilities, Intermediaries and Clearing 

Organizations, Final Rules, 66 FR 42256, 42257, 

Aug. 10, 2001. 

609See id. 

610 17 CFR part 38 app. B (2002); see also 66 FR 

42256, Aug. 10, 2001. 

611 Id. 

612 Id. 

613See Core Principles and Other Requirements 

for Designated Contract Markets, Final Rule, 77 FR 

36611, 36639, Jun. 19, 2012. The Commission 

published the final rules for Position Limits for 

Futures and Swaps on November 18, 2011, which 

required DCMs to comply with part 150 (Limits on 

Positions) until such time that the Commission 

replaces part 150 with the new part 151 (Limits on 

Positions). Id. 

614CFTC Reauthorization Act of 2008, 

incorporated as Title XIII of the Food, Conservation 

and Energy Act of 2008, Public Law 110–246, 122 

Stat. 1651 (June 18, 2008). 

615CEA sections 2(h)(3)–(7) were deleted by the 

Dodd-Frank Act on July 15, 2011, thus eliminating 

the ECM category. 

616See Joint Explanatory Statement of the 

Committee of Conference, H.R. Rep. No. 110–627, 

110 Cong., 2d Sess. at 985 (2008). Section 723 of 

the Dodd-Frank Act subsequently repealed the ECM 

SPDC provisions. See Section 723 of the DoddFrank Act, Pub. L. 111–203, 124 Stat. 1376 (2010). 

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

618Significant Price Discovery Contracts on 

Exempt Commercial Markets, Final Rulemaking, 74 

FR 12178, Mar. 23, 2009; See also 17 CFR part 36 

app. B (2009). 

619For example, ECMs were advised to adopt 

spot-month limits for SPDCs. If there was an 

economically-equivalent SPDC, or a contract on a 

DCM, then the spot-month limit should be set at the 

same level as that specified for such other contract. 

If there was not an economically-equivalent SPDC 

or contract traded on a DCM, then in the case of 

a physical delivery contact, the spot-month limit 

should be set based upon an analysis of deliverable 

supplies and the history of spot-month liquidations 

and at no more than 25 percent of the estimated 

deliverable supply or, in the case of a cash 

settlement provision, the spot month limit should 

be set at a level that minimizes the potential for 

price manipulation or distortion in the significant 

price discovery contract itself; in related futures 

and options contracts traded on a DCM or DTEF; 

in other significant price discovery contracts; in 

other fungible agreements, contracts and 

transactions; and in the underlying commodity. 

ECMs were also advised to adopt position 

accountability provisions for non-spot month and 

all-months combined or, in lieu of position 

accountability, an ECM could establish non-spot 

individual month position limits and all-monthscombined position limits for its SPDC. See 17 CFR 

part 36 app. B (2009). 

620See 74 FR 12178, 12183, Mar. 23, 2009. 

621See id. 

622See id. 

623See id. 

624See id; see also CEA Section 4a and 17 CFR 

150.5(f). 

core principle 5.607 The Commission 

did not amend § 150.5 following passage 

of CFMA. 

In August 2001, the Commission 

adopted part 38 to govern trading on 

DCMs post-CFMA. Under § 38.2, DCMs 

operating under part 38 were ‘‘exempt 

from all Commission rules not 

specifically reserved’’ 608 and § 38.2 did 

not reserve § 150.5.609 Accordingly, 

DCMs operating under part 38 in the 

post-CFMA environment have not been 

required to comply with § 150.5. In this 

same rulemaking, the Commission 

adopted appendix B to part 38 as 

guidance on and acceptable practices for 

compliance with the DCM core 

principles, including core principle 

5.610 Within appendix B to part 38, the 

Commission advised DCMs to, among 

other things, adopt spot-month limits 

for markets based on commodities 

having more limited deliverable 

supplies, or where otherwise necessary 

to minimize the susceptibility of the 

market to manipulation or price 

distortions.611 The Commission also 

advised DCMs on how they should set 

spot-moth limit levels and instructed 

DCMs that they could elect not to adopt 

all-months-combined and non-spot 

month limits.612 Appendix B to part 38 

was subsequently amended in June 2012 

to delete the guidance and acceptable 

practices section relevant to compliance 

with DCM core principle 5 in deference 

to parts 150 and 151.613

3. The CFTC Reauthorization Act of 

2008 

In the CFTC Reauthorization Act of 

2008, Congress, among other things, 

expanded the Commission’s authority to 

set position limits to include significant 

price discovery contracts (‘‘SPDCs’’) on 

exempt commercial markets 

(‘‘ECMs’’).614 The Reauthorization Act’s 

provisions regarding ECMs were based 

largely on the Commission’s 

recommendations for improving 

oversight of ECMs whose contracts 

perform or affect a significant price 

discovery function. The legislation 

significantly expanded the 

Commission’s regulatory authority over 

ECMs by adding section 2(h)(7) 615 to 

the CEA, establishing criteria for the 

Commission to consider in determining 

whether a particular ECM contract 

performs a significant price discovery 

function, and providing for greater 

regulation of SPDCs traded on ECMs. 

The Reauthorization Act also required 

ECMs to adopt position limit and 

accountability level provisions for 

SPDCs, authorized the Commission to 

require the reporting of large trader 

positions in SPDCs, and established 

core principles governing ECMs with 

SPDCs. The core principles applicable 

to ECMs with SPDCs were largely 

derived from selected DCM core 

principles and designation criteria set 

forth in CEA section 5, and Congress 

intended that they be construed in a like 

manner.616

Much like DCM core principle 5, ECM 

core principle IV of CEA section 

2(h)(7)(C) required electronic trading 

facilities to adopt where necessary and 

appropriate, position limits or position 

accountability provisions, especially 

during trading in the delivery month, 

and taking into account fungible 

positions at a derivative clearing 

organization.617

In a Notice of Final Rulemaking in 

March 2009, the Commission adopted 

Appendix B to Part 36 as guidance on 

and acceptable practices for compliance 

with ECM core principles.618 The 

guidance on and acceptable practices for 

compliance with ECM core principle IV 

generally tracked those for DCM core 

principle 5 as listed in § 150.5.619

Furthermore, the Commission indicated 

within this Notice of Final Rulemaking 

that § 150.5 was not binding on DCMs 

once part 38 was finalized.620 The 

Commission rejected a commenter’s 

suggestion that a proposed ECM–SPDCs 

core principle for position limits and 

accountability should adopt the existing 

standards in CEA section 4a(b)(2) 

(barring trading or positions in excess of 

federal limits) and, especially, 

incorporate a broader good faith 

exemption in § 150.5(f).621 The 

Commission responded that section 

4a(b)(2) applies to federal limits, not 

exchange-set limits.622 The Commission 

further explained that § 150.5(f) ‘‘no 

longer has direct application to DCM-set 

limits’’ because ‘‘the statutory authority 

governing [those] limits is found in CEA 

section 5(d)(5)—DCM core principle 

5.’’ 623 That core principle does not, the 

Commission explained, contain any of 

the exemptive language found in CEA 

section 4a or § 150.5(f).624 The 

Commission observed that the part 38 

rules specifically exempt DCMs and 

DCM-traded contracts from all rules 

other than those specifically reserved in 

§ 38.2, and § 38.2 did not retain 


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625See 74 FR 12178, 12183, Mar. 23, 2009; see 

also 17 CFR Part 38. The Commission 

acknowledged that the acceptable practices in 

former appendix B to part 38 incorporate many 

provisions of § 150.5, but not § 150.5(f). 

626 74 FR 12183. In a 2010 notice of proposed 

rulemaking, the Commission similarly noted that 

former appendix B to part 38 ‘‘specifically 

reference[d] part 150’’ in order to provide 

‘‘guidance’’ to DCMs on how to comply with the 

core principle on position limits/accountability. 75 

FR 4144, 4147, Jan. 26, 2010. 

627See generally the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Public Law 

111–203, 124 Stat. 1376 (2010). 

628Furthermore, the Dodd-Frank Act amended 

the DCM core principles by: (1) Eliminating the 

eight criteria for designation as a contract market; 

(2) amending most of the core principles, including 

incorporating the substantive requirements of the 

designation criteria; and (3) adding five new core 

principles. Accordingly, all DCMs and DCM 

applicants must comply with a total of 23 core 

principles as a condition of obtaining and 

maintaining designation as a contract market. 

629 77 FR 66288, Nov. 2, 2012. See also 

amendments to CEA section 4a, discussed above. 

630CEA section 5(d)(1); 7 U.S.C. 7(d)(1). 

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

632The SEF definition is added in section 721 of 

the Dodd-Frank Act, amending CEA section 1a. 7 

U.S.C. 1a(50). 

633See CEA section 5h, as enacted by section 733 

of the Dodd-Frank Act; 7 U.S.C. 7b–3. 

634See id.; see also SEF core principle 1 at CEA 

section 5h(f)(1)(B); 7 U.S.C. 7b–3(f)(1)(B). 

635Compare CEA section 5h(f)(6); 7 U.S.C. 7b– 

3(f)(6) with CEA section 5(d)(5); 7 U.S.C. 7(d)(5). 

636CEA section 5h(f)(6)(A); 7 U.S.C. 7b–3(f)(6). 

637 7 U.S.C. 7b–3(f)(6) as added by the DoddFrank Act. 

638See CEA section 5(d)(1)(B); 7 U.S.C. 7(d)(1)(B). 

DCM core principle 5 under CEA section 5(d)(5) 

requires that DCMs adopt for each contract, as is 

necessary and appropriate, position limitations or 

position accountability. 

§ 150.5(f).625 Accordingly, the 

Commission explained, ‘‘the part 150 

rules essentially constitute guidance for 

DCMs administering position limit 

regimes, [and] Commission staff in 

overseeing such regimes has not 

required that position limits include an 

exemption for positions acquired in 

good faith.’’ 626

4. The Dodd-Frank Act Amendments to 

CEA Section 5 

On July 21, 2010, President Obama 

signed The Dodd-Frank Wall Street 

Reform and Consumer Protection 

Act.627 The legislation was enacted to 

reduce risk, increase transparency, and 

promote market integrity within the 

financial system by, among other things, 

enhancing the Commission’s 

rulemaking and enforcement authorities 

with respect to all registered entities 

and intermediaries subject to the 

Commission’s oversight.628 The DoddFrank Act repealed certain sections of 

the CEA, amended others, and added 

many new provisions and vastly 

expanded the Commission’s 

jurisdiction. The Commission has 

finalized 65 rules, orders, and guidance 

to implement sweeping changes to the 

regulatory framework established by the 

Dodd-Frank Act.629 This proposed 

rulemaking would make several 

conforming amendments to part 150 of 

the Commission’s regulations, most 

prominently to § 150.5, in order to 

integrate that section more fully within 

the statutory framework created by the 

Dodd-Frank Act. 

i. The Dodd-Frank Act Added 

Provisions That Permit the Commission 

To Override the Discretion of DCMs in 

Determining How To Comply With the 

Core Principles 

As discussed above, DCM core 

principle 1, set out in CEA section 

5(d)(1), states that boards of trade ‘‘shall 

have reasonable discretion in 

establishing the manner in which they 

comply with the core principles.’’ 630

However, section 735 of the Dodd-Frank 

Act amended section 5(d)(1) of the CEA 

to include the proviso that ‘‘[u]nless 

otherwise determined by the 

Commission by rule or 

regulation . . . ,’’ boards of trade shall 

have reasonable discretion in 

establishing the manner in which they 

comply with the core principles.631 In 

view of amended CEA section 5(d)(1), 

which gives the Commission authority 

to determine, by rule or regulation, the 

manner in which boards of trade must 

comply with the core principles, the 

Commission has proposed a number of 

new and revised rules, guidance, and 

acceptable practices to implement the 

new and revised Dodd-Frank Act core 

principles. 

ii. The Dodd-Frank Act Established a 

Comprehensive New Statutory 

Framework for Swaps 

The Dodd-Frank Act tasked the 

Commission with overseeing the U.S. 

market for swaps (except for securitybased swaps). Title VII of the DoddFrank Act amended the CEA to establish 

a comprehensive new regulatory 

framework for swaps, including 

requirements for SEFs.632 This new 

regulatory framework includes: (1) 

Registration, operation, and compliance 

requirements for SEFs; and (2) fifteen 

core principles with which SEFs must 

comply. As a condition of obtaining and 

maintaining their registration as a SEF, 

applicants and registered SEFs are 

required to comply with the SEF core 

principles and with any requirement 

that the Commission may impose by 

rule or regulation.633 The Dodd-Frank 

Act also amended the CEA to provide 

that, under new section 5h, the 

Commission may determine, by rule or 

regulation, the manner in which SEFs 

comply with the core principles.634

iii. The Dodd-Frank Act Added the 

Regulation of Swaps, Added Core 

Principles for SEFs, Including SEF Core 

Principle 6, and Amended DCM Core 

Principle 5 

The Dodd-Frank Act added a core 

principle concerning position 

limitations or accountability for SEFs, 

SEF core principle 6, which parallels 

DCM core principle 5.635 SEF core 

principle 6 requires SEFs that are 

trading facilities to set, ‘‘as is necessary 

and appropriate, position limitations or 

position accountability for 

speculators’’ 636 for each contract 

executed pursuant to their rules. 

Furthermore, for contracts subject to 

Federal position limits imposed by the 

Commission under CEA section 4a(a), 

CEA section 5h(f)(6)(B) 637 requires SEFs 

that are trading facilities to set and 

enforce speculative position limits at a 

level no higher than those established 

by the Commission. 

The Dodd-Frank Act similarly 

amended DCM core principle 5 by 

adding that for any contract that is 

subject to a position limit established by 

the Commission pursuant to CEA 

section 4a(a), the DCM shall set the 

position limit of the board of trade at a 

level not higher than the position 

limitation established by the 

Commission.638

5. Dodd-Frank Rulemaking 

To implement section 735 of the 

Dodd-Frank Act, the Commission has 

proposed a number of new and revised 

rules, guidance, and acceptable 

practices to implement the new and 

revised DCM core principles. In doing 

so, the Commission has evaluated the 

preexisting regulatory framework for 

overseeing DCMs, which consisted 

largely of guidance and acceptable 

practices, in order to update those 

provisions and to determine which core 

principles would benefit from having 

new or revised derivative regulations. 

Based on that review, and in view of the 

Dodd-Frank Act’s amendment to section 

5(d)(1) of the CEA, which grants the 

Commission authority to determine, by 

rule or regulation, the manner in which 

boards of trade comply with the core 

principles, the Commission has 

proposed revised guidance and 

acceptable practices for some core 


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639Position Limits for Derivatives, Proposed Rule, 

76 FR 4752, Jan. 26, 2011. The final rulemaking for 

vacated part 151 required DCMs to comply with 

part 150 until such time that the Commission 

replaces part 150 with the new part 151. See 76 FR 

at 71632. 

640 75 FR 80571, 80585, Dec. 22, 2010. 

641 77 FR 36611, 36639, Jun. 19, 2012. The 

Commission mandated in final § 38.301 that, in 

order to comply with DCM core principle 5, a DCM 

must ‘‘meet the requirements of parts 150 and 151 

of this chapter, as applicable.’’ See also 17 CFR 

38.301. 

642 77 FR at 36639. 

643 Id. See also CEA sections 5(d)(1) and 5(d)(5) 

(amended 2010), and discussion supra of DoddFrank amendments to the DCM core principles. 

644See 887 F. Supp. 2d 259 (D.D.C. 2012). 

645See id generally. 

646Current § 37.601 provides requirements for 

SEFs that are trading facilities to comply with SEF 

core principle 6 (Position Limits or Accountability). 

647Core Principles and Other Requirements for 

Swap Execution Facilities, 76 FR 1214 (proposed 

Jan. 7, 2011). 

648Appendix B to Part 37—Guidance on, and 

Acceptable Practices in, Compliance with Core 

Principles. 

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

650See 76 FR at 71659–61. 

651 76 FR at 71659. 

652 76 FR at 71659–60. For Referenced Contracts, 

DCMs and SEFs would have been similarly required 

under vacated § 151.11(b) to set single non-spotmonth and all-months limits for Referenced 

Contracts at levels no higher than the federal 

position limits (established pursuant to vacated 

§ 151.4). Id. For non-referenced contracts, it would 

be acceptable practice under vacated § 151.11(b)(2) 

for DCMs and SEFs to impose limits based on ten 

percent of the average combined futures, swaps and 

delta-adjusted option month-end open interest for 

the most recent two calendar years up to 25,000 

contracts, with a marginal increase of 2.5 percent 

thereafter based on open interest in the contract and 

economically equivalent contracts traded on the 

same DCM or SEF. 76 FR 71661. 

653 76 FR at 71660. Furthermore, for nonreferenced contracts, vacated § 151.11(b)(3) would 

have allowed as an acceptable practice the 

provision of speculative limits for an individual 

single-month or in all-months-combined at no 

greater than 1,000 contracts for non-energy physical 

commodities and at no greater than 5,000 contracts 

for other commodities. Id. 

principles and, for other core principles, 

has proposed to codify rules in lieu of 

guidance and acceptable practices. 

i. Amended Part 38 

In January 2011, the Commission 

published a notice of proposed 

rulemaking to replace existing part 150, 

in its entirety, with a new federal 

position limits rules regime in the form 

of new part 151.639 Just one month prior 

to this publication, the Commission 

published a notice of proposed 

rulemaking to amend part 38 to 

establish regulatory obligations that 

each DCM must meet in order to comply 

with section 5 of the CEA, as amended 

by the Dodd-Frank Act. Accordingly, 

the Commission proposed § 38.301 to 

require that each DCM must comply 

with the requirements of part 151 as a 

condition of its compliance with DCM 

core principle 5.640 The Commission 

later adopted a revised version of 

§ 38.301 with an additional clause that 

requires DCMs to continue to meet the 

requirements of part 150 of the 

Commission’s regulations—the current 

position limit regulations—until such 

time that compliance would be required 

under part 151.641 The Commission 

explained that this clarification would 

ensure that DCMs are in compliance 

with the Commission’s regulations 

under part 150 during the interim 

period until the compliance date for the 

new position limits regulations of part 

151 would take effect.642 The 

Commission further explained that new 

§ 38.301 was based on the Dodd-Frank 

amendments to the DCM core principles 

regime, which collectively provide that 

DCM discretion in setting position 

limits or position accountability levels 

is limited by Commission regulations 

setting limits.643

However, in an Order dated 

September 28, 2012, the United States 

District Court for the District of 

Columbia vacated part 151.644 The 

District Court’s decision did not affect 

the applicability of part 150.645

Therefore, part 150 continues to apply 

as if part 151 had not been finally 

adopted by the Commission, and § 150.5 

continues to apply as non-exclusive 

guidance and acceptable practices for 

compliance with DCM core principle 5. 

In light of the foregoing, the 

Commission could not, without notice, 

interpret § 150.5 as a pre-requisite for 

compliance with core principle 5. 

Additionally, the Commission is 

proposing to amend § 38.301 by deleting 

the reference to vacated part 151. 

Proposed § 38.301 would maintain the 

requirement that DCMs meet the 

requirements of part 150, as applicable. 

ii. Amended Part 37 

Similarly, in the Commission’s 

proposal to adopt a regulatory scheme 

applicable to SEFs, under proposed 

§ 37.601,646 the Commission proposed 

to require that SEFs establish position 

limits in accordance with the 

requirements set forth in part 151 of the 

Commission’s regulations.647 In the SEF 

final rulemaking, the Commission 

revised § 37.601 to state that until such 

time that compliance is required under 

part 151, a SEF may refer to the 

guidance and/or acceptable practices in 

appendix B of part 37 to demonstrate to 

the Commission compliance with the 

requirements of core principle 6. 

In light of the District Court vacatur 

of part 151, the Commission proposes to 

amend § 37.601 to delete the reference 

to vacated part 151. Instead, this 

rulemaking proposes to require that 

SEFs that are trading facilities meet the 

requirements of part 150, which are 

comparable to the DCM’s requirement, 

since, as proposed, § 150.5 would apply 

to commodity derivative contracts, 

whether listed on a DCM or on a SEF 

that is a trading facility. In addition, the 

Commission proposes to amend 

appendix B to part 37, which provides 

guidance on complying with core 

principles, both initially and on an 

ongoing basis, to maintain SEF 

registration.648 Since this rulemaking 

proposes to require that SEFs that are 

trading facilities meet the requirements 

of part 150, the proposed amendments 

to the guidance regarding SEF core 

principle 6 would reiterate that 

requirement. For SEFs that are not 

trading facilities, to whom core 

principle 6 is not applicable under the 

statutory language, the proposal would 

provide that part 150 should be 

considered as guidance. 

iii. Vacated Part 151 

As discussed above, the United States 

District Court for the District of 

Columbia vacated part 151 of the 

Commission’s regulations.649 Because 

the District Court’s decision did not 

affect the applicability of part 150, 

current § 150.5 remains as guidance and 

acceptable practices for compliance 

with DCM core principle 5 and SEF core 

principle 6. The Commission continues 

to rigorously enforce compliance with 

these core principles. 

Vacated § 151.11 would have required 

DCMs and SEFs to adopt position limits 

for Referenced Contracts, and would 

have established acceptable practices for 

establishing position limits and position 

accountability for certain nonreferenced contracts and excluded 

commodities.650 Specifically, vacated 

§ 151.11(a) would have required DCMs 

and SEFs to set spot month limits, with 

exceptions for securities futures and 

some excluded commodities.651 Under 

vacated § 151.11(a)(1), the Commission 

would have required DCMs and SEFs to 

establish spot-month limits for 

Referenced Contracts at levels no greater 

than the federal position limits 

(established pursuant to vacated 

§ 151.4).652 For contracts other than 

Referenced Contracts (including other 

physical commodity contracts), it would 

be acceptable practice under vacated 

§ 151.11(a)(2) for DCMs and SEFs to set 

position limits at levels no greater than 

25 percent of estimated deliverable 

supply.653 Additionally, under vacated 

§ 151.11(c), DCMs and SEFs would have 

had discretion to establish position 

accountability levels in lieu of position 


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654 Id. Position accountability levels could be 

used in lieu of position limits only if the contract 

involves either a major currency or certain excluded 

commodities (such as measures of inflation, or 

other macroeconomic measures) or an excluded 

commodity that: (1) Has an average daily open 

interest of 50,000 or more contracts, (2) has an 

average daily trading volume of 100,000 or more 

contracts, and (3) has a highly liquid cash market. 

Id. Compare this vacated provision with current 17 

CFR 150.5(e). As for physical commodities, under 

vacated § 151.11(c), the Commission would have 

allowed a DCM or SEF to establish position 

accountability rules as an acceptable alternative to 

position limits outside of the spot month for 

physical commodity contracts when a contract has 

an average month-end open interest of 50,000 

contracts and an average daily volume of 5,000 

contracts and a liquid cash market. Id. 

655 Id. Furthermore, under vacated § 151, the 

Commission would have removed the procedure to 

apply to the Commission for bona fide hedge 

exemptions for non-enumerated transactions or 

positions under § 1.3(z)(3). Id. DCMs and SEFs 

would have been able to recognize non-enumerated 

hedge transactions subject to Commission review. 

Id. Additionally, DCMs and SEFs could continue to 

provide exemptions for ‘‘risk-reducing’’ and ‘‘riskmanagement’’ transactions or positions consistent 

with existing Commission guidelines. Id. (citing 

Clarification of Certain Aspects of Hedging 

Definition, 52 FR 27195, Jul. 20, 1987; and Risk 

Management Exemptions from Speculative Position 

Limits Approved under Commission Regulation 

1.61, 52 FR 34633, Sep. 14, 1987). Vacated 

§ 151.11(f)(2) would have required traders seeking 

a hedge exemption to comply with the procedures 

of the DCM or SEF for granting exemptions from its 

speculative position limit rules. 76 FR 71660–61. 

656 76 FR at 71661. 

657 Id. Vacated § 151.11 contemplated that DCMs 

and SEFs would administer their own bona fide 

hedge exemption regime in parallel to the 

Commission’s regime. 

658See CEA sections 5(d)(1)(B) and 5h(f)(1)(B); 7 

U.S.C. 7(d)(1)(B) and 7b–3(f)(1)(B). 

659See id. 

660Aggregation exemptions are, in effect, a way 

for a trader to acquire a larger speculative position. 

The Commission believes that it is important that 

the aggregation rules set out, to the extent feasible, 

‘‘bright line’’ standards that are capable of easy 

application by a wide variety of market participants 

while not being susceptible to circumvention. 

limits for excluded commodities under 

certain circumstances.654

Vacated §§ 151.11(e) and 151.11(f) 

would have required DCMs and SEFs to 

follow the same account aggregation and 

bona fide exemption standards set forth 

by vacated §§ 151.5 and 151.7 with 

respect to exempt and agricultural 

commodities.655 With respect to a 

DCM’s or SEF’s duty to administer 

hedge exemptions, the Commission 

intended that DCMs and SEFs 

administer their own position limits 

under § 151.11.656 Accordingly, the 

Commission had required under this 

vacated rulemaking that DCMs and SEFs 

create rules and procedures to allow 

traders to claim a bona fide hedge 

exemption, consistent with vacated 

§ 151.5 for physical commodity 

derivatives and § 1.3(z), as was amended 

in the vacated rulemaking, for excluded 

commodities.657

C. Proposed Amendments to § 150.5 

To implement section 735 of the 

Dodd-Frank Act regarding DCMs, the 

Commission continues to adopt new 

and revised rules, guidance, and 

acceptable practices to implement the 

DCM core principles added and revised 

by the Dodd-Frank Act. The 

Commission continues to evaluate its 

pre-Dodd-Frank Act regulations and 

approach to oversight of DCMs, which 

had consisted largely of published 

guidance and acceptable practices, with 

the aim of updating them to conform to 

the new Dodd-Frank Act regulatory 

framework. Based on that review, and 

pursuant to the authority given to the 

Commission in amended sections 

5(d)(1) and 5h(f)(1) of the CEA, which 

permit the Commission to determine, by 

rule or regulation, the manner in which 

boards of trade and SEFs, respectively, 

must comply with the core 

principles,658 the Commission is 

proposing several updates to § 150.5 to 

promote compliance with DCM core 

principle 5 and SEF core principle 6. 

First, the Commission proposes 

amendments to the provisions of § 150.5 

to include SEFs and swaps. Second, the 

Commission proposes to codify rules 

and revise acceptable practices for 

compliance with DCM core principle 5 

and SEF core principle 6 within 

amended § 150.5(a) for contracts subject 

to the federal position limits set forth in 

§ 150.2. Lastly, the Commission 

proposes to codify rules and revise 

guidance and acceptable practices for 

compliance with DCM core principle 5 

and SEF core principle 6 within 

amended § 150.5(b) for contracts not 

subject to the federal position limits set 

forth in § 150.2. 

As noted above, the CFMA core 

principles regime concerning position 

limitations or accountability for 

exchanges had the effect of undercutting 

the mandatory rules promulgated by the 

Commission in § 150.5. Since the CFMA 

amended the CEA in 2000, the 

Commission has retained § 150.5, but 

only as guidance on, and acceptable 

practice for, compliance with DCM core 

principle 5.659 However, the 

Commission did not amend the text of 

§ 150.5 following passage of CFMA, 

leaving language in place that could 

suggest that the rules originally codified 

within § 150.5 remain mandatory for 

exchanges. To correct this potential 

misimpression, the Commission now 

proposes several amendments to § 150.5 

to clarify that certain provisions of 

§ 150.5 are non-exclusive guidance on, 

and acceptable practice for, compliance 

with DCM core principle 5. 

Additionally, the Commission is 

proposing several conforming 

amendments to § 150.5 in order to 

integrate that section more fully with 

the statutory framework created by the 

Dodd-Frank Act. The Commission, 

pursuant to the factors enumerated in 

section 4a(a)(3) of the Act, has 

endeavored to maximize the objectives 

of preventing excessive speculation, 

deterring and preventing market 

manipulation, ensuring that markets 

remain sufficiently liquid so as to afford 

end users and producers of commodities 

the ability to hedge commercial risks, 

and promoting efficient price discovery. 

These proposed clarifying revisions to 

§ 150.5 should also provide exchanges 

with sufficient flexibility to address the 

divergent and changing conditions in 

their respective markets. 

Within amended § 150.5(a), the 

Commission proposes to codify a set of 

rules and revise acceptable practices for 

compliance with DCM core principle 5 

and SEF core principle 6 for contracts 

that are subject to the federal position 

limits set forth in § 150.2. Within 

amended § 150.5(b), the Commission 

proposes to codify rules and revise 

guidance and acceptable practices for 

compliance with DCM core principle 5 

and SEF core principle 6 for contracts 

that are not subject to the federal 

position limits set forth in § 150.2. 

Unlike current § 150.5, which 

contains only non-exclusive guidance 

on and acceptable practices for 

compliance with DCM core principle 5 

(despite the presence of language that 

connotes mandatory rules), proposed 

§ 150.5 contains a mix of rules that 

would be mandatory for compliance 

with DCM core principle 5 and SEF core 

principle 6, coupled with guidance and 

acceptable practices for compliance 

with those core principles. Accordingly, 

the Commission urges the reader to pay 

special attention to the language in 

proposed § 150.5 that distinguishes 

mandatory rules (indicated by terms 

such as ‘‘must’’ and ‘‘shall’’) from 

guidance and acceptable practices 

(indicated by terms such as ‘‘should’’ or 

‘‘may’’). 

Additionally, the Commission 

proposes to amend § 150.5 to implement 

uniform requirements for DCMs and 

SEFs relating to hedging exemptions 

across all types of contracts, including 

those that are subject to federal limits. 

The Commission also proposes to 

require DCMs and SEFs to have 

aggregation policies that mirror the 

federal aggregation provisions.660

Hedging exemptions and position 

aggregation exemptions, if not uniform 

with the Commission’s requirements, 


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661See supra discussion of SEF core principles. 

662See CEA section 5h(f)(1)(B); 7 U.S.C. 7b– 

3(f)(1)(B). 

663As added by section 723 of the Dodd-Frank 

Act. 

664A similar duty is imposed on DCMs under 

CEA section 5(d)(5)(A); 7 U.S.C. 7(d)(5)(A). 

665As added by section 723 of the Dodd-Frank 

Act. 666This requirement for SEFs parallels that for 

DCMs as listed in the CEA section 5(d)(5)(B); 7 

U.S.C. 7(d)(5)(B). 667See core principle 6 for SEFs, CEA section 

5h(f)(6)(A); 7 U.S.C. 7b–3(f)(6)(A). The Commission 

notes that section 4a(a)(2) of the CEA requires the 

Commission to establish speculative position limits 

on physical commodity DCM contracts as 

appropriate, but did not extend this requirement to 

SEF contracts. See discussion above. 668As discussed above, 17 CFR 150.2 provides 

limits for specified agricultural contracts in the spot 

month, individual non-spot months, and allmonths-combined. 

669Proposed § 150.5(a)(1) is in keeping with the 

mandate in core principle 5 as amended by the 

Dodd-Frank Act. See CEA section 5(d)(1)(B); 7 

U.S.C. 7(d)(1)(B). SEF core principle 6 parallels 

DCM core principle 5. Compare CEA section 

5h(f)(5); 7 U.S.C. 7b–3(f)(5) with CEA section 

5(d)(5); 7 U.S.C. 7(d)(5). 

670Compare 17 CFR 150.5(d) which explicitly 

precludes exchanges from applying exchange-set 

speculative position limits rules to bona fide 

hedging positions as defined by the exchange in 

accordance with § 1.3(z)(1). 

671The Commission has proposed to maintain the 

current practice in 17 CFR 150.2 of setting singlemonth limits at the same levels as all-months limits, 

rendering the ‘‘spread’’ exemption in 17 CFR 150.3 

unnecessary. However, since DCM core principle 5 

allows exchanges to set more restrictive limits than 

the federal limits, a DCM or SEF may set the single 

month limit at a level lower than that of the allmonth limit, an exemption for intramarket spread 

position may be useful. See CEA section 5(d)(5); 7 

U.S.C. 7(d)(5). An exemption for intramarket spread 

positions would be unnecessary if the DCM or SEF 

sets the single month limit at the same level as the 

all-months limit. 

Additionally, the duplicative term ‘‘arbitrage’’ 

would be removed because CEA section 4a(a)(1) 

explains that ‘‘the word ‘arbitrage’ in domestic 

markets shall be defined to mean the same as 

‘spread’ or ‘straddle.’ ’’ 7 U.S.C. 6a(a)(1). 

672Hence, proposed § 150.5(a)(2)(C) would codify 

as a requirement for DCMs and SEFs the acceptable 

practice concerning application for exemption 

listed in 17 CFR 150.5(d)(2). 

may serve to permit a person to obtain 

a larger position on a particular DCM or 

SEF than would be permitted under the 

federal limits. For example, if an 

exchange were to grant an aggregation 

position to a corporate person with 

aggregate positions above federal limits, 

that exchange may permit such person 

to be treated as two or more persons. 

The person would avoid violating 

exchange limits, but may be in violation 

of the federal limits. The Commission 

believes that a DCM or SEF, consistent 

with its responsibilities under 

applicable core principles, may serve an 

important role in ensuring compliance 

with federal positions limits and 

thereby protect the price discovery 

function of its market and guard against 

excessive speculation or manipulation. 

In the absence of uniform hedging and 

position aggregation exemptions, DCMs 

or SEFs may not serve that role. The 

Commission notes that hedging 

exemptions and aggregation policies 

that vary from exchange to exchange 

would increase the administrative 

burden on a trader active on multiple 

exchanges, as well as increase the 

administrative burden on the 

Commission in enforcing exchange-set 

position limits. 

The essential features of the proposed 

amendments to § 150.5 are summarized 

below. 

1. Proposed Amendments to § 150.5 To 

Add References to Swaps and Swap 

Execution Facilities 

As discussed above, the Dodd-Frank 

Act created a new type of regulated 

marketplace, SEFs, for which it 

established a comprehensive regulatory 

framework. A SEF must comply with 

fifteen enumerated core principles and 

any requirement that the Commission 

may impose by rule or regulation.661

The Dodd-Frank Act provides that the 

Commission may, in its discretion, 

determine by rule or regulation the 

manner in which SEFs comply with the 

core principles.662

For contracts that are subject to 

federal position limits imposed under 

CEA section 4a(a), new CEA section 

5h(f)(6)(A) 663 requires that SEFs set ‘‘as 

is necessary and appropriate, position 

limitations or position accountability for 

speculators’’ for each contract executed 

pursuant to their rules.664 New CEA 

section 5h(f)(6)(B),665 requires SEFs that 

are trading facilities to set and enforce 

speculative position limits at a level no 

higher than those established by the 

Commission.666 The Commission 

recognizes that SEFs may need to 

contract with derivative clearing 

organizations in order to comply with 

SEF core principle 6. The Commission 

invites comments on the practicability 

and effectiveness of such arrangements. 

In addition, the Commission invites 

comment as to whether the Commission 

should use its exemptive authority 

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

SEFs from the requirements of CEA 

section 5h(f)(6)(B). If so, why and to 

what extent? 

The Commission carefully considered 

both the novel nature of SEFs and its 

experience in overseeing DCMs’ 

compliance with core principles when 

determining which SEF core principles 

to address with rules that would 

provide more certainty to the 

marketplace, and which core principles 

to address with guidance or acceptable 

practices that might provide more 

flexibility. The Commission has 

determined that the policy purposes 

effectuated by establishing uniform 

requirements for aggregation and bona 

fide hedging exemptions for DCM 

contracts are equally present in SEF 

markets.667 Accordingly, the 

Commission has determined to amend 

§ 150.5 to present essentially identical 

standards for establishing rules and 

acceptable practices relating to position 

limits (and accountability levels) for 

DCMs and SEFs. 

2. Proposed § 150.5(a)—Requirements 

and Acceptable Practices for 

Commodity Derivative Contracts That 

Are Subject to Federal Position Limits 

Proposed § 150.5(a) adds several 

requirements that a DCM or SEF must 

adhere to when setting position limits 

for contracts that are subject to the 

federal position limits listed in 

§ 150.2.668 Proposed § 150.5(a)(1) 

specifies that a DCM or SEF that lists a 

contract on a commodity that is subject 

to federal position limits must adopt 

position limits for that contract at a 

level that is no higher than the federal 

position limit.669 Exchanges with cashsettled contracts price-linked to 

contracts subject to federal limits must 

also adopt those limit levels. 

Proposed § 150.5(a)(2) prescribes the 

manner in which a DCM or SEF that 

lists a contract on a commodity that is 

subject to federal position limits must 

adopt hedge exemption rules. Proposed 

§ 150.5(a)(2)(i) cross-references the 

definition of bona fide hedging, as 

proposed in amended § 150.1, as the 

regulation governing bona fide hedging 

positions.670 Proposed § 150.5(a)(2)(ii) 

clarifies the types of spread positions for 

which a DCM or SEF may grant 

exemptions from the federal limits by 

cross-referencing the definitions of 

intermarket and intramarket spread 

positions in proposed § 150.1.671 To be 

eligible for exemption under proposed 

§ 150.5(a)(2)(ii), intermarket and 

intramarket spread positions must be 

outside of the spot month for physical 

delivery contracts, and intramarket 

spread positions must not exceed the 

federal all-months limit when combined 

with any other net positions in the 

single month. Proposed § 150.5(a)(2)(iii) 

would require traders to apply to the 

DCM or SEF for any exemption from its 

speculative position limit rules.672

Proposed § 150.5(a)(2)(iii) also preserves 

the exchange’s ability to limit bona fide 

hedging positions which it determines 

are not in accord with sound 

commercial practices, or which exceed 


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673Proposed § 150.5(a)(2)(C) presents guidance 

that largely mirrors the guidance provided in the 

second half of 17 CFR 150.5(d), with edits to specify 

DCMs and SEFs. 

674The Commission is exercising its authority 

under CEA section 4a(a)(7) to exempt pre-DoddFrank and transition period swaps from speculative 

position limits (unless the trader elects to include 

such a position to net with post-effective date 

commodity derivative contracts). Such a preexisting swap position will be exempt from initial 

spot month speculative position limits. 

675Notwithstanding any pre-existing exemption 

adopted by a DCM or SEF that applies to 

speculative position limits in non-spot months, a 

person holding pre-existing commodity derivative 

contracts (except for pre-existing swaps as 

described above) must comply with spot month 

speculative position limits. However, nothing in 

proposed § 150.5(a)(3)(B) would override the 

exclusion of pre-Dodd-Frank and transition period 

swaps from speculative position limits. 

676See supra discussion concerning aggregation. 

677Proposed § 150.5(a)(4) references 17 CFR 150.4 

as the regulation governing aggregation for contracts 

subject to federal position limits and would replace 

17 CFR 150.5(g). See supra the Commission’s 

explanation for implementing uniform aggregation 

standards across DCMs and SEFs. 

678Therefore, federal spot month position limits 

do not apply to positions in physical-delivery 

contracts on which notices of intention to deliver 

have been issued, stopped long positions, delivery 

obligations established by the clearing organization, 

or deliveries taken. 

679For example, an exchange may restrict a 

speculative long position holder that otherwise 

would obtain a large long position, take delivery, 

and seek to re-establish a large long position in an 

attempt to corner a significant portion of the 

deliverable supply or to squeeze shorts. Proposed 

§ 150.5(b)(9) would set forth the same acceptable 

practices for contracts not subject to federal limits. 

680For position limits purposes, proposed 

§ 150.1(k) would define ‘‘physical commodity’’ to 

mean any agricultural commodity, as defined in 17 

CFR 1.3, or any exempt commodity, as defined in 

section 1a(20) of the Act. Excluded commodity is 

defined in section 1a(19) of the Act. 

681See supra discussion of the § 150.3 

exemptions. 

682See id. 

683New appendix A to part 150 is intended to 

capture the essence of the Commission’s 1987 

interpretation of its definition of bona fide hedge 

transactions to permit exchanges to grant hedge 

exemptions for various risk management 

transactions. See Risk Management Exemptions 

From Speculative Position Limits Approved Under 

Commission Regulation 1.61, 52 FR 34633, Sep. 14, 

1987. The Commission specified that such 

exemptions be granted on a case-by-case basis, 

subject to a demonstrated need for the exemption. 

It also required that applicants for these exemptions 

be typically engaged in the buying, selling, or 

holding of cash market instruments. See id. 

Additionally, the Commission required the 

exchanges to monitor the exemptions they granted 

to ensure that any positions held under the 

exemption did not result in any large positions that 

could disrupt the market. See id. The term 

‘‘excluded commodity’’ is defined in CEA section 

1(a)(19). 

684See supra discussion of pre-enactment and 

transition period swap positions. 

685Proposed § 150.5(b)(7) would replace 17 CFR 

150.5(g) as it relates to contracts that are not subject 

to federal position limits. 

an amount that may be established and 

liquidated in an orderly fashion.673

Proposed § 150.5(a)(3)(i) requires a 

DCM or SEF to exempt from speculative 

position limits established under § 150.2 

a swap position acquired in good faith 

prior to the effective date of such 

limits.674 However, proposed 

§ 150.5(a)(3)(i) would allow a person to 

net such a pre-existing swap with posteffective date commodity derivative 

contracts for the purpose of complying 

with any non-spot-month speculative 

position limit. Furthermore, proposed 

§ 150.5(a)(3)(ii) requires a DCM or SEF 

to exempt from non-spot-month 

speculative position limits established 

under § 150.2 any commodity derivative 

contract acquired in good faith prior to 

the effective date of such limit. 

However, such a pre-existing 

commodity derivative contract position 

must be attributed to the person if the 

person’s position is increased after the 

effective date of such limit.675

The Commission proposes to require 

DCMs and SEFs to have aggregation 

polices that mirror the federal 

aggregation provisions.676 Therefore, 

proposed § 150.5(a)(4) requires DCMs 

and SEFs to have aggregation rules that 

conform to the uniform standards listed 

in § 150.4.677

A DCM or SEF would continue to be 

free to enforce position limits that are 

more stringent that the federal limits. 

The Commission clarifies that federal 

spot month position limits do not to 

apply to physical-delivery contracts 

after delivery obligations are 

established.678 Exchanges generally 

prohibit transfer or offset of positions 

once long and short position holders 

have been assigned delivery obligations. 

Proposed § 150.5(a)(6) would clarify 

acceptable practices for a DCM or SEF 

to enforce spot month limits against the 

combination of, for example, long 

positions that have not been stopped, 

stopped positions, and deliveries taken 

in the current spot month.679

3. Proposed § 150.5(b)—Requirements 

and Acceptable Practices for 

Commodity Derivative Contracts That 

Are Not Subject to Federal Position 

Limits 

The Commission sets forth in 

proposed § 150.5(b) requirements and 

acceptable practices applicable to DCMand SEF-set speculative position limits 

for any contract that is not subject to 

federal position limits, including 

physical and excluded commodities.680

As discussed above, the Commission 

proposes to revise § 150.5 to implement 

uniform requirements for DCMs and 

SEFs relating to hedging exemptions 

across all types of commodity derivative 

contracts, including those that are not 

subject to federal position limits. The 

Commission further proposes to require 

DCMs and SEFs to have uniform 

aggregation polices that mirror the 

federal aggregation provisions for all 

types of commodity derivative 

contracts, including for contracts that 

are not subject to federal position limits. 

As explained above, hedging 

exemptions and aggregation policies 

that vary from exchange to exchange 

would increase the administrative 

burden on a trader active on multiple 

exchanges, as well as increase the 

administrative burden on the 

Commission in monitoring and 

enforcing exchange-set position limits. 

Therefore, proposed § 150.5(b)(5)(i) 

would require any hedge exemption 

rules adopted by a designated contract 

market or a swap execution facility that 

is a trading facility to conform to the 

definition of bona fide hedging position 

in proposed § 150.1. In addition to this 

affirmative rule, proposed § 150.5(b)(5) 

would set forth acceptable practices for 

DCMs and SEFs to grant exemptions 

from position limits for positions, other 

than bona fide hedging positions, in 

contracts not subject to federal limits. 

Such exemptions generally track the 

exemptions set forth in proposed 

§ 150.3, and are suggested as acceptable 

practices based on the same logic that 

underpins the proposed § 150.3 

exemptions.681 It would be acceptable 

practice for a DCM or SEF to grant 

exemptions under certain circumstances 

for financial distress, intramarket and 

intermarket spreads, and qualifying 

cash-settled contract positions in the 

spot month.682 Additionally, proposed 

§ 150.5(b)(5)(ii) would set forth an 

acceptable practice for a DCF or SEF to 

grant a limited risk management 

exemption for contracts on excluded 

commodities pursuant to rules 

submitted to the Commission, and 

consistent with the guidance in new 

appendix A to part 150.683

Proposed § 150.5(b)(6) and (7) set 

forth acceptable practices relating to 

pre-enactment and transition period 

swap positions (as those terms are 

defined in proposed § 150.1),684 and to 

commodity derivative contract positions 

acquired in good faith prior to the 

effective date of mandatory federal 

speculative position limits. 

Additionally, for any contract that is 

not subject to federal position limits, 

proposed § 150.5(b)(8) requires the DCM 

or SEF to conform to the uniform federal 

aggregation provisions.685 This 

proposed requirement generally mirrors 

the requirement in proposed 

§ 150.5(a)(4) for contracts that are 

subject to federal position limits by 

requiring the DCM or SEF to have 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75757 

686Proposed § 150.5(b)(1)(i)(A) is consistent with 

the Commission’s longstanding policy regarding the 

appropriate level of spot-month limits for physical 

delivery contracts. These position limits would be 

set at a level no greater than 25 percent of estimated 

deliverable supply. The spot-month limits would be 

reviewed at least every 24 months thereafter. The 

proposed deliverable supply formula narrowly 

targets the trading that may be most susceptible to, 

or likely to facilitate, price disruptions. The formula 

seeks to minimize the potential for corners and 

squeezes by facilitating the orderly liquidation of 

positions as the market approaches the end of 

trading and by restricting swap positions that may 

be used to influence the price of referenced 

contracts that are executed centrally. 

687 In general, the term ‘‘deliverable supply’’ 

means the quantity of the commodity meeting a 

derivative contract’s delivery specifications that can 

reasonably be expected to be readily available to 

short traders and saleable to long traders at its 

market value in normal cash marketing channels at 

the derivative contract’s delivery points during the 

specified delivery period, barring abnormal 

movement in interstate commerce. Proposed § 150.1 

would define commodity derivative contract to 

mean any futures, option, or swap contract in a 

commodity (other than a security futures product as 

defined in CEA section 1a(45)). 

688This descriptive standard is largely based on 

the language of DCM core principle 5 and SEF core 

principle 6. The Commission does not suggest that 

an excluded commodity derivative contract that is 

based on a commodity without a measurable supply 

should adhere to a numeric formula in setting spot 

month position limits. 689The Commission explained what it considers 

to be a ‘‘typical cash market transaction’’ in the 

preamble for final part 151 (subsequently vacated): 

‘‘[f]or example, if a DCM or SEF offers a new 

physical commodity contract and sets the notional 

quantity per contract at 100,000 units while most 

transactions in the cash market for that commodity 

are for a quantity of between 1,000 and 10,000 units 

and exactly zero percent of cash market transactions 

are for 100,000 units or greater, then the notional 

quantity of the derivatives contract offered by the 

DCM or SEF would be atypical. This clarification 

is intended to deter DCMs and SEFs from setting 

non-spot-month position limits for new contracts at 

levels where they would constitute non-binding 

constraints on speculation through the use of an 

excessively large notional quantity per contract. 

This clarification is not expected to result in 

additional marginal cost because, among other 

things, it reflects current Commission custom in 

reviewing new contracts and is an acceptable 

practice for core principle compliance and not a 

requirement per se for DCMs or SEFs.’’ See 76 FR 

71660. 

690 In this context, ‘‘substantially the same’’ 

means a close economic substitute. For example, a 

position in Eurodollar futures can be a close 

economic substitute for a fixed-for-floating interest 

rate swap. 

691 In contrast, 17 CFR 150.5(b)(3) lists this as an 

acceptable practice for contracts for energy products 

and non-tangible commodities. Excluded 

commodity is defined in CEA section 1a(19), and 

exempt commodity is defined CEA section 1a(20). 

692With respect to cash-settled contracts where 

the underlying product is a physical commodity 

with limited supplies, enabling a trader to exert 

market power (including agricultural and exempt 

commodities), the Commission has viewed the 

specification of speculative position limits to be an 

essential term and condition of such contracts in 

order to ensure that they are not readily susceptible 

to manipulation, which is the DCM core principle 

3 requirement. 

aggregation rules that conform to 

§ 150.4. 

The Commission proposes in 

§ 150.5(b) to generally update and 

reorganize the set of acceptable 

practices listed in current § 150.5 as it 

relates to contracts that are not subject 

to the federal position limits. For 

existing and newly established DCMs 

and newly established SEFs, these 

acceptable practices generally concern 

how to: (1) Set spot-month position 

limits; (2) set individual non-spot 

month and all-months-combined 

position limits; (3) set position limits for 

cash-settled contracts that use a 

reference contract as a price source; (4) 

adjust position limit levels after a 

contract has been listed for trading; and 

(5) adopt position accountability in lieu 

of speculative position limits. 

For a derivative contract that is based 

on a commodity with a measurable 

deliverable supply, proposed 

§ 150.5(b)(1)(i)(A) updates the 

acceptable practice in current 

§ 150.5(b)(1) whereby spot month 

position limits should be set at a level 

no greater than one-quarter of the 

estimated deliverable supply of the 

underlying commodity.686 Proposed 

§ 150.5(b)(1)(i)(A) clarifies that this 

acceptable practice for setting spot 

month position limits would apply to 

any commodity derivative contract, 

whether physical-delivery or cashsettled, that has a measurable 

deliverable supply.687

For a derivative contract that is based 

on a commodity without a measurable 

deliverable supply, proposed 

§ 150.5(b)(1)(i)(B) would codify as 

guidance that the spot month limit level 

should be no greater than necessary and 

appropriate to reduce the potential 

threat of market manipulation or price 

distortion of the contract’s or the 

underlying commodity’s price.688

Proposed § 150.5(b)(1)(ii)(A) preserves 

the existing acceptable practice in 

current § 150.5(b)(2) whereby individual 

non-spot or all-months-combined levels 

for agricultural commodity derivative 

contracts that are not subject to the 

federal limits should be no greater than 

1,000 contracts at initial listing. The 

proposed rule would also codify as 

guidance that the 1,000 contract limit 

should be taken into account when the 

notional quantity per contract is no 

larger than a typical cash market 

transaction in the underlying 

commodity, or reduced if the notional 

quantity per contract is larger than a 

typical cash market transaction.689

Additionally, proposed 

§ 150.5(b)(1)(ii)(A) would codify that if 

the commodity derivative contract is 

substantially the same as a pre-existing 

DCM or SEF commodity derivative 

contract, then it would be an acceptable 

practice for the DCM or SEF to adopt the 

same limit as applies to that pre-existing 

commodity derivative contract.690

Proposed § 150.5(b)(1)(ii)(B) preserves 

the existing acceptable practice, set 

forth in current § 150.5(b)(3), for DCMs 

to set individual non-spot or all-monthscombined limits at levels no greater 

than 5,000 contracts at initial listing, but 

would apply this acceptable practice on 

a wider scale to both exempt and 

excluded commodity derivative 

contracts.691 Proposed 

§ 150.5(b)(1)(ii)(B) would codify as 

guidance for exempt and excluded 

commodity derivative contracts that the 

5,000 contract limit should be 

applicable when the notional quantity 

per contract is no larger than a typical 

cash market transaction in the 

underlying commodity, or should be 

reduced if the notional quantity per 

contract is larger than a typical cash 

market transaction. Additionally, 

proposed § 150.5(b)(1)(B)(ii) would 

codify a new acceptable practice for a 

DCM or SEF to adopt the same limit as 

applies to the pre-existing contract if the 

new commodity contract is substantially 

the same as an existing contract. 

Proposed § 150.5(b)(1)(iii) sets forth 

that if a commodity derivative contract 

is cash-settled by referencing a daily 

settlement price of an existing contract 

listed on a DCM or SEF, then it would 

be an acceptable practice for a DCM or 

SEF to adopt the same position limits as 

the original referenced contract, 

assuming the contract sizes are the 

same. Based on its enforcement 

experience, the Commission believes 

that limiting a trader’s position in cashsettled contracts in this way diminishes 

the incentive to exert market power to 

manipulate the cash-settlement price or 

index to advantage a trader’s position in 

the cash-settled contract.692

Proposed § 150.5(b)(2)(i) updates the 

acceptable practices in current 

§ 150.5(c) for adjusting limit levels for 

the spot month. For a derivative 

contract that is based on a commodity 

with a measurable deliverable supply, 

proposed § 150.5(b)(2)(i) maintains the 

acceptable practice in current § 150.5(c) 

to adjust spot month position limits to 

a level no greater than one-quarter of the 

estimated deliverable supply of the 

underlying commodity, but would 

apply this acceptable practice to any 

commodity derivative contract, whether 

physical-delivery or cash-settled, that 

has a measurable deliverable supply. 

For a derivative contract that is based on 

a commodity without a measurable 

deliverable supply, proposed 

§ 150.5(b)(1)(i)(B) would codify as 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75758 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

693Compare 17 CFR 150.5(e)(2)–(3). 

694 17 CFR 150.5(e)(3) applies this acceptable 

practice to a ‘‘tangible commodity, including, but 

not limited to metals, energy products, or 

international soft agricultural products.’’ Also, 

compare the ‘‘minimum open interest and volume 

test’’ in proposed § 150.5(b)(3)(i) with that in 

current § 150.5(e)(3). 

695The ‘‘minimum open interest and volume’’ 

test, as presented in 17 CFR 150.5(e)(1)–(2), need 

not be used to determine whether an excluded 

commodity derivative contract should be eligible 

for position accountability rules in lieu of position 

limits in the spot month. 

696See supra discussion of what is meant by 

‘‘substantially the same’’ in this context. 

697For SEFs, trading volume and open interest for 

swaptions should be calculated on a delta-adjusted 

basis. 

698 ‘‘Futures-equivalent’’ is a defined term in 

proposed § 150.1 that accounts for swaps in 

referenced contracts. 

699 Derivative contracts—i.e., futures, options and 

swaps—may not transfer any ownership interest in 

the underlying commodity, but their prices are 

substantially derived from the value of the 

underlying commodity. Those who purchase or sell 

derivatives do so either to hedge or speculate. 

Generally, hedging is the use of derivatives markets 

by commodity producers, merchants or end-users to 

manage their exposure to fluctuation in the price of 

a commodity that a producer or user intends to use 

or produce; speculation, in contrast, is the use of 

derivative markets to profit from price appreciation 

or depreciation in the underlying commodity. 

Because the limits only restrict positions obtained 

for speculative purposes, this discussion refers 

interchangeably to ‘‘position limits,’’ ‘‘speculative 

position limits,’’ or ‘‘speculative limits.’’ 

700Congress first granted the CEC, a Commodity 

Futures Trading Commission predecessor, authority 

to set speculative position limits as part of the New 

Deal reforms enacted in the Commodity Exchange 

Act of 1936. Public Law 74–765, 49 Stat. 1491, 1492 

(codified at 7 U.S.C. 6a(1) (1940)). Specifically, 

Congress authorized the CEC to ‘‘fix such limits on 

the amount of trading . . . which may be done by 

any person as the [CEC] finds is necessary to 

diminish, eliminate, or prevent such burden.’’ 

Congress exempted positions attributable to bona 

fide hedging. Unless otherwise indicated, references 

in this discussion to the ‘‘Commission’’ mean the 

Commodity Futures Trading Commission as well as 

its predecessor agencies, including the CEC. 

701Commodity Futures Modernization Act of 

2000, Public Law 106–554, 114 Stat. 2763 (Dec. 21, 

2000). 

guidance that the spot month limit level 

should not be adjusted to levels greater 

than necessary and appropriate to 

reduce the potential threat of market 

manipulation or price distortion of the 

contract’s or the underlying 

commodity’s price. Proposed 

§ 150.5(b)(2)(i) would codify as a new 

acceptable practice that spot month 

limit levels be reviewed no less than 

once every two years. 

Proposed § 150.5(b)(2)(ii) maintains as 

an acceptable practice the basic formula 

set forth in current § 150.5(c)(2) for 

adjusting non-spot-month limits at 

levels of no more than 10% of the 

average combined futures and deltaadjusted option month-end open 

interest for the most recent calendar 

year up to 25,000 contracts, with a 

marginal increase of 2.5% of the 

remaining open interest thereafter. 

Proposed § 150.5(b)(2)(ii) would also 

maintain as an alternative acceptable 

practice the adjustment of non-spotmonth limits to levels based on position 

sizes customarily held by speculative 

traders in the contract. Proposed 

§ 150.5(b)(3) generally updates and 

reorganizes the existing acceptable 

practices in current § 150.5(e) for a DCM 

or SEF to adopt position accountability 

rules in lieu of position limits, under 

certain circumstances, for contracts that 

are not subject to federal position limits. 

This proposed section reiterates the 

DCM’s authority, with conforming 

changes for SEFs, to require traders to 

provide information regarding their 

position when requested by the 

exchange.693 Proposed § 150.5(b)(3) 

would codify a new acceptable practice 

for a DCM or SEF to require traders to 

consent to halt from increasing their 

position in a contract if so ordered. 

Proposed § 150.5(b)(3) would also 

codify a new acceptable practice for a 

DCM or SEF to require traders to reduce 

their position in an orderly manner. 

Proposed § 150.5(b)(3)(i) would 

maintain the acceptable practice for a 

DCM or SEF to adopt position 

accountability rules outside the spot 

month, in lieu of position limits, for an 

agricultural or exempt commodity 

derivative contract that: (1) has an 

average month-end open interest of 

50,000 contracts and an average daily 

volume of 5,000 or more contracts 

during the most recent calendar year; (2) 

has a liquid cash market; and (3) is not 

subject to federal limits in § 150.2— 

provided, however, that such DCM or 

SEF should adopt a spot month 

speculative position limit with a level 

no greater than one-quarter of the 

estimated spot month deliverable 

supply.694

For an excluded commodity 

derivative contract that has a highly 

liquid cash market and no legal 

impediment to delivery, proposed 

§ 150.5(b)(3)(ii)(A) would maintain the 

acceptable practice for a DCM or SEF to 

adopt position accountability rules in 

the spot month in lieu of position limits. 

For an excluded commodity derivative 

contract without a measurable 

deliverable supply, proposed 

§ 150.5(b)(3)(ii)(A) would codify an 

acceptable practice for a DCM or SEF to 

adopt position accountability rules in 

the spot month in lieu of position limits 

because there is not a deliverable supply 

that is subject to manipulation. 

However, for an excluded commodity 

derivative contract that has a 

measurable deliverable supply, but that 

may not be highly liquid and/or is 

subject to some legal impediment to 

delivery, proposed § 150.5(b)(3)(ii)(A) 

sets forth an acceptable practice for a 

DCM or SEF to adopt a spot-month 

position limit equal to no more than 

one-quarter of the estimated deliverable 

supply for that commodity, because the 

estimated deliverable supply may be 

susceptible to manipulation. 

Furthermore, proposed § 150.5(b)(3)(ii) 

would remove the ‘‘minimum open 

interest and volume’’ test for excluded 

commodity derivative contracts 

generally.695 Proposed 

§ 150.5(b)(3)(ii)(B) would codify an 

acceptable practice for a DCM or SEF to 

adopt position accountability levels for 

an excluded commodity derivative 

contract in lieu of position limits in the 

individual non-spot month or allmonths-combined. 

Proposed § 150.5(b)(3)(iii) adds a new 

acceptable practice for an exchange to 

list a new contract with position 

accountability levels in lieu of position 

limits if that new contract is 

substantially the same as an existing 

contract that is currently listed for 

trading on an exchange that has already 

adopted position accountability levels 

in lieu of position limits.696

Proposed § 150.5(b)(4) maintains the 

acceptable practice that for contracts not 

subject to federal position limits, DCMs 

and SEFs should calculate trading 

volume and open interest as established 

in current § 150.5(e)(4).697 Proposed 

§ 150.5(b)(4) would build upon these 

standards by accounting for swaps in 

reference contracts on a futuresequivalent basis.698

III. Related Matters 

A. Considerations of Costs and Benefits 

1. Background 

Generally, speculative position limits 

cap the size of positions that a person 

may hold or control in commodity 

derivative contracts for speculative 

purposes.699 First authorized in 1936,700

position limits are not a new regulatory 

tool for containing speculative market 

activity. The Commission and its 

predecessors have directly set limits for 

futures and options contracts on certain 

agricultural commodities since 1938. 

Additionally, for approximately 20 

years from 1981 until the Commodity 

Futures Modernization Act 

(‘‘CFMA’’) 701 amended the CEA to 

substitute a core-principles-based, selfregulatory model for futures exchanges, 

Commission rules required exchanges to 

set position limits (or, in certain 


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702See, e.g., 46 FR 50938, 50940, Oct. 16, 1981. 

As discussed above, following enactment of the 

CFMA, which among other things afforded DCMs 

discretion to set appropriate position limits under 

DCM core principle 5, these rules, then contained 

in § 150.5, became ineffective as requirements; they 

were retained, however, as guidance and acceptable 

practices for DCMs to use in meeting their core 

principle 5 compliance obligations. 74 FR 12178, 

12183, Mar. 23, 2009. 

703One of these amendments, the Commodity 

Futures Trading Act of 1974, created the CFTC and 

granted it expanded jurisdiction beyond the certain 

enumerated agricultural products of its predecessor 

to all ‘‘services, rights, and interests’’ in which 

futures contracts are traded. Public Law 93–463, 88 

Stat. 1389 (1974). 

704See, e.g., Federal Trade Commission, ‘‘Report 

of the Federal Trade Commission on the Grain 

Trade,’’ vol. VI, at 60–62 (1924)(documenting a 

number of ‘‘violent fluctuations of price’’ over the 

preceding 30 years evidencing ‘‘the close 

connection between extreme fluctuations in annual 

average prices of cash grain and unusual 

speculative activity in the futures market’’); id. vol. 

VII, at 293–294 (1926)(recommending limitation on 

individual open interest because the ‘‘very large 

trader . . . [w]hether he is more often right than 

wrong . . . and whether influenced by a desire to 

manipulate or not . . . can cause disturbances in 

the market which impair its proper functioning and 

are harmful to producers and consumers’’); Grain 

Futures Administration, ‘‘Fluctuations in Wheat 

Futures,’’ S. Doc. No. 69–135, at 1,6 (1926) 

(investigation of ‘‘wide and erratic [1925 wheat 

futures] price fluctuations . . . were largely 

artificial[,] were caused primarily . . . by heavy 

trading on the part of a limited number of 

professional speculators [that] completely disrupted 

the market and resulted in abnormal fluctuations 

. . . felt in every other large grain market in the 

world;’’ concludes that limitations on the extent of 

daily trading by speculators are ‘‘inevitable . . . if 

there is to be eliminated from the market those 

hazards which are so unmistakably reflected as 

existing whenever excessively large lines are held 

by individuals’’); 1932 Annual Report of the Chief 

of the Grain Futures Admin., at 4, 8 (describing the 

16 percent drop in May wheat prices during a 21- 

day period as illustrative of the price impact of 

‘‘short selling by a few large traders;’’ again stresses 

the need for legislation authorizing limitations to 

eliminate ‘‘the economic evils incident to market 

domination by a few powerful operators trading for 

speculative account’’); 1950 Annual Report of the 

Administrator of the Commodity Exchange 

Authority, at 14–15 (speculative operations by a 

small number of traders holding a large proportion 

of long contracts ‘‘distorted egg future prices in 

October 1949 and disrupted orderly marketing of 

the commodity causing financial losses;’’ notes that 

enforcement of speculative limits is a ‘‘strong 

deterrent to excessive speculation by large 

traders’’); Commodity Futures Trading Commission, 

Report To The Congress In Response To Section 21 

Of The Commodity Exchange Act, May 29, 1981, 

Part Two, A Study of the Silver Market (addressing 

silver market corner discussed above); ‘‘The Role of 

Market Speculation in Rising Oil and Gas Prices: A 

Need to Put the Cop Back on the Beat,’’ Staff Report, 

Permanent Subcommittee on Investigations of the 

Senate Committee on Homeland Security and 

Governmental Affairs, U.S. Senate, S. Rpt. No. 109– 

65 at 1 (June 27, 2006) (addressing speculation and 

price increases in oil and gas markets) [hereinafter 

‘‘Oil & Gas Report’’]; ‘‘Excessive Speculation in the 

Natural Gas Market, Staff Report,’’ Permanent 

Subcommittee on Investigations of the Senate 

Committee on Homeland Security and 

Governmental Affairs, U.S. Senate, at 1 (June 25, 

2007) (addressing speculation, price increases and 

market distortion in natural gas markets discussed 

above) [hereinafter ‘‘Gas Report’’]; ‘‘Excessive 

Speculation in the Wheat Market;’’ Staff Report, 

Permanent Subcommittee on Investigations of the 

Senate Committee on Homeland Security and 

Governmental Affairs, U.S. Senate, at 2 (June 24, 

2009) (addressing excessive speculation in wheat 

futures contracts by commodity index traders) 

[hereinafter ‘‘Wheat Report’’]; see also Jerry W. 

Markham, ‘‘The History of Commodity Futures 

Trading and its Regulation,’’ at 3–47 (1987) 

(summarizes numerous incidents of large 

speculative trader abuse in an array of commodities 

from the emergence of futures exchanges in the 

mid-1800s through the 1970s). 

705The roots of this statutory determination date 

back to 1922, when Congress found ‘‘sudden or 

unreasonable fluctuations in the prices’’ of certain 

commodity futures transactions ‘‘frequently occur 

as a result of [ ] speculation, manipulation or 

control’’ and that ‘‘such fluctuations in prices are 

an obstruction to and a burden upon’’ interstate 

commerce. Grain Futures Act of 1922, ch. 369 at 

section 3, 342 Stat. 998, 999 (1922), codified at 7 

U.S.C. 5 (1925–26). 

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

707Hedgers do not always trade simultaneously in 

the same quantities in opposing directions. That is, 

long and short hedgers may trade at different times 

and with different quantities, often making 

transactions between only hedgers unfeasible. 

Speculative traders thus provide a trading partner 

for hedgers for whom there is no feasible hedger 

counterparty. In so doing, speculators provide 

valuable liquidity to the market. 

708Public Law 111–203, 124 Stat. 1376 (2010). 

709See, e.g., Wheat Report, at 15–16 (excessive 

speculation in wheat futures contracts by 

commodity index traders contributed to 

‘‘unreasonable fluctuations or unwarranted 

changes’’ in wheat futures prices, resulting in an 

abnormally large and persistent gap between wheat 

futures and cash prices (the basis);’’ commerce was 

unduly burdened; stiffened position limit 

regulation for index traders recommended); Gas 

Report, at 3–7 (‘‘[t]he current regulatory system was 

unable to prevent [the hedge fund] Amaranth’s 

excessive speculation in the 2006 natural gas 

market;’’ the experience demonstrated ‘‘how 

excessive speculation can distort prices’’ and have 

‘‘serious consequences for other market 

participants;’’ and the Commission should be put 

‘‘back on the beat’’); Oil & Gas Report, at 6–7 (heavy 

speculation in commodity energy markets 

contributed to rising U.S. energy prices, distorting 

the historical relationship between price and 

inventory; recommends putting the CFTC ‘‘back on 

the beat’’ to police these markets by eliminating the 

‘‘Enron’’ loophole that limited it from doing so). In 

the interval between the two reports addressed to 

energy market speculation and the Dodd-Frank Act 

amendments, Congress also expanded the 

Commission’s authority to set position limits for 

significant price discovery contracts on exempt 

commercial markets. See Food, Conservation and 

Energy Act of 2008, Public Law 110–246, 122 Stat. 

1624 (2008). 

710 Dodd-Frank Act section 737(a). 

specified cases, position accountability 

levels) for futures and options contracts 

not subject to Commission-imposed 

limits.702 Through amendments to the 

CEA over more than 75 years and a 

number of legislative reauthorizations, 

the Commission’s basic authority to 

establish speculative position limits, 

now codified in CEA section 4a(a), has 

remained constant.703

The backdrop for this basic authority 

is a public record replete with 

Congressional and other official 

governmental investigations and 

reports—issued over more than 80 

years—critical of the harm attributed to 

‘‘excess speculation’’ in derivative 

markets. From the 1920s through 2009, 

a litany of official government 

investigations, hearings and reports 

document disruptive speculative 

behavior; 704 several of the earliest link 

the behavior to artificial price effects 

and impaired commodity distribution 

efficiency, and recommend mandatory 

position limits as a tool to curb 

speculative abuses and their ill-effects. 

The statute reflects and responds to the 

centerpiece concern of these hearings 

and reports. Indeed, CEA section 

4a(a)(1) states Congress’s express 

determination that excessive commodity 

speculation causing sudden or 

unreasonable price fluctuations or 

unwarranted changes in commodity 

prices is an undue and unnecessary 

burden on interstate commerce, and 

mandates that the Commission set 

position limits, including prophylactic 

limits, to diminish, eliminate, or 

prevent this burden.705

The longstanding statutory approach 

to position limit regulation reflects two 

important concepts with direct bearing 

on the benefits and costs involved in 

this rulemaking. First is the distinction 

between speculative trading, for which 

limits are statutorily authorized, and, as 

to derivatives for physical commodities, 

mandated, and bona fide hedging, for 

which they are not.706 This distinction 

is important because a chief purpose of 

position limits is to preserve the 

integrity of derivative markets for the 

benefit of producers that use them to 

hedge risk and consumers that consume 

the underlying commodities. 

Second is the distinction between 

speculation generally and excessive 

speculation as addressed in CEA section 

4a(a)(1). While, as noted above, 

numerous government inquires have 

linked speculation at excessive levels to 

abuses and burdens on commerce, 

below excessive levels, speculation 

provides needed liquidity to derivative 

markets.707

In 2010 the Dodd-Frank Act 708

amended CEA section 4a(a). These 

amendments responded to the 2008 

financial crisis and came in the wake of 

three Congressional reports within a 

three-year span finding increased and/or 

‘‘excessive’’ derivative market 

speculation linked to increased and 

distorted prices. These reports 

recommended increased statutory 

authority to, in the parlance of two of 

the reports, put the Commission ‘‘back 

on the beat.’’ 709 Among other things, 

the Dodd-Frank Act 710 expanded the 

Commission’s speculative position limit 

authority under CEA section 4a to 


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711As defined in CEA section 1a(20), ‘‘exempt 

commodity’’ means a commodity that is neither an 

agricultural commodity nor an ‘‘excluded 

commodity.’’ Excluded commodities, in turn, are 

defined in CEA section 1a(19) to encompass 

specified groups of financial and occurrence-based 

commodities. Accordingly, exempt commodities 

include energy products and metals. The DoddFrank mandate in CEA section 4a(a)(2) to impose 

limits applies to all agricultural and exempt 

commodities (collectively, physical commodities). 

This mandate does not apply to excluded 

commodities, which are primarily intangible 

commodities, like financial products. 

712The Commission’s statutory interpretation of 

its mandate under CEA section 4a(a)(2) is discussed 

in detail above. A separate provision added by the 

Dodd-Frank Act directs the Commission with 

respect to factors to consider in establishing the 

levels of speculative position limits that are 

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

4a(a)(3); 7 U.S.C. 6a(a)(3). 

713Specifically, as enumerated these are: (1) 

contracts listed by DCMs; (2) with respect to 

FBOTs, contracts that are price-linked to a contract 

listed for trading on a registered entity and made 

available from within the United States via direct 

access; and (3) SPDF Swaps. 

714See Dodd-Frank Act sections 735(b) 

(amending CEA section 5(d)(5)) and 733 (adding 

CEA section 5h, subsection (f)(6) of which specifies 

SEF’s core principle obligation with respect to 

position limitations or accountability). 

715See, e.g., 46 FR 50938, 50940, Oct. 16, 1981. 

In this release adopting § 1.61, the Commission 

articulated its interpretation that the CEA 

authorized prophylactic speculative position limits. 

One year later, Congress enacted the Futures 

Trading Act of 1982, Public Law 97–444, 96 Stat. 

2294, 2299–2300(1982), which, inter alia, amended 

the CEA to ‘‘clarify and strengthen the 

Commission’s’’ position limits authority. S. Rep. 

97–384, at 44 (1982). Congress enacted this 

strengthening amendment with awareness of the 

Commission’s prophylactic interpretation and 

approach, and after rejecting amendments that 

would have circumscribed the Commission’s 

authority. See, e.g., Futures Trading Act of 1982: 

Hearings on S. 2109 before the S. Subcomm. on 

Agricultural Research, 97th Cong. 28, 29, 44–45, 

337, 340–45 (1982) (oral and written statements of 

Commission Chair Phillip McBride Johnson and 

Commodity Exchange Executive Vice Chair Lee 

Berendt concerning, inter alia, the Commission’s 

omnibus approach to position limits); S. Rep. 97– 

384, at 44–45, 79 (discussing rejected amendments). 

716As discussed above, the District Court for the 

District of Columbia vacated part 151 of the 

Commission’s regulations, which would have 

replaced part 150. As a result, part 150 remains in 

effect. 

717See Aggregation NPRM. 

718 7 U.S.C. 19(a). 

719 In ICI v. CFTC, 2013 WL 3185090, at *8 (D.C. 

Cir. 2013), the United States Court of Appeals for 

the D.C. Circuit held that CEA section 15(a) imposes 

no duty on the Commission to conduct a 

quantitative economic analysis: ‘‘Where Congress 

has required ‘‘‘rigorous, quantitative economic 

analysis,’’’ it has made that requirement clear in the 

agency’s statute, but it imposed no such 

requirement here [in the CEA].’’ Id. (citation 

omitted). 

720Many of the revised or new definitions do not 

substantively affect the Commission’s 

considerations of costs and benefits on their own 

merit, but are considered in conjunction with the 

sections of the rule that implement them. 

721The proposed rules also include amendments 

to 17 CFR parts 15 and 17, as discussed supra. The 

Commission preliminarily believes these 

amendments are not substantive in nature and do 

not have cost or benefit implications. The 

Commission welcomes comment on any potential 

costs or benefits of the changes to parts 15 and 17. 

mandate that the Commission: (i) 

establish limits on the amount of 

positions, as appropriate, that may be 

held by any person in agricultural and 

exempt commodity 711 futures and 

options contracts traded on a DCM (CEA 

section 4a(a)(2));* * * 712 (ii) establish 

at an appropriate level position limits 

for swaps that are economically 

equivalent to those futures and options 

that are subject to mandatory position 

limits pursuant to CEA section 4a(a)(2), 

and do so at the same time as the CEA 

section 4a(a)(2) limits are established 

(CEA section 4a(a)(5)); and (iii) apply 

position limits on an aggregate basis to 

contracts based on the same underlying 

commodity across enumerated trading 

venues 713 (CEA section 4a(a)(6)). 

Additionally, the Dodd-Frank Act 

requires DCMs and SEFs to set position 

limits for any contract subject to a 

Commission-imposed limit at a level not 

higher than the Commission’s limit.714

Finally, the Dodd-Frank Act, through 

new CEA section 4a(c)(2), requires that 

the Commission define bona fide 

hedging positions pursuant to an 

express framework for purposes of 

exclusion from position limits. The 

Commission’s approach, historically, to 

exercising its statutory position limits 

authority has been to set or order limits 

prophylactically to deter all forms of 

manipulation and to diminish, 

eliminate, or prevent excessive 

speculation.715 It has done so through 

regulations comprised of three primary 

components: (1) The level of the limits, 

which set a threshold that restricts the 

number of speculative positions that a 

person may hold in the spot-month, in 

any individual month, and in all 

months combined; (2) the standards for 

what constitute bona fide hedging 

versus speculative transactions, as well 

as other exemptions; and (3) the 

accounts and positions a person must 

aggregate for the purpose of determining 

compliance with the position limit 

levels. These rules now reside in part 

150 of the Commission’s regulations.716

The rules proposed herein would 

amend part 150 and make certain 

conforming amendments to related 

reporting requirements in parts 15, 17 

and 19. They would do so in a manner 

that represents an extension of the 

Commission’s historical approach 

towards the first two components: limit 

levels and exemptions. The third 

component, aggregation, is addressed in 

a separate Commission rulemaking.717

i. Statutory Mandate To Consider Costs 

and Benefits 

CEA section 15(a) 718 requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

CEA or issuing certain orders. CEA 

section 15(a) further specifies that the 

costs and benefits shall be evaluated in 

light of five broad areas of market and 

public concern: (1) Protection of market 

participants and the public; (2) 

efficiency, competitiveness, and 

financial integrity of futures markets; (3) 

price discovery; (4) sound risk 

management practices; and (5) other 

public interest considerations.719

The Commission considers the costs 

and benefits resulting from its 

discretionary determinations with 

respect to the CEA section 15(a) factors. 

Accordingly, the discussion that 

follows identifies, and considers against 

the five CEA section 15(a) factors, 

benefits and costs to market participants 

and the public that the Commission 

expects to flow from these proposed 

rules relative to the statutory 

requirements of the CEA and the 

Commission’s regulations now in effect. 

The Commission has attempted to 

quantify the costs and benefits of these 

regulations where feasible. Where 

quantification is not feasible the 

Commission identifies and considers 

costs and benefits qualitatively. 

Beyond specific questions 

interspersed throughout its discussion, 

the Commission generally requests 

comment on all aspects of its 

consideration of costs and benefits, 

including: identification and assessment 

of any costs and benefits not discussed 

therein; data and any other information 

to assist or otherwise inform the 

Commission’s ability to quantify or 

qualify the benefits and costs of the 

proposed rules; and, substantiating data, 

statistics, and any other information to 

support positions posited by 

commenters with respect to the 

Commission’s consideration of costs 

and benefits. 

The following consideration of 

benefits and costs is generally organized 

according to the following rules 

proposed in this release: definitions 

(§ 150.1),720 federal position limits 

(§ 150.2), exemptions to limits (§ 150.3), 

position limits set by DCMs and SEFs 

(§ 150.5), anticipatory hedging 

requirements (§ 150.7), and reporting 

requirements (§ 19.00). For each rule, 

the Commission summarizes the 

proposed rule and considers the benefits 

and costs expected to result from it.721

The Commission then considers the 

benefits and costs of the proposed rules 

collectively in light of the five public 


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722See supra discussion of proposed amendments 

to § 150.1. 

723CEA section 4a(c)(1); 7 U.S.C. 6a(c)(1). 

724Currently, 17 CFR 1.3(z), defines the term 

‘‘bona fide hedging transactions and positions.’’ 

Originally adopted by the newly formed 

Commission in 1975, a revised version of § 1.3(z) 

took effect two years later. This 1977 revision 

largely forms the basis of the current definition of 

bona fide hedging. A history of the definition of 

bona fide hedging is presented above. With the 

adoption of the proposed definition of ‘‘bona fide 

hedging positions’’ in § 150.1, § 1.3(z) would be 

deleted. 

725 17 CFR 1.3(z)(1). The Commission cautions 

that the e-CFR 2012 version of this provision 

reflects changes made by the now-vacated Part 151 

rule. 

726See supra for additional explanation of these 

terms. 

728Compare 17 CFR 1.3(z)(1) (‘‘General 

Definition’’) with the proposed § 150.1 definition of 

bona fide hedging opening sentence and paragraphs 

(1) and (2) (respectively, ‘‘Hedges of an excluded 

commodity’’ and ‘‘Hedges of a physical 

commodity’’). 

729Compare 17 CFR 1.3(z)(2)(‘‘Enumerated 

Hedging Transactions’’) with the proposed § 150.1 

definition of bona fide hedging paragraphs (3) and 

(4) (respectively, ‘‘Enumerated hedging positions’’ 

and ‘‘Other enumerated hedging positions’’). 

interest considerations of CEA section 

15(a). 

2. Section 150.1—Definitions 

Currently, § 150.1 defines terms for 

operation within the various rules that 

comprise part 150. As described above, 

the Commission proposes formatting, 

organizational, and other nonsubstantive amendments to these 

definitional provisions that, subject to 

consideration of any relevant comments, 

it does not view as having benefit or 

cost implications.722 But, with respect 

to a number of definitions, the 

Commission proposes substantive 

amendments and additions. With the 

exception of the term ‘‘bona fide 

hedging position,’’ for which the 

benefits and costs of the proposed 

§ 150.1 definition are considered in the 

subsection directly below, any benefits 

and costs attributable to substantive 

definitional changes and additions 

proposed in § 150.1 are considered in 

the discussion of the rule in which such 

new or amended terms would be 

operational. 

i. Bona Fide Hedging 

Proposed § 150.1 would include a 

definition of the term ‘‘bona fide 

hedging positions’’—which operates to 

distinguish hedging positions from 

those that are speculative and thus 

subject to position limits, both federal 

and exchange-set, unless otherwise 

exempted by the Commission. Hedgers 

present a lesser risk of burdening 

interstate commerce as described in 

CEA section 4a because their positions 

are offset in the physical market. CEA 

section 4a(c) has long directed that no 

Commission rule, regulation or order 

establishing position limits under CEA 

section 4a(a) apply to bona fide hedging 

as defined by the Commission.723 The 

proposed definition would replace the 

definition now contained in § 1.3(z) to 

implement that statutory directive.724

Generally, the current definition of 

bona fide hedging in § 1.3(z) advises 

that a position should ‘‘normally 

represent a substitute for . . . positions 

to be taken at a later time in a physical 

marketing channel’’ and requires such 

position to be ‘‘economically 

appropriate to the reduction of risks in 

the conduct of a commercial enterprise’’ 

where the risks arise from the potential 

change in value of assets, liabilities, or 

services.725 Such bona fide hedges must 

have a purpose ‘‘to offset price risks 

incidental to commercial cash or spot 

operations’’ and must be ‘‘established 

and liquidated in an orderly manner in 

accordance with sound commercial 

practices.’’ 

This general definition thus provides 

general components of the type of 

position that constitute a bona fide 

hedge position. The criterion that such 

a position should ‘‘normally represent a 

substitute for . . . positions to be taken 

at a later time in a physical marketing 

channel’’ has been deemed the 

‘‘temporary substitute’’ criterion. The 

requirement that such position be 

‘‘economically appropriate to the 

reduction of risks in the conduct of a 

commercial enterprise’’ is referred to as 

the ‘‘economically appropriate’’ test. 

The criterion that hedged risks arise 

from the potential change in value of 

assets, liabilities, or services is 

commonly known as the ‘‘change in 

value’’ requirement or test. The phrase 

‘‘price risks incidental to commercial 

cash or spot operations’’ has been 

termed the ‘‘incidental test.’’ The 

criterion that hedges must be 

‘‘established and liquidated in an 

orderly manner’’ is known as the 

‘‘orderly trading requirement.’’ 726

The current definition also describes 

a non-exclusive list of transactions that 

satisfy the definitional criteria and 

therefore qualify as bona fide hedges; 

these ‘‘enumerated hedging 

transactions’’ are located in § 1.3(z)(2). 

For those transactions that may fit the 

definition but are not listed in 

§ 1.3(z)(2), current § 1.3(z)(3) provides a 

means of requesting relief from the 

Commission. 

The Dodd-Frank Act amended the 

CEA in ways that require the 

Commission to adjust its current bona 

fide hedging definition. Specifically, the 

Dodd-Frank Act added section 4a(c)(2) 

of the Act, which the Commission 

interprets as directing the Commission 

to narrow the bona fide hedging 

position definition for physical 

commodities from the definition found 

in current § 1.3(z)(1).727

Dodd-Frank also provided direction 

regarding the bona fide hedging criteria 

for swaps contracts newly under the 

Commission’s jurisdiction. Specifically, 

new CEA sections 4a(a)(5) and (6) 

require the Commission to impose 

limits on an aggregate basis across all 

economically equivalent contracts, 

excepting in both cases bona fide 

hedging positions. CEA section 

4a(c)(2)(B) describes which swap offset 

positions may qualify as bona fide 

hedges. Finally, new CEA section 

4a(a)(7) provides the Commission with 

authority to grant exemptive relief from 

position limits. The Commission 

proposes to amend its definition of bona 

fide hedging under the authority and 

direction of amended CEA section 4a(c) 

and the other provisions added by the 

Dodd-Frank Act. To the extent a change 

in the definition represents a statutory 

requirement, it is not discretionary and 

thus not subject to CEA section 15(a). 

ii. Rule Summary 

Like current § 1.3(z), the proposed 

§ 150.1 bona fide hedging definition 

employs a basic organizational model of 

stating general, broadly applicable 

requirements for a hedge to qualify as 

bona fide,728 and then specifying certain 

particular (‘‘enumerated’’) hedges that 

are deemed to meet the general 

requirements.729 Generally, the 

proposed definition is built around the 

same criteria as are currently found in 

§ 1.3(z), including the temporary 

substitute and economically appropriate 

criteria. Thus, the proposed definition is 

substantially similar to the current 

definition, with limited changes to 

accommodate altered statutory 

requirements regarding bona fide 

hedging as well as accomplish 

discretionary improvements. The 

proposed definition also reflects 

organizational changes to better 

accommodate the extension of 

speculative position limits to all 

economically equivalent contracts 

across all trading venues. To the extent 

the proposed definition carries over 

requirements currently resident in the 

§ 1.3(z) definition, it does not represent 

a change from current practice and 

therefore should not pose incremental 

benefits or costs. 

The proposed definition has been 

relocated from § 1.3(z) to § 150.1 in 

order to facilitate reference between 

sections of part 150. The proposed 


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730An ‘‘excluded commodity’’ is defined in CEA 

section 1a(19). The definition includes financial 

products such as interest rates, exchange rates, 

currencies, securities, credit risks, and debt 

instruments as well as financial events or 

occurrences. 

731See discussion above. 

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

733As discussed supra, the Commission believes 

that negligent trading, practices, or conduct should 

be a sufficient basis for the Commission to deny or 

revoke a bona fide hedging exemption. 

734The Commission notes that DCMs currently 

incorporate the temporary substitute and change in 

value criteria when the contract’s underlying 

market has physical delivery obligations. The 

proposal would not limit their ability to continue 

to do so when appropriate. 

735With respect to the temporary substitute test, 

the word ‘‘normally’’ has been removed in the 

proposed definition in order to conform with the 

stricter statutory standard in new CEA section 

4a(c)(2). See discussion above. 

736A detailed description of each enumerated 

position can be found supra. 

737See discussion above. 

definition of bona fide hedging position 

is also re-organized into six sections, 

starting with an opening paragraph 

describing the general requirements for 

all hedges followed by five numbered 

paragraphs. Paragraph (1) of the 

proposed definition describes 

requirements for hedges of an excluded 

commodity,730 including guidance on 

risk management exemptions that may 

be adopted by an exchange. Paragraph 

(2) describes requirements for hedges of 

a physical commodity. Paragraphs (3) 

and (4) describe enumerated 

exemptions. Paragraph (5) describes 

cross-commodity hedges. 

The following discussion is meant to 

highlight the essential components of 

each section of the proposed definition. 

A full discussion of the history and 

policy rationale of each section may be 

found supra.731

a. Opening Paragraph 

The opening paragraph of the 

proposed definition incorporates the 

incidental test and the orderly trading 

requirement, both found in the current 

§ 1.3(z)(1). The Commission intends the 

proposed incidental test to be a 

requirement that the risks offset by a 

commodity derivative contract hedging 

position must arise from commercial 

cash market activities. The Commission 

believes this requirement is consistent 

with the statutory guidance to define 

bona fide hedging positions to permit 

the hedging of ‘‘legitimate anticipated 

business needs.’’ 732 The incidental test 

allows the Commission to distinguish 

between hedging and speculate 

activities by defining the former as 

requiring a legitimate business need. 

The proposed orderly trading 

requirement is intended to impose on 

bona fide hedgers the duty to enter and 

exit the market carefully in the ordinary 

course of business. The requirement is 

also intended to avoid to the extent 

possible the potential for significant 

market impact in establishing or 

liquidating a position in excess of 

position limits. This requirement is 

particularly important because, as 

discussed below, the Commission 

proposes to set the initial levels of 

position limits at the outer bound of the 

range of levels of limits that may serve 

to balance the statutory policy 

objectives in CEA section 4a(a)(3) for 

limit levels. As such, bona fide hedgers 

likely would only need an exemption 

for very large positions. The orderly 

trading requirement is intended to 

prevent disorderly trading, practices, or 

conduct from bona fide hedgers by 

encouraging market participants to 

assess market conditions and consider 

how the trading practices and conduct 

affect the orderly execution of 

transactions when establishing or 

liquidating a position greater than the 

applicable position limit.733

b. Paragraph (1) Hedges of an Excluded 

Commodity 

The first paragraph in the proposed 

definition addresses hedging of an 

excluded commodity; it emanates from 

the Commission’s discretionary 

authority to impose limits on intangible 

commodities. In general, in addition to 

the requirements in the opening 

paragraph, proposed paragraph (1) 

requires the position meet the 

economically appropriate test and is 

either enumerated in paragraphs (3), (4), 

or (5) of the proposed definition or is 

recognized by a DCM or SEF as a bona 

fide hedge pursuant to exchange rules. 

The temporary substitute and change in 

value criteria are not included in the 

proposed paragraph (1), as these 

requirements are inappropriate in the 

context of certain excluded 

commodities that lack a physical 

marketing channel.734

Exclusively addressed to excluded 

commodity hedging, paragraph (1) is 

relevant only for the purposes of 

exchange-set limits under § 150.5 as 

proposed for amendment. As the 

Commission has determined to focus 

the application of federal speculative 

position limits on 28 physical 

commodities and their related physicaldelivery and cash-settled referenced 

contracts, this paragraph does not affect 

the imposition of federal speculative 

position limits and exemptions thereto. 

c. Paragraph (2) Hedges of a Physical 

Commodity 

Proposed paragraph (2) of the 

definition enumerates what constitutes 

a hedge for physical commodities, 

including physical agricultural and 

exempt commodities both subject and 

not subject to federal speculative 

position limits. In addition to the 

requirements in the opening paragraph, 

proposed paragraph (2) requires that the 

position satisfy the temporary substitute 

test, the economically appropriate test, 

and the change-in-value test. These tests 

have been incorporated into the revised 

statutory definition in CEA section 

4a(c)(2) and essentially mirror the 

current definition in § 1.3(z).735 The 

proposed paragraph (2) also requires the 

position either be enumerated in 

proposed paragraphs (3), (4), or (5) or be 

a pass-through swap offset or passthrough swap position as defined in 

paragraph (2)(ii). 

Proposed paragraph (2) of the 

definition applies generally to 

derivative positions that hedge a 

physical commodity and as such 

includes swaps. Thus, the paragraph 

responds to the statutory requirement in 

CEA section 4a(a)(5) that the 

Commission establish limits on 

economically equivalent contracts, 

including swaps, excluding bona fide 

hedging positions. The definition of a 

pass-through swap offset position 

incorporates the definition in new CEA 

section 4a(c)(2)(B)(i), with the inclusion 

of the requirement that such position 

not be maintained during the lesser of 

the last five days of trading or the time 

period for the spot month for the 

physical-delivery contract. 

d. Paragraphs (3) and (4) Enumerated 

Hedging Positions 

Proposed paragraph (3) lists specific 

positions that would fit under the 

definition of a bona fide hedging 

position, including hedges of inventory, 

cash commodity purchase and sales 

contracts, unfilled anticipated 

requirements, and hedges by agents.736

Each of these positions was described in 

§ 1.3(z), with the exception of paragraph 

(iii)(B), which was added in response to 

the petition submitted to the 

Commission by the Working Group of 

Commercial Energy Firms.737

Proposed paragraph (4) provides other 

enumerated hedging exemptions, 

including hedges of unanticipated 

production, offsetting unfixed price 

cash commodity sales and purchases, 

anticipated royalties, and services, all of 

which are subject to the ‘‘five-day rule.’’ 

The ‘‘five-day rule’’ is a provision in 

many of the enumerated hedging 

positions that prohibits a trader from 

maintaining the positions in any 

physical-delivery commodity derivative 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75763 

738As discussed above, the purpose of the fiveday rule is to protect the integrity of the delivery 

and settlement processes in physical-delivery 

contracts. Without this rule, high concentrations of 

exempted positions can distort the markets, 

impairing price discovery while potentially having 

an adverse impact on efforts to deter all forms of 

market manipulation and diminish excessive 

speculation. 

739See discussion above. 

740The Commission notes that the relocation of 

the definition from § 1.3(z) to part 150 is also 

discretionary. As noted above, the placement is 

intended to facilitate compliance with the other 

sections of part 150; the Commission does not 

believe, however, that this action has substantive 

cost or benefit implications. Also, the proposed 

definition incorporates and references elements of 

non-binding guidance not encompassed by CEA 

section 15(a). 

741As discussed supra, CEA section 4a(a)(5) 

requires that the Commission set speculative limits 

on the amount of positions, ‘‘other than bona fide 

hedging positions . . . held by any person with 

respects to swaps that are economically equivalent’’ 

to futures and options. 7 U.S.C. 6a(a)(5). Subject to 

CEA section 4a(a)(2), the Commission is exercising 

its discretion in defining bona fide hedging in 

economically equivalent contracts in the same 

manner as for futures and options in physical 

commodities. 7 U.S.C. 6a(a)(2). 

742Further, using the same exemptions in 

economically equivalent contracts is consistent 

with the approach of the Dodd-Frank Act section 

737(a) amendment requiring that the Commission 

establish limits for economically equivalent swap 

positions and across trading venues, including 

direct-access linked FBOT contracts. See 7 U.S.C. 

6a(a)(5)–(6). 

contract during the lesser of the last five 

days of trading or the time period for the 

spot month in such physical-delivery 

contract.738 Because each exemption 

shares this provision, the Commission is 

proposing to reorganize such 

exemptions into proposed paragraph (4) 

for administrative efficiency. 

Of the enumerated hedges in 

proposed paragraphs (4)(i) and (ii) are 

currently in § 1.3(z) and paragraph 

(4)(iv) codifies a hedge that has 

historically been recognized by the 

Commission. Paragraph (4)(iii) proposes 

a royalties exemption not now specified 

in § 1.3(z). 

e. Paragraph (5) cross-commodity 

hedges 

Proposed paragraph (5) describes 

positions that would qualify as crosscommodity bona fide hedges. The 

Commission has long recognized crosscommodity hedging, stating in 1977 that 

such positions would be covered under 

the general provisions of § 1.3(z)(2). 

The definition in proposed paragraph 

(5) would condition cross-commodity 

hedging on: (i) whether the fluctuations 

in value of the position in the 

commodity derivative contract are 

‘‘substantially related’’ to the 

fluctuations in value of the actual or 

anticipated cash position or passthrough swap; and (ii) the five-day rule 

being applied to positions in any 

physical-delivery commodity derivative 

contract. The second condition, i.e. the 

application of the five-day rule, would 

help to protect the integrity of the 

delivery process in the physicaldelivery contract but would not apply to 

cash-settled contract positions.739

iii. Benefits and Costs 

Elements of the proposed definition 

that represent discretionary, substantive 

modifications to the required manner in 

which bona fide hedging have been 

defined under § 1.3(z) include the 

following: 740 (i) Proposing requirements 

for hedges in an excluded commodity in 

proposed paragraph (1); (ii) adding the 

five-day rule into the statutory 

definition of pass-through swap as 

described in paragraph (2)(ii)(A); (iii) 

applying the definition in proposed 

paragraph (2) to positions in 

economically equivalent contracts in a 

physical commodity; 741 (iv) expanding 

paragraph (3)(III)(b) to incorporate 

hedges encouraged by a public utility 

commission; (v) expanding paragraph 

(4)(ii) to include offsetting unfixed-price 

cash commodity sales and purchases 

that are basis different contracts in the 

same commodity, regardless of whether 

the contracts are in the same calendar 

month; (vi) adding paragraph (iii) to 

proposed paragraph (4) to enumerate 

anticipated royalty hedges; and (vii) 

enumerating cross-commodity hedges as 

a standalone provision in paragraph (5). 

a. Benefits 

The Commission proposes the 

definition for excluded commodities in 

paragraph (1) in order to provide a 

consistent definition of bona fide 

hedging—i.e., a definition that 

incorporates the economically 

appropriate test—for all commodities 

under the Commission’s jurisdiction. 

The addition of paragraph (1) would 

provide exchanges with a definition for 

bona fide hedging designed to provide 

a level of assurance that the 

Commission’s policy objectives 

regarding bona fide hedging are met at 

the exchange level as well as at the 

federal level, and for excluded 

commodities as well as agricultural and 

exempt commodities. 

The Commission believes that the 

additions to the definition of bona fide 

hedging proposed in this release 

provide additional necessary relief to 

bona fide hedgers. This relief, in turn, 

will help to ensure that market 

participants with positions hedging 

legitimate business needs are properly 

recognized as hedgers under the 

Commission’s speculative position 

limits regime. Thus, the Commission 

anticipates that the addition of the 

enumerated position for anticipated 

royalties and the expansion of the 

enumerated unfilled anticipated 

requirements position provide 

additional means for obtaining a hedge 

exemption by recognizing the legitimate 

business need in each position. The safe 

harbor proposed in paragraph (5) is 

expected to provide clarity and promote 

regulatory certainty for entities that use 

cross-commodity hedging strategies. 

Further, the addition of the five-day rule 

to the hedging definition for passthrough swaps helps the Commission to 

ensure the integrity of the delivery 

process in the physical-delivery contract 

and as a result to accomplish to the 

maximum extent practicable the factors 

in CEA section 4a(a)(3). Finally, the 

Commission believes using the same 

bona fide hedging exemptions in 

economically equivalent contracts may 

facilitate administrative efficiency by 

avoiding the need for market 

participants to manage and apply 

different definitional criteria across 

multiple products and trading 

venues.742 The Commission requests 

comment on its consideration of the 

benefits of the proposed definition of 

bona fide hedging. Has the Commission 

misidentified any of the benefits of the 

proposed rule? Are there additional 

benefits the Commission ought to 

consider regarding the proposed 

definition of bona fide hedging? Why or 

why not? 

b. Costs 

The Commission anticipates that 

there will be some small additional 

costs associated with the proposed 

definition. 

Entities may incur costs to the extent 

the proposed definition of a bona fide 

hedging position in an excluded 

commodity requires an exchange to 

adjust its policies for bona fide hedging 

exemptions or a market participant to 

adjust its trading strategies for what is 

and is not a bona fide hedge in an 

excluded commodity. The Commission 

expects such costs to be negligible, as 

the definition is substantially the same 

as the current definition under § 1.3(z). 

Costs for exchanges are also considered 

in the section of this release that 

discusses the proposed amendments to 

§ 150.5. 

In general, under other aspects of the 

Commission’s proposed definition, 

market participants may incur costs to 

determine whether their positions fall 

under one of the new or expanded 

enumerated positions. In the event a 

position does not fit under any of the 

enumerated positions, market 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75764 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

743See supra discussion of the Commission’s 

interpretation of this mandate. 

744These contracts are Chicago Board of Trade 

corn and mini-corn, oats, soybeans and minisoybeans, wheat and mini-wheat, soybean oil, and 

soybean meal; Minneapolis Grain Exchange hard 

red spring wheat; ICE Futures U.S. cotton No. 2; 

and Kansas City Board of Trade hard winter wheat. 

745These objectives are to: (1) ‘‘diminish, 

eliminate, or prevent excessive speculation;’’ (2) 

‘‘deter and prevent market manipulation, squeezes, 

and corners;’’ (3) ‘‘ensure sufficient market liquidity 

for bona fide hedgers;’’ and (4) ‘‘ensure that the 

price discovery function of the underlying market 

is not disrupted.’’ 7 U.S.C. 6a(a)(3). 

746For a more detailed description, see 

discussion above. 

747Proposed § 150.1 would include a consistent 

definition of the term ‘‘speculative position limits.’’ 

748Proposed § 150.1 also would define the term 

‘‘core referenced futures contract’’ by reference to 

‘‘a futures contract that is listed in § 150.2(d).’’ 

749Specifically, in addition to the existing 9 

legacy agricultural contracts now within § 150.2— 

i.e., Chicago Board of Trade corn, oats, soybeans, 

soybean oil, soybean meal, and wheat; Minneapolis 

Grain Exchange hard red spring wheat; ICE Futures 

U.S. cotton No. 2; and Kansas City Board of Trade 

hard winterwheat—proposed § 150.2 would expand 

the list of core referenced futures contracts to 

capture the following additional agricultural, 

energy, and metal contracts: Chicago Board of Trade 

Rough Rice; ICE Futures U.S. Cocoa, Coffee C, 

FCOJ–A, Sugar No. 11 and Sugar No. 16; Chicago 

Mercantile Exchange Feeder Cattle, Lean Hog, Live 

Cattle and Class III Milk; Commodity Exchange, 

Inc., Gold, Silver and Copper; and New York 

Mercantile Exchange Palladium, Platinum, Light 

Sweet Crude Oil, NY Harbor ULSD, RBOB Gasoline 

and Henry Hub Natural Gas. 

750This would result in the application of 

prescribed position limits to a number of contract 

types with prices that are or should be closely 

correlated to the prices of the 28 core referenced 

futures contracts—i.e., economically equivalent 

contracts—including: (1) ‘‘look-alike’’ contracts 

(i.e., those that settle off of the core referenced 

futures contract and contracts that are based on the 

same commodity for the same delivery location as 

the core referenced futures contract); (2) contracts 

based on an index comprised of one or more prices 

for the same delivery location and in the same or 

substantially the same commodity underlying a 

core referenced futures contract; and (3) intercommodity spreads with two components, one or 

both of which are referenced contracts. The 

proposed ‘‘reference contract’’ definition would 

exclude, however, a guarantee of a swap. 

751As discussed supra, the Commission proposes 

to adopt a streamlined, amended definition of ‘‘spot 

month’’ in proposed § 150.1. The term would be 

defined as the trading period immediately 

preceding the delivery period for a physicaldelivery futures contract and cash-settled swaps 

and futures contracts that are linked to the physicaldelivery contract. The definition proposes similar 

but slightly different language for cash-settled 

contracts, providing for the spot month to be the 

earlier of the period in which the underlying cashsettlement price is calculated or the close of trading 

on the trading day preceding the third-to-last 

trading day, until the contract cash-settlement price 

is determined. For more details, see discussion 

above. 

participants may incur costs associated 

with filing for exemptive relief as 

described in the section discussing the 

costs of proposed § 150.3 or in altering 

speculative trading strategies as 

discussed above. As trading strategies 

are proprietary, and the determinations 

made by individual entities present a 

burden that is highly idiosyncratic, it is 

not reasonably feasible for the 

Commission to estimate the value of the 

burden imposed. 

c. Request for Comment 

The Commission requests comment 

on its consideration of the costs of the 

proposed definition of bona fide 

hedging position. Are there additional 

costs related to the Commission’s 

discretionary actions that the 

Commission should consider? Has the 

Commission misidentified any costs? 

Commenters are encouraged to submit 

any data that the Commission should 

consider in evaluating the costs of the 

proposed definition. 

d. Consideration of Alternatives 

The Commission recognizes that 

alternatives exist to discretionary 

elements of the definition of bona fide 

hedging positions proposed herein. The 

Commission requests comments on 

whether an alternative to what is 

proposed would result in a superior 

benefit-cost profile, with support for any 

such position provided. 

3. Section 150.2—Limits 

i. Rule Summary 

As previously discussed, the 

Commission interprets CEA section 

4a(a)(2) to mandate that it establish 

speculative position limits for all 

agricultural and exempt physical 

commodity derivative contracts.743 The 

Commission currently sets and enforces 

speculative position limits for futures 

and futures-equivalent options contracts 

on nine agricultural products. 

Specifically, current § 150.2 provides 

‘‘[n]o person may hold or control 

positions, separately or in combination, 

net long or net short, for the purchase 

or sale of a commodity for future 

delivery or, on a futures-equivalent 

basis, options thereon, in excess of’’ 

enumerated spot, single-month, and allmonth levels for nine specified 

contracts.744 These proposed 

amendments to § 150.2 would expand 

the scope of federal position limits 

regulation in three chief ways: (1) 

specify limits on 19 contracts in 

addition to the nine existing legacy 

contracts (i.e., a total of 28); (2) extend 

the application of these limits beyond 

futures and futures-equivalent options 

to all commodity derivative interests, 

including swaps; and (3) extend the 

application of these limits across trading 

venues to all economically equivalent 

contracts that are based on the same 

underlying commodity. In addition, the 

proposed rule would provide a 

methodology and procedures for 

implementing and applying the 

expanded limits. 

The Commission proposes to amend 

§ 150.2 to impose speculative position 

limits as mandated by Congress in 

accordance with the statutory bounds 

that define its discretion in doing so. 

First, pursuant to CEA section 4a(a)(5) 

the Commission must concurrently 

impose position limits on swaps that are 

economically equivalent to the 

agricultural and exempt commodity 

derivatives for which position limits are 

mandated in section 4a(a)(2). Second, 

CEA section 4a(a)(3) requires that the 

Commission appropriately set limit 

levels mandated under section 4a(a)(2) 

that ‘‘to the maximum extent 

practicable, in its discretion,’’ 

accomplish four specific objectives.745

Third, CEA section 4a(a)(2)(C) requires 

that in setting limits mandated under 

section 4a(a)(2)(A), the ‘‘Commission 

shall strive to ensure that trading on 

foreign boards of trade in the same 

commodity will be subject to 

comparable limits and that any limits 

. . . imposed . . . will not cause price 

discovery in the commodity to shift to 

trading on the foreign boards of trade.’’ 

Key elements of the proposed rule are 

summarized below.746

Generally, proposed § 150.2 would 

limit the size of speculative 

positions,747 i.e., prohibit any person 

from holding or controlling net long/

short positions above certain specified 

spot month, single month, and allmonths-combined position limits. These 

position limits would reach: (1) 28 ‘‘core 

referenced futures contracts,’’ 748

representing an expansion of 19 

contracts beyond the 9 legacy 

agricultural contracts identified 

currently in § 150.2; 749 (2) a newly 

defined category of ‘‘referenced 

contracts’’ (as defined in proposed 

§ 150.1); 750 and (3) across all trading 

venues to all economically equivalent 

contracts that are based on the same 

underlying commodity. 

a. § 150.2(a) Spot-Month Speculative 

Position Limits 

In order to implement the statutory 

directive in CEA section 4a(a)(3)(A), 

proposed § 150.2(a) would prohibit any 

person from holding or controlling 

positions in referenced contracts in the 

spot month in excess of the level 

specified by the Commission for 

referenced contracts.751 Proposed 

§ 150.2(a) would require, in the 

Commission’s discretion, that a trader’s 

positions, net long or net short, in the 

physical-delivery referenced contract 

and cash-settled referenced contract be 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75765 

752The Commission proposes to use the same 

level for single-month and all-months-combined 

limits, and refers to those limits as the ‘‘non-spotmonth limits.’’ The spot month and any single 

month refer to those periods of the core referenced 

futures contract. 

753As discussed above, the definition of 

referenced contract excludes any guarantee of a 

swap, basis contracts, and commodity index 

contracts. 

754 17 CFR 150.2. 

755See discussion above. 

756The guidance for meeting DCM core principle 

3 (as listed in 17 CFR part 38 app. C) specifies that, 

‘‘[t]he specified terms and conditions [of a futures 

contract], considered as a whole, should result in 

a ‘deliverable supply’ that is sufficient to ensure 

that the contract is not susceptible to price 

manipulation or distortion. In general, the term 

‘deliverable supply’ means the quantity of the 

commodity meeting the contract’s delivery 

specifications that reasonably can be expected to be 

readily available to short traders and salable by long 

traders at its market value in normal cash marketing 

channels . . .’’ See 77 FR 36612, 36722, Jun. 19, 

2012. 

757Proposed § 150.2(e)(3)(ii) would require DCMs 

to submit estimates of deliverable supply. DCM 

estimates of deliverable supplies (and the 

supporting data and analysis) would continue to be 

subject to Commission review. 

758Since 1999, the same 10 percent/2.5 percent 

methodology, now incorporated in current 

§ 150.5(c)(2), has been used to determine futures allmonths position limits for referenced contracts. 

calculated separately under the spot 

month position limits fixed by the 

Commission for each. As a result, a 

trader could hold positions up to the 

applicable spot month limit in the 

physical-delivery contracts, as well as 

positions up to the applicable spot 

month limit in cash-settled contracts 

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

but would not be able to net across 

physical-delivery and cash-settled 

contracts in the spot month. 

b. § 150.2(b) Single-Month and AllMonths-Combined Speculative Position 

Limits 

Proposed § 150.2(b) would provide 

that no person may hold or control 

positions, net long or net short, in 

referenced contracts in a single-month 

or in all-months-combined in excess of 

the levels specified by the Commission. 

Proposed § 150.2(b) would require 

netting all positions in referenced 

contracts (regardless of whether such 

referenced contracts are physicaldelivery or cash-settled) when 

calculating a trader’s positions for 

purposes of the proposed single-month 

or all-months-combined position limits 

(collectively ‘‘non-spot-month’’ 

limits).752

c. § 150.2(d) Core Referenced Futures 

Contracts 

To be clear, the statutory mandate in 

Dodd-Frank section 4a(a)(2) applies on 

its face to all physical commodity 

contracts. The Commission is 

nevertheless proposing, initially, to 

apply speculative position limits to 

referenced contracts that are based on 

28 core referenced futures contract 

listed in proposed § 150.2(d). As defined 

in proposed § 150.1, referenced 

contracts are futures, options, or swaps 

contracts that are directly or indirectly 

linked to a core referenced futures 

contract or the commodity underlying a 

core referenced futures contract.753

Proposed § 150.2(d) lists the 28 core 

referenced futures contracts on which 

the Commission is initially proposing to 

establish federal speculative position 

limits. The list represents a significant 

expansion of federal speculative 

position limits from the current list of 

nine agricultural contracts under 

current part 150.754 The Commission 

has selected these important food, 

energy, and metals contracts on the 

basis that such contracts (i) have high 

levels of open interest and significant 

notional value and/or (ii) serve as a 

reference price for a significant number 

of cash market transactions. Thus, the 

Commission is proposing limits to 

commence the expansion of its federal 

position limit regime with those 

commodity derivative contracts that it 

believes are likely to have the greatest 

impact on interstate commerce. Because 

the mandate applies to all physical 

commodity contracts, the Commission 

intends through supplemental 

rulemaking to establish limits for all 

other physical commodity contracts. 

Given limited Commission resources, it 

cannot do so in this initial rulemaking. 

As discussed above,755 the 

Commission calculated the notional 

value of open interest (delta-adjusted) 

and open interest (delta-adjusted) for all 

futures, futures options, and significant 

price discovery contracts as of 

December 31, 2012 in all agricultural 

and exempt commodities in order to 

select the list of 28 core referenced 

futures contracts in proposed § 150.2(d). 

The Commission selected commodities 

in which the derivative contracts had 

largest notional value of open interest 

and open interest for three categories: 

agricultural, energy, and metals. The 

Commission then designated the 

benchmark futures contracts for each 

commodity as the core referenced 

futures contracts for which position 

limits would be established. Proposed 

§ 150.2(d) lists 19 core referenced 

futures contracts for agricultural 

commodities, four core referenced 

futures contracts for energy 

commodities, and five core referenced 

futures contracts for metals 

commodities. 

d. § 150.2(e) Levels of Speculative 

Position Limits 

The Commission proposes setting 

initial spot month position limit levels 

for referenced contracts at the existing 

DCM-set levels for the core referenced 

futures contracts. Thereafter, proposed 

§ 150.2(e)(3) would task the Commission 

with recalibrating spot month position 

limit levels no less frequently than 

every two calendar years. The 

Commission’s proposed recalibration 

would result in limits no greater than 

one-quarter (25 percent) of the estimated 

spot-month deliverable supply 756 in the 

relevant core referenced futures 

contract. This formula is consistent with 

the acceptable practices in current 

§ 150.5, as well as the Commission’s 

longstanding practice of using this 

measure of deliverable supply to 

evaluate whether DCM-set spot-month 

limits are in compliance with DCM core 

principles 3 and 5. The proposed rules 

separately restrict the size of positions 

in cash-settled referenced contracts that 

would potentially benefit from a trader’s 

potential distortion of the price of the 

underlying core referenced futures 

contract. 

As proposed, each DCM would be 

required to supply the Commission with 

an estimated spot-month deliverable 

supply figure that the Commission 

would use to recalibrate spot-month 

position limits unless it decides to rely 

on its own estimate of deliverable 

supply instead.757

In contrast to spot-month limits, 

which would be set as a function of 

deliverable supply, the proposed 

formula for the non-spot-month position 

limits is based on total open interest for 

all referenced contracts that are 

aggregated with a particular core 

referenced contract. Proposed 

§ 150.2(e)(4) explains that the 

Commission would calculate non-spotmonth position limit levels based on the 

following formula: 10 percent of the 

largest annual average open interest for 

the first 25,000 contracts and 2.5 

percent of the open interest 

thereafter.758 As is the case with spot 

month limits, the Commission proposes 

to adjust single month and all-monthscombined limits no less frequently than 

every two calendar years. 

The Commission’s proposed average 

open interest calculation would be 

computed for each of the past two 

calendar years, using either month-end 

open contracts or open contracts for 

each business day in the time period, as 

practical and in the Commission’s 

discretion. Initially, the Commission 

proposes to set the levels of initial nonspot-month limits using open interest 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75766 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

759Options listed on DCMs would be adjusted 

using an option delta reported to the Commission 

pursuant to 17 CFR part 16; swaps would be 

counted on a futures equivalent basis, equal to the 

economically equivalent amount of core referenced 

futures contracts reported pursuant to 17 CFR part 

20 or as calculated by the Commission using swap 

data collected pursuant to 17 CFR part 45. 760See also the definition of the term ‘‘Preexisting position’’ incorporated in proposed § 150.1 

herein. Such pre-existing positions that are in 

excess of the proposed position limits would not 

cause the trader to be in violation based solely on 

those positions. To the extent a trader’s pre-existing 

positions would cause the trader to exceed the nonspot-month limit, the trader could not increase the 

directional position that caused the positions to 

exceed the limit until the trader reduces the 

positions to below the position limit. As such, 

persons who established a net position below the 

speculative limit prior to the enactment of a 

regulation would be permitted to acquire new 

positions, but the total size of the pre-existing and 

new positions may not exceed the applicable limit. 

761 7 U.S.C. 6a(a)(3)(A). 

762See discussion above. 763 7 U.S.C. 6a(a)(3)(A). 

for calendar years 2011 and 2012 in 

futures contracts, options thereon, and 

in swaps that are significant price 

discovery contracts and are traded on 

exempt commercial markets. Using the 

2011/2012 combined levels of open 

interest for futures contracts and for 

swaps that are significant price 

discovery contracts and are traded on 

exempt commercial markets will result 

in non-spot month position limit levels 

that are not overly restrictive at the 

outset; this is intended to facilitate the 

transition to the new position limits 

regime without disrupting liquidity. For 

example, the Commission is proposing 

a non-spot-month limit for CBOT Wheat 

that represents the harvest from around 

2 million acres (3,125 square miles) of 

wheat, or 81 million bushels. The 

proposed non-spot-month limit for 

NYMEX WTI Light Sweet Crude Oil 

represents 109.2 million barrels of oil. 

The Commission believes these levels to 

be sufficiently high as to restrict 

excessive speculation without 

restricting the benefits of speculative 

activity, including liquidity provision 

for bona fide hedgers. 

After the initial non-spot-month 

limits are set, the Commission proposes 

subsequently to use the data reported by 

DCMs and SEFs pursuant to parts 16, 

20, and/or 45 to estimate average open 

interest in referenced contracts.759

e. § 150.2(f)–(g) Pre-Existing Positions 

and Positions on Foreign Boards of 

Trade 

The Commission proposes in new 

§ 150.2(f)(2) to exempt from federal nonspot-month speculative position limits 

any referenced contract position 

acquired by a person in good faith prior 

to the effective date of such limit, 

provided that the pre-existing position 

is attributed to the person if such 

person’s position is increased after the 

effective date of such limit.760

Finally, proposed § 150.2(g) would 

apply position limits to positions on 

foreign boards of trade (‘‘FBOT’’s) 

provided that positions are held in 

referenced contracts that settle to a 

referenced contract and that the FBOT 

allows direct access to its trading system 

for participants located in the United 

States. 

ii. Benefits 

The criteria set out in CEA section 

4a(a)(3)(B)—namely, that position limit 

levels (1) ‘‘diminish, eliminate, or 

prevent excessive speculation;’’ (2) 

‘‘deter and prevent market 

manipulation, squeezes, and corners;’’ 

(3) ‘‘ensure sufficient market liquidity 

for bona fide hedgers;’’ and (4) ‘‘ensure 

that the price discovery function of the 

underlying market is not disrupted’’— 

clearly articulate objectives that 

Congress intended the Commission to 

accomplish, to the maximum extent 

practicable, in setting limit levels in 

accordance with the mandate to impose 

limits. The Commission is proposing to 

expand its speculative position limits 

regime to include all commodity 

derivative interests, including swaps; to 

impose federal limits on 19 additional 

contract markets; and to apply limits 

across trading venues to all 

economically equivalent contracts that 

are based on the same underlying 

commodity. 

In so doing, the proposed rules 

generally would expand the 

prophylactic protections of federal 

position limits to additional contract 

markets. Proposed § 150.2(f) and (g) 

implement statutory directives in CEA 

section 4a(b)(2) and CEA section 

4a(a)(6)(B), respectively, and are not acts 

of the Commission’s discretion. Thus, 

the Commission is not required to 

consider costs and benefits of these 

provisions under CEA section 15(a). 

Specific discussion of the benefits of the 

other components of proposed § 150.2 is 

below. 

a. § 150.2(a) Spot-Month Speculative 

Position Limits 

As discussed above, CEA section 

4a(a)(3)(A) now directs the Commission 

to set limits on speculative positions 

during the spot-month.761 It is during 

the spot-month period that concerns 

regarding certain manipulative 

behaviors, such as corners and squeezes, 

become most urgent.762 Spot-month 

position limits cap speculative traders’ 

positions, and therefore restrict their 

ability to amass market power. In so 

doing, spot-month limits restrict the 

ability of speculators to engage in 

corners and squeezes and other forms of 

manipulation. They also prevent the 

potential adverse impacts of unduly 

large positions even in the absence of 

manipulation, thereby promoting a more 

orderly liquidation process for each 

contract. 

The Commission has used its 

discretion in the manner in which it 

implements the statutorily-required 

spot-month position limits so as to 

achieve Congress’s objectives in CEA 

section 4a(a)(3)(B)(ii) to prevent or deter 

market manipulation, including corners 

and squeezes. For example, the 

Commission has used its discretion 

under CEA section 4a(a)(1) to set 

separate but equal limits in the spotmonth for physical-delivery and cashsettled referenced contracts. By setting 

separate limits for physical-delivery and 

cash-settled referenced contracts, the 

proposed rule restricts the size of the 

position a trader may hold or control in 

cash-settled reference contracts, thus 

reducing the incentive of a trader to 

manipulate the settlement of the 

physical-delivery contract in order to 

benefit positions in the cash-settled 

reference contract. Thus, the separate 

limits further enhance the prevention of 

market manipulation provided by spotmonth position limits by reducing the 

potential for adverse incentives to 

manifest in manipulative action. 

b. § 150.2(b) Single-Month and AllMonths-Combined Speculative Position 

Limits 

CEA section 4a(a)(3)(A) further directs 

the Commission to set limits on 

speculative positions for months other 

than the spot-month.763 While market 

disruptions arising from the 

concentration of positions remain a 

possibility outside the spot month, the 

above-mentioned concerns about 

corners and squeezes and other forms of 

manipulation are reduced because the 

potential for the same is reduced 

outside the spot-month. Accordingly, 

the Commission has proposed to use its 

discretion to require netting of physicaldelivery and cash-settled referenced 

contracts for purposes of determining 

compliance with non-spot-month limits. 

The Commission deems it is appropriate 

to provide traders with additional 

flexibility in complying with the nonspot-months limits given their 

decreased risk of corners and squeezes. 

Because this additional flexibility 

means market participants are able to 

retain offsetting positions outside of the 

spot-month, liquidity should not be 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75767 

764The Commission notes that the CME Group 

submitted an estimate of deliverable supply that, if 

used by the Commission as a base for setting initial 

levels of spot month limits, would result in higher 

spot month limits than those currently proposed in 

appendix D. See discussion above for more 

information. 

765To put this figure in context, over the same 

period the number of unique owners over at least 

one of the proposed limit levels in the 28 proposed 

markets was 384, while 932 unique owners were 

over 60 percent of at least one of the proposed limit 

levels. In contrast, under the large trader reporting 

provisions of part 17, there are thousands of traders 

with reportable positions as defined in § 15.00(p). 

766For example, a market participant has a 

position close to the spot-month limit in the 

NYMEX cash-settled crude oil contract is currently 

able to take the same size position in the ICE cashsettled crude oil contract. The proposed rule would, 

in accordance with the statutory requirement of 

CEA section 4a(a)(6), require that the positions on 

NYMEX and ICE be aggregated for the purposes of 

complying with the limit—effectively halving the 

limit. 

impaired and price discovery should 

not be disrupted. 

c. § 150.2(e) Levels of Speculative 

Position Limits 

The proposed methodology for 

determining the levels at which the 

limits are set is consistent with the 

Commission’s longstanding acceptable 

practices for DCM-set speculative 

position limits. Further, the 

Commission’s proposal to set initial 

spot-month limits at the current federal 

or DCM-set levels for each core 

referenced futures contract means that 

any trading activity that is compliant 

with the current position limits regime 

generally will continue to be compliant 

under the first two years of the proposed 

rule.764

The proposed rule is designed to 

result in speculative position limit 

levels that prevent excessive 

speculation and deter market 

manipulation without diminishing 

market liquidity. Specifically, levels 

that are too low may be binding and 

overly restrictive, but levels that are too 

high may not adequately protect against 

manipulation and excessive 

speculation. The Commission believes 

that both standards—i.e., spot month 

limits of not greater than 25 percent of 

deliverable supply and the 10 and 2.5 

percent formula for non-spot-month 

limits—produce levels for speculative 

position limits that help to ensure that 

both policy objectives—to deter market 

manipulation and excessively large 

speculative positions and to maintain 

adequate market liquidity—are achieved 

to the maximum extent practicable. 

The Commission’s review of the 

number of potentially affected traders 

indicates that the proposed rule will not 

significantly affect market liquidity. 

Over the last two full years (2011–2012), 

an average of fewer than 40 traders in 

any one of the 28 proposed markets 

exceeded just 60 percent of the level of 

the proposed spot-month position limit. 

An average of fewer than 10 of those 

traders exceeded 100 percent of the 

proposed level of the spot-month 

limit.765 In several months over the 

period, no trader exceeded the proposed 

level of the spot-month limits and some 

months saw a much larger number of 

traders with positions in excess of the 

proposed level of the spot-month limits. 

Smaller numbers were revealed when 

observing traders’ positions in relation 

to proposed levels for non-spot-month 

position limits—an average of fewer 

than 10 traders exceeded 60 percent of 

the proposed all-months-combined 

limit. The analysis reviewed by the 

Commission does not account for 

hedging and other exemptions, which 

leads the Commission to believe that the 

number of speculative traders in excess 

of the proposed limit is even smaller. 

The relatively low number of traders 

that may exceed proposed limits in nonspot-months is indicative of the 

flexibility of the limit formula to 

account for changes in market 

participation. 

d. Request for Comment 

The Commission welcomes comment 

on its considerations of the benefits of 

proposed § 150.2. What other benefits of 

the provisions in § 150.2 should the 

Commission consider? Has the 

Commission accurately identified the 

potential benefits of the proposed rules? 

iii. Costs 

The expansion of § 150.2 will 

necessarily create some additional 

compliance costs for market 

participants. The Commission has 

attempted, where feasible, to reduce 

such burdens without compromising its 

policy objectives. 

a. § 150.2(a)–(b) Spot-Month, SingleMonths, and All-Months-Combined 

Speculative Position Limits; Other 

Considerations 

Notwithstanding the above analysis of 

potentially affected traders, the 

Commission anticipates that some 

market participants still may find it 

necessary to reassess and modify 

existing trading strategies in order to 

comply with spot- and non-spot-month 

position limits for the 28 commodities 

with applicable federal limits, though 

the Commission believes much of these 

costs to be the direct result of the 

statutory mandate to impose limits. The 

Commission anticipates any such costs 

would be largely incurred by swapsonly entities, as futures and options 

market participants have experience 

with position limits, particularly in the 

spot-month, such that the costs of any 

strategic or trading changes that needed 

to be made may have already been 

incurred. These costs are not reasonably 

quantifiable by the Commission, due to 

their highly variable and entity-specific 

nature, and because trading strategies 

are proprietary, but to the extent an 

expanded position limits regime alters 

the ways a trader conducts speculative 

trading activity, such costs may be 

incurred. 

Broadly speaking, imposing position 

limits raises the concerns that liquidity 

and price discovery may be diminished, 

because certain market segments, i.e., 

speculative traders, are restricted. The 

Commission has endeavored to mitigate 

concerns about liquidity and price 

discovery, as well as costs to market 

participants, by expanding limits to 

additional markets incrementally in 

order to facilitate the transition to the 

expanded position limits regime. For 

example, the Commission has proposed 

to adopt current spot-month limit levels 

as the initial levels in order to ensure 

traders know well in advance of the 

effective date of the rule what limits 

will be on that date. The Commission 

also expects a large number of swaps 

traders to avail themselves of the preexisting position exemption as defined 

in proposed § 150.3. As preexisting 

positions are replaced with new 

positions, traders will be able to 

incorporate an understanding of the 

new regime into existing and new 

trading strategies, which allows the 

burden of altering strategies to happen 

incrementally over time. The 

preexisting position exemption applies 

to non-spot-month positions entered 

into in good faith prior to (i) the 

enactment of the Dodd-Frank Act or (ii) 

the effective date of this proposed rule. 

Implementing the statutory 

requirement of CEA section 4a(a)(6), the 

aggregate limits proposed in § 150.2 

would impact, as described above, 

market participants who are active 

across trading venues in economically 

equivalent contracts. Under current 

practice, speculative traders may hold 

positions up to the limit in each 

derivative product for which a limit 

exists. In contrast, aggregate limits cap 

all of a speculative market participant’s 

positions in derivatives contracts for a 

particular commodity. In some 

circumstances, the aggregate limit will 

prevent traders from entering into 

positions that would have otherwise 

been permitted without aggregate 

limits.766 The proposed rule 

incorporates features that provide 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75768 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

767The Commission’s estimates concerning the 

wage rates are based on 2011 salary information for 

the securities industry compiled by the Securities 

Industry and Financial Markets Association 

(‘‘SIFMA’’). The Commission is using $120 per 

hour, which is derived from a weighted average of 

salaries across different professions from the SIFMA 

Report on Management & Professional Earnings in 

the Securities Industry 2011, modified to account 

for an 1800-hour work-year, adjusted to account for 

the average rate of inflation in 2012, and multiplied 

by 1.33 to account for benefits and 1.5 to account 

for overhead and administrative expenses. The 

Commission anticipates that compliance with the 

provisions would require the work of an 

information technology professional; a compliance 

manager; an accounting professional; and an 

associate general counsel. Thus, the wage rate is a 

weighted national average of salary for 

professionals with the following titles (and their 

relative weight); ‘‘programmer (senior)’’ and 

‘‘programmer (non-senior)’’ (15% weight), ‘‘senior 

accountant’’ (15%) ‘‘compliance manager’’ (30%), 

and ‘‘assistant/associate general counsel’’ (40%). 

All monetary estimates have been rounded to the 

nearest hundred dollars. 

768The Commission notes that costs associated 

with the inclusion of swaps contracts in the federal 

position limits regime are the direct result of 

changes made by the Dodd-Frank Act to section 4a 

of the Act. The Commission presents a discussion 

of these costs in order to be transparent regarding 

the effects of the proposed rules. 

769See 17 CFR 23.601. 

770See 76 FR at 71667. The presentation of costs 

on a five-year annualized basis is consistent with 

requirements under the Paperwork Reduction Act 

(‘‘PRA’’). See OMB Form 83–I requiring the 

Commission’s Paperwork Reduction Act analysis be 

submitted with ‘‘annualized’’ costs in all categories. 

Instructions for the form do not provide 

instructions for annualizing costs; the Commission 

chose to annualize over a five year period. 

771 Id. (n. 401). 772 Id. 

counterbalancing opportunities for 

speculative trading. 

First, the limits apply separately to 

physical-delivery and cash-settled 

contracts in the spot-month. Physicaldelivery core referenced futures 

contracts have one limit; cash-settled 

reference contracts traded on the same 

exchange, a different exchange, or overthe-counter have a separate, but equal, 

limit. Therefore, a speculative trader 

may hold positions up to the spot 

month limit in both the physicaldelivery core referenced futures 

contract, and a cash-settled contract 

(i.e., cash-settled future and/or swap). 

The second feature is the proposed 

conditional spot-month limit 

exemption. As discussed in a 

subsequent section of this release, the 

conditional spot-month limit exemption 

allows a speculative trader to hold a 

position in a cash-settled contract that is 

up to five times the spot-month limit of 

the core referenced futures contract, 

provided that trader does not hold any 

position in the physical-delivery core 

referenced futures contract. 

Finally, federal non-spot-month limits 

are calculated as a fixed ratio of total 

open interest in a particular commodity 

across all markets for referenced 

contracts. Because of this feature of the 

Commission’s formula for calculating 

non-spot-month limit levels and of the 

proposed rule’s application of non-spotmonth limits on an aggregate basis 

across all markets, the imposition of the 

required aggregate limits should not 

unduly impact positions outside of the 

spot-month, as evidenced by the 

relatively few number of traders that 

would have been impacted historically, 

noted in table 11, supra. 

b. § 150.2(e) Levels of Speculative 

Position Limits 

Market participants would incur costs 

to monitor positions to prevent a 

violation of the limit level. The 

Commission expects that large traders in 

the futures and options markets for the 

28 core referenced futures contracts 

have already developed some system to 

control the size of their positions on an 

intraday basis, in compliance with the 

longstanding position limits regimes 

utilized by both the Commission on a 

federal level and DCMs on an exchange 

level and in light of industry practices 

to measure, monitor, and control the 

risk of positions. For these traders, the 

Commission anticipates a small 

incremental burden to accommodate 

any physical commodity swap positions 

that such traders may hold that would 

become subject to the position limits 

regime. The Commission, subject to 

evidence establishing the contrary, 

believes the burden will be minimal 

because futures and options market 

participants are currently monitoring 

trading to track, among other things, 

their positions vis-a`-vis current limit 

levels. For those participating in the 

futures and options markets, the 

Commission estimates two to three labor 

weeks to adjust monitoring systems to 

track position limits for referenced 

contracts, including swaps and other 

economically equivalent contracts 

traded on other trading venues. 

Assuming an hourly wage of $120,767

multiplied by 120 hours, this 

implementation cost would amount to 

approximately $14,000 per entity. 

The incremental costs of compliance 

with the proposed rule would be higher 

for speculative traders who have until 

now traded only or primarily in swap 

contracts.768 Specifically, swaps-only 

traders may potentially incur larger 

start-up costs to develop a compliance 

system to monitor their positions in 

referenced contracts and to comply with 

an applicable position limit. Though 

swaps-only market participants have not 

historically been subject to position 

limits, swap dealers and major swap 

participants (as defined by the 

Commission pursuant to the DoddFrank Act) are required in § 23.601 to 

implement systems to monitor position 

limits.769 In addition, many of these 

entities have already developed systems 

or business processes to monitor or 

control the size of swap positions for a 

variety of business reasons, including (i) 

managing counterparty credit risk 

exposure; and (ii) limiting and 

monitoring the risk exposure to such 

swap positions. Such existing systems 

would likely make compliance with 

position limits significantly less 

burdensome, as they may be able to 

leverage current monitoring procedures 

to comply with this rule. The 

Commission anticipates that a firm 

could select from a wide range of 

compliance systems to implement a 

monitoring regime. This flexibility 

allows the firm to tailor the system to 

suit its specific needs in a cost-effective 

manner. 

In the release adopting now-vacated 

part 151, the Commission recognized 

the potentially firm-specific and highly 

variable nature of implementing 

monitoring systems. In particular, the 

Commission presented estimates of, on 

average, labor costs per entity ranging 

from 40 to 1,000 hours, $5,000 to 

$100,000 in five-year annualized 

capital/start-up costs, and $1,000 to 

$20,000 in annual operating and 

maintenance costs.770 The Commission 

explained that costs would likely be 

lower for firms with positions far below 

the speculative limits, but higher for 

firms with large or complex positions as 

those firms may need comprehensive, 

real-time analysis.771 The Commission 

further explained that due to the 

variation in both number of positions 

held and degree of sophistication in 

existing risk management systems, it 

was not feasible for the Commission to 

provide a greater degree of specificity as 

to the particularized costs for swaps 

firms.772

At this time, the Commission remains 

in the early stages of implementing the 

suite of Dodd-Frank Act regulations 

addressing swap markets now under its 

jurisdiction. The Commission is 

registering swap dealers and major 

swaps participants for the first time. 

Much of the infrastructure, including 

execution facilities, of the new markets 

has only recently become operational, 

and the collection of comprehensive 

regulatory data on physical commodity 

swaps is in its infancy. Because of this, 

the Commission is unable to estimate 

with precision the likely number of 

impacted swaps-only traders who 

would be subject to position limits for 

the first time. However, the Commission 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75769 

774For example, an operator of a commodity pool 

or certain other trading vehicle, a commodity 

trading advisor, or another specified financial entity 

such as a bank, trust company, savings association, 

or insurance company. 775 IACs are defined currently in 17 CFR 150.1(e). 

Amendments to that definition are being proposed 

in a separate release. See Aggregation NPRM. 776Specifically, as described above: a) proposed 

§ 150.3(a)(1)(i) would update the cross-references to 

the bona fide hedging definition to reflect its 

proposed replacement in amended § 150.1 from its 

current location in § 1.3(z); b) proposed § 150.3(a)(3) 

would add a new cross-reference to the reporting 

requirements proposed to be amended in part 19; 

and c) proposed § 150.3(i) would add a crossreference to the updated aggregation rules in 

proposed § 150.4. 

777See Aggregation NPRM. The exemption for 

accounts carried by an IAC is set out in proposed 

§ 150.4(b)(5); adoption of that proposal would 

render current § 150.3(a)(4) duplicative. 

778More specifically, as discussed supra, the 

Commission proposes to amend § 150.2 to increase 

the level of single month position limits to the same 

level as all months limits. As a result, the spread 

exemption set forth in current § 150.3(a)(3) that 

permits a spread trader to exceed single month 

limits only to the extent of the all months limit 

would no longer provide useful relief. 

preliminarily believes that a relatively 

small number of swaps-only traders will 

be affected. The Commission anticipates 

that most of the traders in swaps 

markets that accumulate physical 

commodity swap positions of a 

sufficiently high volume to engender 

concern for crossing position limit 

thresholds either: Are required to 

register as swap dealers or major swaps 

participants and as such already have 

systems in place to monitor limits in 

accordance with § 23.601; or, are also 

active in futures markets and as such 

have the ability to leverage existing 

strategies for monitoring limits. 

Accordingly, for purposes of 

proposing these amendments to § 150.2, 

the Commission again estimates that 

swaps entities will incur, on average, 

labor costs per entity ranging from 40 to 

1,000 hours; between $25,000 and 

$500,000 in total (non-annualized) 

capital/start-up costs and $1,000 to 

$20,000 in annual operating and 

maintenance costs. These estimates 

provide a preliminary range of costs for 

monitoring positions that reflects, on 

average, costs that market participants 

may incur based on their specific, 

individualized needs. 

Finally, proposed § 150.2(e)(3)(ii) 

requires DCMs that list a core referenced 

futures contract to supply to the 

Commission estimates of deliverable 

supply. The Commission proposes to 

require staggered submission of the 

deliverable supply estimates in order to 

spread out the administrative burden of 

the proposed rules. Further, for 

contracts with DCM-set limits, an 

exchange would have already estimated 

deliverable supply in order to set spotmonth position limit or demonstrate 

continued compliance with core 

principles 3 and 5. Thus, the 

Commission does not anticipate a large 

burden to result from the proposed 

§ 150.2(e)(3)(ii). The Commission 

preliminarily believes that, as estimated 

in accordance with the Paperwork 

Reduction Act (‘‘PRA’’), the submission 

would require a labor burden of 

approximately 20 hours per estimate. 

Thus, a DCM that submits one estimate 

may incur a burden of 20 hours for a 

cost, using the estimated hourly wage of 

$120,773 of approximately $2,400. DCMs 

that submit more than one estimate may 

multiply this per-estimate burden by the 

number of estimates submitted to obtain 

an approximate total burden for all 

submissions, subject to any efficiencies 

and economies of scale that may result 

from submitting multiple estimates. 

c. Request for Comment 

Do the estimates presented accurately 

reflect the expected costs of monitoring 

position limits under the proposed rule? 

Would the proposed rule engender 

material costs for monitoring positions 

addition to those the Commission has 

identified? Are the assumptions 

reflected in the Commission’s 

consideration of the proposed rule’s 

costs to monitor limits valid? If not, why 

and to what degree? 

Is the Commission’s view that 

aggregate limits as proposed will not 

create overly restrictive limit levels 

valid? Would the aggregated, crossexchange nature of the limits as 

proposed in § 150.2 engender material 

costs that the Commission has not 

identified? 

Are there other cost factors related to 

operational changes that the 

Commission should consider? What 

other factors should the Commission 

consider? 

The Commission requests that 

commenters submit data or other 

information to assist it in quantifying 

anticipated costs of proposed § 150.2 

and to support their own assertions 

concerning costs associated with 

proposed § 150.2. 

iv. Consideration of Alternatives 

The Commission recognizes there 

exist alternatives to its discretionary 

proposals herein. These include the 

alternative of setting initial levels for 

spot month speculative position limit 

based on estimates of deliverable 

supply, as provided by the CME Group, 

rather than at the levels proposed in 

appendix D. The Commission requests 

comment on whether an alternative to 

what is proposed, including setting 

initial limits based on a current estimate 

of deliverable supply, would result in a 

superior benefit-cost profile, with 

support for any such position provided. 

4. Section 150.3—Exemptions 

CEA section 4a(a)(7), added by the 

Dodd-Frank Act, authorizes the 

Commission to exempt, conditionally or 

unconditionally, any person, swap, 

futures contract, or option—as well as 

any class of the same—from the position 

limit requirements that the Commission 

establishes. Current § 150.3 specifies 

three types of positions for exemption 

from calculation against the federal 

limits prescribed by the Commission 

under § 150.2: (1) Bona fide hedges, (2) 

spreads or arbitrage between single 

months of a futures contract (and/or, on 

a futures-equivalent basis, options), and 

(3) those of an ‘‘eligible entity’’ as that 

term is defined in § 150.1(d) 774 carried 

in a separate account by an independent 

account controller (‘‘IAC’’) 775 when 

specific conditions are met. The 

Commission proposes to make 

organizational and conforming changes 

to § 150.3 as well as several substantive 

changes. By exempting positions that 

pose less risk of unduly burdening 

interstate commerce from position limit 

regulation, these substantive revisions 

would further the Commission’s 

mission specified in CEA section 

4a(a)(3). 

The proposed organizational/

conforming changes consist of updating 

cross references; 776 relocating the IAC 

exemption to consolidate it with the 

Commission’s separate proposal to 

amend the aggregation requirements of 

§ 150.4; 777 and deleting the calendar 

month spread provision that, due to 

changes proposed under § 150.2, would 

be rendered unnecessary.778 These 

amendments will facilitate reader easeof-use and clarity. However, the 

Commission foresees little additional 

impact from these non-substantive 

proposed amendments. 

The proposed substantive changes to 

§ 150.3 would revise an existing 

exemption, add three additional 

exemptions, and revise recordkeeping 

requirements. As summarized in the 

section below, proposed § 150.3 would: 

(i) Codify in Commission regulation the 

statutory requirement of CEA section 

4a(c)(1) that federal position limits not 

apply to bona fide hedging as defined by 

the Commission; (ii) add exemptions for 

financial distress situations, certain 

spot-month positions in cash-settled 

reference contracts, and pre-Dodd-Frank 

and transition period swaps; (iii) 

provide guidance for non-enumerated 

exemptions, including the deletion of 

§ 1.47; and (iv) revise recordkeeping 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75770 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

779See discussion above. 

780See 76 FR at 71635 (n. 100–01). 

781See discussion above. 

782Traders participating in the physical-delivery 

contract in the spot month are understood to have 

a commercial reason or need to stay in the spot 

month; the Commission preliminarily believes at 

this time that it is unlikely that the factors keeping 

traders in the spot month physical-delivery contract 

will change due solely to the introduction of a 

higher cash-settled contract limit. 

783CEA section 4a(b)(2) states in part that ‘‘any 

position limit fixed by the Commission . . . good 

faith prior to the effective date of such rule, 

regulation or order.’’ 7 U.S.C. 6a(b)(2). 

requirements for traders claiming any 

exemption from the federal speculative 

position limits. 

i. Rule Summary 

a. Section 150.3(a) Bona Fide Hedging 

Exemption 

As does current § 150.3(a)(1), 

proposed § 150.3(a)(1)(i) will codify the 

statutory requirement that bona fide 

hedging positions be exempt from 

federal position limits. To the extent 

that benefits and costs would derive 

from the Commission’s proposed 

amendment in § 150.1 to the definition 

of ‘‘bona fide hedging position’’ that is 

discussed above. This proposed 

amendment would also require that the 

anticipatory hedging requirements 

proposed in § 150.7, the recordkeeping 

requirements proposed in § 150.3(g), 

and the reporting requirements in 

proposed part 19 are met in order to 

claim the exemption. Any benefits and 

costs attributable to these features of the 

rule are considered below in the 

respective discussions of proposed 

§ 150.7, § 150.3(g) and Part 19. 

b. Section 150.3(b) Financial Distress 

Exemption 

Proposed § 150.3(b) provides the 

means for market participants to request 

relief from applicable speculative 

position limits during times of market 

stress. The proposed rule allows for 

exemption under certain financial 

distress circumstances, including the 

default of a customer, affiliate, or 

acquisition target of the requesting 

entity, that may require an entity to 

assume in short order the positions of 

another entity. 

c. Section 150.3(c) Conditional SpotMonth Limit Exemption 

Proposed § 150.3(c) would provide a 

conditional spot-month limit exemption 

that permits traders to acquire positions 

up to five times the spot month limit if 

such positions are exclusively in cashsettled contracts. The conditional 

exemption would not be available to 

traders who hold or control positions in 

the spot-month physical-delivery 

referenced contract in order to reduce 

the risk that traders with large positions 

in cash-settled contracts would attempt 

to distort the physical-delivery price to 

benefit such positions. 

The proposed conditional exemption 

is consistent with current exchange-set 

position limits on certain cash-settled 

natural gas futures and swaps.779 Both 

NYMEX and ICE have established 

conditional spot month limits in their 

cash-settled natural gas contracts at a 

level five times the level of the spot 

month limit in the physical-delivery 

futures contract. Since spot-month limit 

levels for referenced contracts will be 

set at no greater than 25 percent of the 

estimated deliverable supply in the 

relevant core referenced futures 

contract, the proposed exemption would 

allow a speculative trader to hold or 

control positions in cash-settled 

referenced contracts equal to no greater 

than 125 percent of the spot month 

limit. 

Historically, the Commission has been 

particularly concerned about protecting 

the spot month in physical-delivery 

futures contracts because they are most 

at risk for corners and squeezes. This 

acute risk is the reason that speculative 

limits in physical-delivery markets are 

generally set more restrictively during 

the spot month. The conditional 

exemption, as proposed, would 

constrain the potential for manipulative 

or disruptive activity in the physicaldelivery contracts during the spot 

month by capping speculative trading in 

such contracts; however, in parallel 

cash-settled contracts, where the 

potential for manipulative or disruptive 

activity is much lower, the conditional 

exemption would broaden speculative 

trading opportunity, potentially 

providing additional liquidity for bona 

fide hedgers in cash-settled contracts. 

In proposing the conditional limit, the 

Commission has examined market data 

on the effectiveness of conditional spotmonth limits in natural gas markets, 

including the data submitted as part of 

the rulemaking for now-vacated part 

151.780 The Commission has also 

examined market data in other 

contracts, and has observed that open 

interest levels naturally decline in the 

physical-delivery contract leading up to 

and during the spot month, as the 

contract approaches expiration.781 Both 

hedgers and speculators exit the 

physical-delivery contract in order to, 

for example, roll their positions to the 

next contract month or avoid delivery 

obligations. Market participants in cashsettled contracts, however, tend to hold 

their positions through to expiration. 

This market behavior suggests that the 

conditional spot-month limit exemption 

should not affect liquidity in the spot 

month of the physical-delivery contract, 

as open interest is rapidly declining.782

The exemption, would, however, 

provide the opportunity for speculative 

trading to increase in the cash-settled 

contract. The Commission preliminarily 

believes that while this proposed 

exemption would remove certain 

constraints from speculative trading in 

cash-settled contracts, it would not 

damage liquidity in the aggregate, i.e., 

across physical-delivery and cashsettled contracts in the same 

commodity. On this basis, the 

Commission preliminarily believes a 

conditional limit in additional 

commodities is consistent with the 

statutory direction to deter 

manipulation while ensuring sufficient 

liquidity for bona fide hedgers without 

disrupting the price discovery process. 

The Commission’s current proposal 

would not restrict a trader’s cash 

commodity position. Instead, the 

Commission proposes to require 

enhanced reporting of cash market 

positions of traders availing themselves 

of the conditional spot-month limit. As 

discussed in the proposed changes to 

part 19, the Commission proposes to 

initially require this enhanced reporting 

only for the natural gas contract until it 

gains more experience administering the 

conditional spot month limit in the 

other referenced contracts. The 

Commission preliminarily believes that 

the proposed reporting regime in natural 

gas will provide useful information that 

can be deployed by surveillance staff to 

detect and potentially deter 

manipulative schemes involving the 

cash market. 

d. Section 150.3(d) Pre-Enactment and 

Transition Period Swaps Exemption 

To implement the statutory 

requirement of CEA section 4a(b)(2),783

proposed § 150.3(d) would provide an 

exemption from federal position limits 

for swaps entered into prior to July 21, 

2010 (the date of the enactment of the 

Dodd-Frank Act), the terms of which 

have not expired as of that date, and for 

swaps entered into during the period 

commencing July 22, 2010, the terms of 

which have not expired as of that date, 

and ending 60 days after the publication 

of final rule § 150.3 in the Federal 

Register, i.e., its effective date. The 

Commission would allow both preenactment and transition swaps to be 

netted with commodity derivative 

contracts acquired more than 60 days 

after publication of final rule § 150.3 in 

the Federal Register for the purpose of 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75771 

784Because of concerns regarding manipulation 

during the delivery period of a referenced contract, 

the proposed rule would not allow pre- and postenactment and transition swaps to be netted for the 

purpose of complying with any spot-month position 

limit. 

785 17 CFR 140.99 defines three types of staff 

letters—exemptive letters, no-action letters, and 

interpretative letters—that differ in terms of scope 

and effect. An interpretative letter is written advice 

or guidance by the staff of a division of the 

Commission or its Office of the General Counsel. It 

binds only the staff of the division that issued it (or 

the Office of the General Counsel, as the case may 

be), and third-parties may rely upon it as the 

interpretation of that staff. 

786See supra discussion of CEA section 4a(a)(7). 787 77 FR 66288, Nov. 2, 2012. 

complying with any non-spot-month 

position limit.784 This exemption 

facilitates the transition to full position 

limits compliance for previously 

unregulated swaps markets. Allowing 

netting with pre-enactment and 

transition swaps provides flexibility 

where possible in order to lessen the 

impact of the regime on entities that 

trade swaps. 

e. Section 150.3(e) and (f) Other 

Exemptions and Previously Granted 

Exemptions 

Proposed § 150.3(e) and (f) provide 

information on other exemptive relief 

not specified by other sections of 

§ 150.3. The Commission previously 

permitted a person to file an application 

seeking approval for a non-enumerated 

position to be recognized as a bona fide 

hedging position under § 1.47. Though 

the Commission is proposing to delete 

§ 1.47, the Commission believes it is 

appropriate to provide persons the 

opportunity to seek exemptive relief. 

Proposed § 150.3(e) provides guidance 

to persons seeking exemptive relief. A 

person engaged in risk-reducing 

practices that are not enumerated in the 

revised definition of bona fide hedging 

in proposed § 150.1 may use two 

different avenues to apply to the 

Commission for relief from federal 

position limits. The person may request 

an interpretative letter from 

Commission staff pursuant to 

§ 140.99 785 concerning the applicability 

of the bona fide hedging position 

exemption, or may seek exemptive relief 

from the Commission under section 

4a(a)(7) of the Act.786

f. Section 150.3(g) and (h) 

Recordkeeping 

Proposed § 150.3(g)(1) specifies 

recordkeeping requirements for persons 

who claim any exemption set forth in 

proposed § 150.3. Persons claiming 

exemptions under § 150.3 would need 

to maintain complete books and records 

concerning all details of their related 

cash, forward, futures, options and swap 

positions and transactions. Proposed 

§ 150.3(g)(1) is largely duplicative of 

other recordkeeping obligations 

imposed on market participants, 

including provisions in § 1.35 and 

§ 18.05 as amended by the Commission 

to conform with the Dodd-Frank Act.787

Proposed § 150.3(g)(2) require persons 

seeking to rely upon the pass-through 

swap offset exemption to obtain a 

representation from its counterparty that 

the swap qualifies as a bona fide 

hedging position and to retain this 

representation on file. Similarly, 

proposed § 150.3(g)(3) requires a person 

who makes such a representation to 

maintain records supporting the 

representation. Under proposed 

§ 150.3(h), all persons would need to 

make such books and records available 

to the Commission upon request, which 

would preserve the ‘‘call for 

information’’ rule set forth in current 

§ 150.3(b). 

ii. Benefits 

In articulating exemptions from 

position limit requirements, § 150.3 

works in concert with § 150.2 as it 

pertains to Commission-specified 

federal limits and with certain 

requirements of § 150.5 pertaining to 

exchange-set position limits. 

Functioning as an integrated component 

within the broader position-limits 

regulatory regime, the Commission 

believes the proposed changes to § 150.3 

accomplish, to the maximum extent 

practicable, the four objectives outlined 

in CEA section 4a(a)(3). As such, the 

Commission perceives these proposed 

amendments to offer significant 

benefits. These are explained more 

specifically below. 

a. Section 150.3(b) Financial Distress 

Exemption 

In codifying the Commission’s 

historical practice of temporarily lifting 

position limit restrictions, the proposed 

rule further strengthens the benefits of 

accommodating transfers of positions 

from financially distressed firms to 

financially secure firms or facilitating 

other necessary remediation measures 

during times of market stress. More 

specifically, due to the improved facility 

and transparency with respect to the 

availability of this exemption, it 

becomes less likely that positions will 

be prematurely or unnecessarily 

liquidated. The disorderly liquidation of 

a position poses the threat of price 

impacts that may harm the efficiency as 

well as the price discovery function of 

markets. In addition, the availability of 

a financial distress exemption provides 

market participants with a degree of 

confidence that the Commission has the 

appropriate tools to facilitate the 

transfer of positions expeditiously in 

times of market uncertainty. 

b. Section 150.3(c) Conditional Spotmonth Limit Exemption 

The conditional spot-month limit 

exemption provides speculators with an 

opportunity to maintain relatively large 

positions in cash-settled contracts up to 

but no greater than 125 percent of the 

spot-month limit. By prohibiting 

speculators using the exemption in the 

cash-settled contract from trading in the 

spot-month of the physical-delivery 

contract, the proposed rules should 

further protect the delivery and 

settlement process. In addition, the 

condition of the exemption—i.e., a 

trader availing himself of the exemption 

may not have any position in the 

physical-delivery contract—reduces the 

ability for a trader with a large cashsettled contract position to attempt to 

manipulate the physical-delivery 

contract price in order to benefit his 

position. As such, the conditional spotmonth limit exemption would further 

three of the goals under CEA section 

4a(a)(3)—deterring market 

manipulation, and ensuring sufficient 

market liquidity for bona fide hedgers, 

without disrupting the price discovery 

process. 

The proposed rules are specifically 

intended to provide an alternate 

structure to the one that is currently in 

place that also meets the objectives to 

deter and prevent manipulation and to 

ensure sufficient market liquidity. In 

this way, the conditional limit 

exemption provides flexibility for 

market participants and the Commission 

to meet the objectives outlined in CEA 

section 4a(a)(3). The Commission 

expects that market participants will 

respond to the flexibility afforded by the 

proposed exemption in order to fulfill 

their needs in a manner that is 

consistent with their business interests, 

although it cannot reasonably predict 

how markets, DCMs and market 

participants will adapt. Accordingly, the 

Commission requests comment on this 

exemption, its potential impacts on 

trading strategies, competition, and any 

other direct or indirect costs to markets 

or market participants and exchanges 

that could arise as a result of the 

conditional spot-month limit 

exemption. 

c. Section 150.3(d) Pre-Enactment and 

Transition Period Swaps Exemption 

The pre-existing swaps exemption in 

proposed § 150.3(d) is consistent with 

CEA section 4a(b)(2). This exemption 

facilitates the transition to full position 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75772 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

788See supra considerations of costs and benefits 

of the proposed amendments to part 19 and the 

Paperwork Reduction Act. 

789Specific costs associated with filing Form 504 

are considered above in the sections that implement 

that form, namely the discussion of the costs and 

benefits of proposed amendments to part 19 and the 

Paperwork Reduction Act . 

limits compliance for previously 

unregulated swaps markets. Allowing 

netting with post-enactment swaps 

outside of the spot-month provides 

flexibility where possible in order to 

lessen the impact of the regime on 

entities that trade swaps. 

d. Section 150.3(e)–(f) Other 

Exemptions and Previously Granted 

Exemptions 

The proposed amendments to 

§ 150.3(e) and the replacement of 

existing § 1.47 with new proposed 

§ 150.3(f) are essentially clarifying and 

organizational in nature. As such they 

will confer limited substantive benefits 

beyond providing market participants 

with clarity regarding the process for 

obtaining non-enumerated exemptive 

relief and promoting regulatory 

certainty for those granted exemptions 

pursuant to § 1.47. 

e. Section 150.3(g) Recordkeeping 

By requiring that market participants 

who avail themselves of the exemptions 

offered under § 150.3 maintain certain 

records to document their exemption 

eligibility and make such records 

available to the Commission on request, 

the rule reinforces proposed § 150.2 and 

§ 150.3 and helps to accomplish, to the 

maximum extent practicable, the goals 

set out in CEA section 4a(a)(3)(B). 

Supporting books and records are 

critical to the Commission’s ability to 

effectively monitor compliance with 

exemption eligibility standards each 

and every time an exemption is 

employed. Absent this ability, 

exemptions are more susceptible to 

abuse. This susceptibility increases the 

potential that position limits function in 

a diminished capacity than intended to 

prevent excessive speculation and/or 

market manipulation. 

f. Request for Comment 

The Commission requests comments 

on its considerations of the benefits 

associated with the proposed 

amendments to § 150.3, including data 

or other information to assist the 

Commission in identifying the number 

and type of market participants that will 

realize, respectively, the benefits 

identified and/or to monetize such 

benefits. Has the Commission correctly 

identified market behavior and 

incentives that affect or would likely be 

affected by the conditional spot-month 

limit exemption? What other potential 

benefits could the conditional spotmonth limit exemption have for markets 

and/or market participants? Will the 

exemptions proposed likely result in 

any benefits, direct or indirect, for 

markets and/or market participants in 

addition to those that the Commission 

has identified? If so, what, and why and 

how will they result? Has the 

Commission misidentified or 

overestimated any benefits likely to 

result from the proposed exemptions? If 

so, which and/or to what extent? 

iii. Costs 

In general, the exemptions proposed 

in § 150.3 do not increase the costs of 

complying with position limits, and in 

fact may decrease these costs by 

providing for relief from speculative 

limits in certain situations. The 

exemptions are elective, so no entity is 

required to assert an exemption if it 

determines the costs of doing so do not 

justify the potential benefit resulting 

from the exemption. Thus, the 

Commission does not anticipate the 

costs of obtaining any of the exemptions 

to be overly burdensome. Nor does the 

Commission anticipate the costs would 

be so great as to discourage entities from 

utilizing available exemptions, as 

applicable. 

Potential costs attendant to the 

proposed amendments to § 150.3 are 

discussed specifically below. 

a. Section 150.3(b) Financial Distress 

Exemption 

The Commission anticipates the costs 

associated with the codification of the 

financial distress exemption to be 

minimal. Market participants who 

voluntarily employ these exemptions 

will incur costs stemming from the 

requisite filing and recordkeeping 

obligations that attend the 

exemptions.788 Along with performing 

its due diligence to acquire a distressed 

firm, or positions held or controlled by 

a distressed firm, an entity would have 

to update and submit to the Commission 

a request for the financial distress 

exemption. The Commission is unable 

at this time to accurately estimate how 

often this exemption may be invoked, as 

emergency or distressed market 

situations by nature are unpredictable 

and dependent on a variety of firm- and 

market-specific idiosyncratic factors as 

well as general macroeconomic 

indicators. Given the unusual and 

unpredictable nature of emergency or 

distressed market situations, the 

Commission anticipates that this 

exemption would be invoked 

infrequently, but is unable to provide a 

more precise estimate. The Commission 

also assumes that codifying the 

proposed rule and thus lending a level 

of transparency to the process will 

result in an administrative burden that 

is less onerous than the current regime. 

In addition, the Commission believes 

that in the case that one firm is 

assuming the positions of a financially 

distressed firm, the costs of claiming the 

exemption would be incidental to the 

costs of assuming the position. 

b. Section 150.3(c) Conditional Spotmonth Limit Exemption 

A market participant that elects to 

exercise this exemption, one that is not 

available under current rules, will incur 

certain direct costs to do so. A person 

seeking to utilize this exemption for the 

natural gas market must file Form 504 

in accordance with requirements listed 

in proposed § 19.01.789 If that person 

currently has any position in the 

physical-delivery contract, such person 

may incur costs associated with 

liquidating that position in order to 

meet the conditions of the conditional 

spot-month limit exemption. As 

previously discussed, the conditional 

spot month limit is designed to deter 

market manipulation without disrupting 

the price discovery process. The 

Commission does not have reason to 

believe that liquidity, in the aggregate 

(across the core referenced and 

referenced contracts), will be adversely 

impacted. However, the proposed rules 

are specifically intended to provide an 

alternative to the position limit regime 

that is currently in place for the purpose 

of deterring and preventing 

manipulation and ensuring sufficient 

market liquidity; the Commission 

expects that market participants will 

respond to the flexibility afforded by the 

proposed exemption in order to fulfill 

their needs in a manner that is 

consistent with their business interests, 

although it cannot reasonably predict 

how markets, DCMs and market 

participants will adapt. Accordingly, the 

Commission requests comment on this 

exemption, its potential impacts on 

trading strategies, competition, and any 

other direct or indirect costs to markets 

or market participants and exchanges 

that could arise as a result of the 

conditional spot-month limit 

exemption. 

c. Section 150.3(d) Pre-Enactment and 

Transition Period Swaps Exemption 

The exemption offered in proposed 

§ 150.3(d) is self-executing and would 

not require a market participant to file 

for relief. However, a firm may incur 

costs to identify positions eligible for 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75773 

790Alternatively, to the extent petitioning the 

Commission under § 140.99 or under CEA section 

4a(a)(7) results in lower costs relative to those 

necessary to utilize the current § 1.47 process, the 

cost difference is a benefit attributable to this 

rulemaking. The Commission requests comment 

concerning whether, and to what degree, requiring 

petitions for exemption under § 140.99 or under 

CEA section 4a(a)(7) in place of current § 1.47 is 

likely to result in any material cost difference. 

791The Commission’s estimates concerning the 

wage rates are based on 2011 salary information for 

the securities industry compiled by the Securities 

Industry and Financial Markets Association 

(‘‘SIFMA’’). The Commission is using $120 per 

hour, which is derived from a weighted average of 

salaries across different professions from the SIFMA 

Report on Management & Professional Earnings in 

the Securities Industry 2011, modified to account 

for an 1800-hour work-year, adjusted to account for 

the average rate of inflation in 2012, and multiplied 

by 1.33 to account for benefits and 1.5 to account 

for overhead and administrative expenses. The 

Commission anticipates that compliance with the 

provisions would require the work of an 

information technology professional; a compliance 

manager; an accounting professional; and an 

associate general counsel. Thus, the wage rate is a 

weighted national average of salary for 

professionals with the following titles (and their 

relative weight); ‘‘programmer (senior)’’ and 

‘‘programmer (non-senior)’’ (15% weight), ‘‘senior 

accountant’’ (15%) ‘‘compliance manager’’ (30%), 

and ‘‘assistant/associate general counsel’’ (40%). 

All monetary estimates have been rounded to the 

nearest hundred dollars. 

792See discussion above. 

793CEA section 5(d)(5) (specifying DCM core 

principle 5 titled ‘‘Position Limits or 

Accountability’’). 

794Specifically, in 2001, the Commission adopted 

in part 38 app. B (Guidance on, and acceptable 

Practices in, Compliance with Core Principles), 66 

FR 42256, 42280, Aug. 10, 2001, an acceptable 

practice for compliance with DCM core principle 5 

that stated ‘‘[p]rovisions concerning speculative 

position limits are set forth in part 150.’’ Current 

§ 150.5 states that each DCM shall ‘‘limit the 

maximum number of contracts a person may hold 

or control, separately or in combination, net long 

or net sort, for the purchase or sale of a commodity 

for future delivery or, on a futures-equivalent basis, 

options thereon,’’ with certain exemptions. 

Exemptions from federal limits include major 

foreign currencies and ‘‘spread, straddles or 

arbitrage’’ exemptions. Current § 150.5 expressly 

excludes bona fide hedging positions from limits, 

but acknowledges that exchanges may limit 

positions ‘‘not in accord with sound commercial 

practices or exceed an amount which may be 

established and liquidated in an orderly fashion.’’ 

795 Dodd-Frank Act section 735(b). CEA section 

4a(e), effective prior to, and not amended by, the 

Dodd-Frank Act, likewise provides that position 

limits fixed by a board of trade not exceed federal 

limits. 7 U.S.C. 6a(e). 

796 Dodd-Frank Act section 733 (adding CEA 

section 5h; 7 U.S.C. 7b–3). 

the exemption and to determine if that 

position is to be netted with postenactment swaps for purposes of 

complying with a non-spot-month 

position limit. Such costs would be 

assumed voluntarily by a market 

participant in order to avail itself of the 

exemption, and the Commission does 

not anticipate these costs to be overly 

burdensome. 

d. Section 150.3(e)–(f) Other 

Exemptions and Previously Granted 

Exemptions 

Under the proposed § 150.3(e), market 

participants electing to seek an 

exemption other than those specifically 

enumerated, will incur certain direct 

costs to do so. First, they will incur 

costs related to petitioning the 

Commission under § 140.99 of the 

Commission’s regulations or under CEA 

section 4a(a)(7). To the extent these 

costs may be marginally greater than a 

market participant would experience to 

seek an exemption under the process 

afforded under current § 1.47— 

something the Commission cannot rule 

out at this time—the cost difference 

between the two is attributable to this 

rulemaking.790 Further, market 

participants who had previously relied 

upon the exemptions granted under 

§ 1.47 would be able to continue to rely 

on such exemptions for existing 

positions. Going forward, market 

participants would need to enter into a 

new position that fits within applicable 

limits or are eligible for an alternate 

exemption, in which case the 

participants may incur costs associated 

with applying for such exemptions. The 

Commission is unable to ascertain at 

this time the number of participants 

affected by these proposed regulations. 

The Commission notes, however, that a 

decision to incur the costs inherent in 

seeking relief is voluntary. 

e. Section 150.3(g) Recordkeeping 

Finally, any person that elects to 

exercise an exemption provided in 

proposed § 150.3 would incur costs 

attributable to additional recordkeeping 

obligations under proposed § 150.3(e)– 

(g). The Commission preliminarily 

believes that these costs will be 

minimal, as participants already 

maintain books and records under a 

variety of other Commission regulations 

and as the information required in these 

sections is likely already being 

maintained as part of prudent 

accounting and risk management 

policies and procedures. The 

Commission preliminarily believes that, 

as estimated in accordance with the 

PRA, a total of 400 entities will incur an 

annual labor burden of approximately 

50 hours each, or 20,000 total hours for 

all affected entities, to comply with the 

additional recordkeeping obligations. 

Using an estimated hourly wage of $120 

per hour,791 the Commission anticipates 

an annual burden of approximately 

$6,000 per entity and a total of 

$2,400,000 for all affected entities. 

f. Request for Comment 

The Commission requests comment 

on its considerations of the costs 

associated with the proposed changes to 

§ 150.3. Are there other costs associated 

with new exemptions that the 

Commission should consider? With 

respect to the proposed conditional 

spot-month limit exemption, 

specifically, the Commission welcomes 

comments regarding the potential cost 

impact on trading strategies, any other 

direct or indirect costs to markets or 

market participants that could arise as a 

result of it, and the estimated number of 

impacted entities. 

iv. Consideration of Alternatives 

The Commission recognizes that 

alternatives may exist to discretionary 

elements of § 150.3 proposed herein. 

The Commission requests comment on 

whether an alternative to what is 

proposed would result in a superior 

benefit-cost profile, with support for any 

such position provided. 

5. Section 150.5—Exchange-Set 

Speculative Position Limits 

Current § 150.5 addresses the 

requirements and acceptable practices 

for exchanges in setting speculative 

position limits or position 

accountability levels for futures and 

options contracts traded on each 

exchange. As further described 

above,792 the CFMA’s amendments to 

the CEA in 2000 gave DCMs discretion 

to set those limits or levels within the 

statutory requirements of core principle 

5.793 With this grant of statutory 

discretion, § 150.5 became non-binding 

guidance and accepted practice to assist 

the exchanges in meeting their statutory 

responsibilities under the core 

principles.794 Subsequently, the DoddFrank Act scaled back the discretion 

afforded DCMs for establishing position 

limits under the earlier CFMA 

amendments. Specifically, among other 

things, the 2010 law: (1) amended core 

principle 1 to expressly subordinate 

DCMs’ discretion in complying with 

statutory core principles to Commission 

rules and regulations; and (2) amended 

core principle 5 to additionally require 

that, with respect to contracts subject to 

a position limit set by the Commission 

under CEA section 4a, a DCM must set 

limits no higher than those prescribed 

by the Commission.795 The Dodd-Frank 

Act also added parallel core principle 

obligations on newly-authorized SEFs, 

including SEF core principle 6 

regarding the establishment of position 

limits.796


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75774 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

797As discussed above, proposed § 150.5 also 

would continue to incorporate non-exclusive 

guidance and acceptable practices for DCMs and 

SEFs with respect to setting limits with and without 

a measurable deliverable supply, adopting position 

accountability in lieu of a position limits scheme, 

and adjusting limit levels, among other things. As 

non-binding guidance and acceptable practices, 

these components of the rulemaking are not binding 

Commission regulations or orders subject to the 

requirement of CEA section 15(a). 

798The Commission notes that for contracts 

subject to federal limits, exchange-granted 

exemptions would need to conform with the 

standards in proposed § 150.5(a)(2)(i) for hedge 

exemptions and proposed § 150.5(a)(2)(ii) for other 

exemptions. 

799CEA section 4a(a)(3)(B) applies for purposes of 

setting federal limit levels. 7 U.S.C. 6a(a)(3)(B). The 

Commission considers the four factors set out in the 

section relevant for purposes of considering the 

benefits and costs of these proposed amendments 

addressed to exchange-set position limits as well. 

800See Aggregation NPRM. 

i. Rule Summary 

In light of these Dodd-Frank Act 

statutory amendments, the Commission 

proposes to amend § 150.5 to specify 

certain binding requirements with 

which DCMs and SEFs must comply in 

establishing exchange-set limits. 797

Specifically, proposed § 150.5(a)(1) 

would require that DCMs and SEFs set 

limits for contracts listed in § 150.2(d) at 

a level not higher than the levels 

specified in § 150.2. Proposed 

§ 150.5(a)(5) and (b)(8) would require 

that exchanges adopt aggregation rules 

that conform to proposed § 150.4 for all 

contracts, including those contracts 

subject to federal speculative limits. 

Proposed § 150.5(a)(2)(i) and (b)(5)(i) 

would require that exchanges conform 

their bona fide hedging exemption rules 

to the proposed § 150.1 definition of 

bona fide hedging for all contracts, 

including those contracts subject to 

federal speculative limits. Proposed 

§ 150.5(a)(2)(iii) and (b)(5)(iii) would 

require that exchanges condition any 

exemptive relief from federal or 

exchange-set position limits on an 

application from the trader.798 To the 

extent an exchange offers exemptive 

relief for intra- and inter-market spread 

positions for contracts subject to federal 

limits under proposed § 150.2, proposed 

§ 150.5(a)(2)(i) and (ii) would require 

that the exchange provide such relief 

only outside of the spot month for 

physical-delivery contracts and, with 

respect to intra-market spread positions, 

on the condition that such positions do 

not exceed the all-months limit. Finally, 

proposed § 150.5(a)(4) would further 

implement the statutory provision in 

CEA section 4a(b)(2) that exempts preexisting positions, while § 150.5(a)(3) 

would require exchanges to mirror the 

Commission’s exemption in proposed 

§ 150.3 for pre-enactment and transition 

period swaps from exchange-set limits 

on contracts subject to limits under 

proposed § 150.2. Proposed § 150.5(a)(3) 

would also require exchanges to allow 

the netting of pre-enactment and 

transition swaps with post-effective date 

commodity derivative contracts for the 

purpose of complying with any nonspot-month position limit. 

Two of these proposed 

requirements—i.e., that for contracts 

subject to limits specified in § 150.2, 

DCMs and SEFs set limits no higher 

than those specified in § 150.2, and that 

pre-existing positions must be exempted 

from exchange-set limits on contracts 

subject to § 150.2—exclusively codify 

statutory requirements, and therefore 

reflect no exercise of Commission 

discretion subject to CEA section 15(a). 

The other-listed requirements, however, 

do involve Commission discretion, the 

costs and benefits of which are 

considered below. 

ii. Benefits 

Functioning as an integrated 

component within the broader positionlimits regulatory regime, the 

Commission expects the proposed 

changes to § 150.5 would further the 

four objectives outlined in CEA section 

4a(a)(3).799 As explained more fully 

below, the Commission believes these 

proposed amendments offer significant 

benefits. 

a. Section 150.5(a)(5) and (b)(8) 

Aggregation 

CEA section 4a(a)(1) states that the 

Commission, ‘‘[in] determining whether 

any person has exceeded such limits,’’ 

must include ‘‘the positions held and 

trading done by any persons directly or 

indirectly controlled’’ by such person. 

Pursuant to this statutory direction, the 

Commission has proposed in a separate 

release amendments to its aggregation 

policy, located in § 150.4.800 The 

regulations proposed in this release 

require that exchange-set limits employ 

aggregation policies that conform to the 

Commission’s aggregation policy both 

for contracts that are subject to federal 

limits under § 150.2 and those that are 

not, thus harmonizing aggregation rules 

for all federal and exchange-set 

speculative position limits. 

For contracts subject to federal 

speculative position limits under 

proposed § 150.2, the Commission 

anticipates that a harmonized approach 

to aggregation will prevent confusion 

that otherwise might result from 

allowing divergent standards between 

federal and exchange-set limits on the 

same contracts. Further, the proposed 

approach would prevent the kind of 

regulatory arbitrage that may impede the 

benefits of the federal speculative 

position limits regime. The harmonized 

approach to aggregation policies for 

limits on all levels eliminates the 

potential for exchanges to use 

permissiveness in aggregation policies 

as a competitive advantage and 

therefore prevents a ‘‘race to the 

bottom,’’ which would impair the 

effectiveness of the Commission’s 

aggregation policy. In addition, DCMs 

and SEFs are required to set position 

limits at a level not higher than that set 

by the Commission. Differing 

aggregation standards may have the 

practical effect of lowering a DCM- or 

SEF-set limit to a level that is lower 

than that set by the Commission. 

Accordingly, harmonizing aggregation 

standards reinforces the efficacy and 

intended purpose of §§ 150.5(a)(2)(iii) 

and (b)(5)(iii) by foreclosing an avenue 

to circumvent applicable limits. 

Moreover, by extending this 

harmonized approach to contracts not 

included in proposed § 150.2, the 

Commission is proposing a common 

standard for all federal and exchange-set 

limits. The proposed rule provides 

uniformity, consistency, and certainty 

for traders who are active on multiple 

trading venues, and thus should reduce 

the administrative burden on traders as 

well as the burden on the Commission 

in monitoring the markets under its 

jurisdiction. 

b. Section 150.5(a)(2)(i) and (b)(5)(i) 

Hedge Exemptions 

The proposed rules also promote a 

common standard for bona fide hedging 

exemptions by requiring such 

exemptions granted by an exchange to 

conform with the proposed definition of 

bona fide hedging in § 150.1. For 

contracts subject to federal limits under 

proposed § 150.2, the proposed rules 

under § 150.5(a)(2)(i) prescribe a 

harmonized approach intended to 

prevent the confusion that may arise 

should the same contract have differing 

standards of bona fide hedging between 

the Commission’s federal standard and 

the standard on any given exchange. As 

discussed above, the definition of bona 

fide hedging proposed by the 

Commission in this release allows only 

positions that represent legitimate 

commercial risk to be exempt from 

position limits. Deviation from this 

definition could impede the 

effectiveness of the Commission’s 

position limit regime by potentially 

allowing positions to be improperly 

exempted from speculative limits. 

Proposed § 150.5(b)(5)(i) would 

extend this common standard of bona 

fide hedging to contracts not subject to 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75775 

801See, e.g., CME Rule 559; NYMEX Rule 559; 

CBOT Rule 559; KCBT Rule 559; ICE Futures Rules 

6.26, 6.27, and 6.29; and MGEX Rule 1504.00. 

802The terms ‘‘inter-market spread’’ and ‘‘intramarket spread’’ are defined in proposed § 150.1. 

803Under § 37.204, possible third-party regulatory 

service providers include registered futures 

associations (such as the National Futures 

Association (NFA)), registered entities (such as 

DCMs or SEFs), and the Financial Industry 

Regulatory Authority (FINRA). 

804See 78 FR 33476, 33516, Jun. 4, 2013. 

federal speculative limits, thereby 

creating a single standard across all 

trading venues that would reduce the 

administrative burden on market 

participants trading on multiple trading 

venues and the burden on the 

Commission of monitoring the markets 

under its jurisdiction. 

c. Section 150.5(a)(2)(iii) and (b)(5)(iii) 

Application for Exemption 

Proposed § 150.5 requires traders to 

apply to the exchange for any 

exemption from position limits. 

Requiring traders to apply to the 

exchange affirms the position of the 

DCM or SEF as the front-line regulator 

for position limits while providing the 

exchanges with information that can be 

used to ensure the legitimacy of a 

trader’s position with regards to its 

eligibility for exemptive relief. By 

gathering information from traders’ 

applications for exemption, exchanges 

will have a complete record of all 

exemptions requested, granted, and 

denied, as well as information about the 

commercial operations of traders who 

apply for exemptions. Because the 

Commission has not specified a format 

for such exemption applications, 

exchanges have flexibility to determine 

which information will best inform the 

exchange’s self-regulatory operations 

and obligations. 

The Commission understands that 

many DCMs are already requiring 

applications for exemptive relief from 

speculative position limits,801 and that 

SEFs are likely to adopt this practice as 

a ‘‘best practice’’ for complying with 

core principles. As such, the proposed 

rules codify an industry ‘‘best practice’’ 

regarding position limits and promote 

the continuation of the benefits of that 

best practice across all trading venues 

and all commodity derivative contracts. 

d. Section 150.5(a)(2)(ii) Other 

Exemptions 

As discussed above, the Commission 

is proposing to set single-month limits 

at the same levels as all-months limits, 

rendering the ‘‘spread’’ exemption in 

current § 150.3 unnecessary. However, 

since DCM core principle 5 allows 

exchanges to set more restrictive levels 

than those set by the Commission, a 

DCM or SEF may set the single month 

limit at a lower level than that of the allmonth limit. Further, because federal 

limits apply across trading venues, 

exchanges may grant spread exemptions 

for inter-market spreads across 

exchanges. As such, the Commission is 

proposing § 150.5(a)(2)(ii) to clarify the 

types of spread positions for which a 

DCM or SEF may grant exemptions by 

cross-referencing the definitions 

proposed in § 150.1 802 and to require 

that any such exemption be outside of 

the spot month for physical-delivery 

contracts. 

This exemption would provide 

exchanges with certainty regarding the 

application of spread exemptions for 

contracts subject to federal limits under 

proposed § 150.2. Should an exchange 

decide to provide exemptive relief for 

spread positions, the exemption 

described in § 150.5(a)(2)(ii) promotes 

the intended goals of federal speculative 

limits, including protection of the spot 

period in the physical-delivery contract 

and exemption of positions as 

appropriate. 

e. Section 150.5(a)(3) Pre-Enactment and 

Transition Period Swaps Positions 

Proposed § 150.5(a)(3) requires DCMs 

and SEFs to exempt pre-enactment and 

transition period swaps as defined in 

proposed § 150.1 from exchange-set 

limits on contracts subject to federal 

limits under proposed § 150.2. This 

provision mirrors the exemption 

proposed in § 150.3 and requires that 

exchanges provide the same relief as the 

Commission for pre-existing swaps 

positions. 

Further, requiring that DCMs and 

SEFs allow netting of pre-and-post 

enactment swaps outside of the spot 

month provides additional flexibility on 

an exchange level for market 

participants in transitioning to a 

position limits regime that includes 

swaps. 

f. Request for Comment 

The Commission requests comment 

on its consideration of the benefits of 

proposed § 150.5. Are there additional 

benefits that the Commission should 

consider? Has the Commission 

misidentified any benefits? 

iii. Costs 

DCMs presently have considerable 

experience in setting and administering 

speculative position limits and hedge 

exemption programs in line with 

existing Commission guidance and 

acceptable practices that run parallel in 

most respects to the requirements that 

are incorporated in the proposed rule. 

Accordingly, as a general matter, the 

Commission anticipates minimal cost 

impact on DCMs from these proposed 

requirements; relative to DCMs, the cost 

impact for SEFs as newly-instituted 

entities may be somewhat greater. 

The Commission notes that recently 

adopted § 37.204 of the Commission’s 

regulations allows SEFs the flexibility to 

contract with a third-party regulatory 

service provider 803 to fulfill certain 

regulatory obligations.804 The 

administration of position limits is 

within the range of obligations eligible 

for outsourcing to a third-party 

regulatory service provider. Presumably, 

a SEF will avail itself of this flexibility 

if doing so results in lower costs for the 

entity. In order to better inform itself 

with respect to the cost implications of 

this proposed rule for SEFs, the 

Commission requests comment on the 

likelihood of SEFs utilizing a third-party 

regulatory service provider to comply 

with its position limits obligations and 

the expected dollar costs of doing so. 

The Commission also requests comment 

on the expected dollar costs of meeting 

the proposed rule’s requirement if a SEF 

undertakes to perform the proposed 

rule’s obligations in-house rather than 

outsourcing them. 

The following discusses potential 

costs with respect to the specific 

discretionary aspects of the rule to 

which they are attributable. 

a. Section 150.5(a)(5) and (b)(8) 

Aggregation and § 150.5(a)(2)(i) and 

(b)(5)(i) Hedge Exemptions 

DCMs may incur costs to amend their 

current aggregation and bona fide 

hedging policies to conform with 

proposed § 150.4 and proposed § 150.1 

respectively. Such costs may include 

burdens associated with reviewing and 

evaluating current standards to assess 

differences that must be addressed, 

employing legal counsel to aid in 

ensuring conformity, and transitioning 

from an old standard to the new one. 

Because the burden associated with this 

rule is proportional to the divergence of 

a DCM’s current standard from the 

Commission’s proposed standard, costs 

are specific and proprietary to each 

affected entity; as such, the Commission 

is unable to estimate costs at this time 

within a range of reasonable accuracy. It 

requests comment to assist it in doing 

so. 

SEFs, as newly-instituted entities, 

will be required to incur costs to 

develop aggregation and bona fide 

hedging policies that conform to the 

appropriate provisions as required 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75776 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

805See, paragraphs (3)(iii), (4)(i), (iii), and (iv), 

and (5), respectively, of the Commission’s amended 

definition of bona fide hedging transactions in 

proposed § 150.1. 

806See 17 CFR 1.48. See also definition of bona 

fide hedging transactions in current 17 CFR 

1.3(z)(2)(i)(B) and (ii)(C), respectively. 

807See Hedging Anticipated Requirements for 

Processing or Manufacturing under Section 4a(3) of 

the Commodity Exchange Act, 21 FR 6913, Sep. 12, 

1956. 

808For purposes of simplicity, the proposed 

special reporting requirements for anticipatory 

hedges would be placed within the Commission’s 

position limits regime in part 150, and alongside 

the Commission’s updated definition of bona fide 

hedging positions in proposed § 150.1; rendered 

duplicative by these changes, current § 1.48 would 

be deleted. In another non-substantive change, 

proposed § 150.7(i) would replace current § 140.97 

which delegates to the Director of the Division of 

Market Oversight or his designee authority 

regarding requests for classification of positions as 

bona fide hedging under current §§ 1.47 and 1.48. 

For purposes of simplicity, this delegation of 

authority would be placed within the Commission’s 

position limits regime in part 150. 

under proposed § 150.5. Such costs are 

likely to include legal counsel, as well 

as drafting and implementation of the 

new policy. Because these entities are 

new and have not previously been 

subject to the Commission’s oversight in 

this capacity, the Commission requests 

comment regarding the costs associated 

with implementing the appropriate 

policies. 

b. Section 150.5(a)(2)(iii) and (b)(5)(iii) 

Application for Exemption 

The Commission anticipates that 

DCMs will incur minimal costs to 

administer the application process for 

exemption relief in accordance with 

standards set forth in the proposed rule. 

As described above, the Commission 

understands that requiring traders to 

apply for exemptive relief comports 

with existing DCM practice. 

Accordingly, by incorporating an 

application requirement that the 

Commission has reason to understand 

most if not all active DCMs already 

follow, the rule should have little cost 

impact for DCMs. 

For SEFs, the rules necessitate a 

compliant application regime, which 

will require an initial investment 

similar to that which DCMs have likely 

already made and need not duplicate. 

As noted above, the Commission 

considers it highly likely that, in 

accordance with industry best practices 

to comply with core principles and due 

to the utility of application information 

in demonstrating compliance with core 

principles, SEFs may incur such costs 

with or without the proposed rules. 

Again, due to the new existence of these 

entities, the Commission is unable to 

estimate what costs may be associated 

with the requirement to impose an 

application regime for exemptive relief 

on the exchange level. The Commission 

requests comment regarding the burden 

on a SEF to impose a compliant 

application regime. 

c. Section 150.5(a)(2)(ii) Other 

Exemptions 

Proposed § 150.5(a)(2)(ii) provides 

clarity on the imposition of exemptions 

for spread positions on contracts subject 

to federal limits under proposed § 150.2 

in accordance with new definitions 

proposed in § 150.1. The Commission 

notes again that the rules would apply 

if the single-month limit is at a lower 

level than the all-month limit, which 

would occur if a DCM or SEF 

determines to set more restrictive levels 

for a single-month limit that what has 

been set by the Commission, or if the 

exchange grants inter-market spread 

exemptions. Thus, the Commission 

anticipates that a DCM or SEF that has 

determined to set a more restrictive 

limit will have done so having taken 

into account any burden imposed by the 

proposed rule. Further, some trading 

venues already grant inter-market 

spread exemptions on certain 

commodities; such entities may be able 

to leverage current practices to extend 

such spread exemptions to other 

commodities as appropriate. 

The Commission expects small costs 

to be associated with communicating 

and monitoring the appropriate 

conditions for exemption as described 

in proposed § 150.5(a)(2)(ii), namely 

that such position must be solely 

outside of the spot-month of the 

physical-delivery contract. 

d. Request for Comment 

The Commission requests comment 

on its considerations of the costs of 

proposed § 150.5. Are there additional 

costs that the Commission should 

consider? Has the Commission 

misidentified any costs? What other 

relevant cost information or data, 

including alternative cost estimates, 

should the Commission consider and 

why? 

iv. Consideration of Alternatives 

The Commission recognizes that 

alternatives may exist to discretionary 

elements of § 150.5 proposed herein. 

The Commission requests comment on 

whether an alternative to what is 

proposed would result in a superior 

benefit-cost profile, with support for any 

such position provided. 

6. Section 150.7—Reporting 

Requirements for Anticipatory Hedging 

Positions 

The revised definition of bona fide 

hedging in proposed § 150.1 

incorporates hedges of five specific 

types of anticipated transactions: 

unfilled anticipated requirements, 

unsold anticipated production, 

anticipated royalties, anticipated 

services contract payments or receipts, 

and anticipatory cross-hedges.805 The 

Commission proposes reporting 

requirements in new § 150.7 for traders 

seeking an exemption from position 

limits for any of these five enumerated 

anticipated hedging transactions. 

Proposed § 150.7 would build on, and 

replace, the special reporting 

requirements for hedging of unsold 

anticipated production and unfilled 

anticipated requirements in current 

§ 1.48.806

Current § 1.48 provides a procedure 

for persons to file for bona fide hedging 

exemptions for anticipated production 

or unfilled requirements when that 

person has not covered the anticipatory 

need with fixed-price commitments to 

sell a commodity, or inventory or fixedprice commitments to purchase a 

commodity. It reflects a long-standing 

Commission concern for the difficulty of 

distinguishing between reduction of risk 

arising from anticipatory needs and that 

arising from speculation if anticipatory 

transactions are not well defined.807

These same concerns apply to any 

position undertaken to reduce the risk 

of anticipated transactions. To address 

them, the Commission proposes to 

extend the special reporting 

requirements in proposed § 150.7 for all 

types of enumerated anticipatory hedges 

that appear in the definition of bona fide 

hedging positions in proposed 

§ 150.1.808

The Commission proposes to add a 

new series ’04 reporting form, Form 704, 

to effectuate these additional and 

updated reporting requirements for 

anticipatory hedges. Persons wishing to 

avail themselves of an exemption for 

any of the anticipatory hedging 

transactions enumerated in the updated 

definition of bona fide hedging in 

proposed § 150.1 would be required to 

file an initial statement on Form 704 

with the Commission at least ten days 

in advance of the date that such 

positions would be in excess of limits 

established in proposed § 150.2. 

Proposed § 150.7(f) would add a 

requirement for any person who files an 

initial statement on Form 704 to provide 

annual updates that detail the person’s 

actual cash market activities related to 

the anticipated exemption. Proposed 

§ 150.7(g) would similarly enable the 

Commission to review and compare the 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75777 

809These amendments are non-substantive 

conforming amendments and should not have 

implications for the Commission’s consideration of 

costs and benefits. 

810See supra discussion of proposed amendments 

to part 19. 

811Furthermore, anyone exceeding the federal 

limits who has received a special call must file a 

series ’04 form. 

812 17 CFR 15.02. 

actual cash activities and the remaining 

unused anticipated hedge transactions 

by requiring monthly reporting on Form 

204. 

As is the case under current § 1.48, 

proposed § 150.7(h) requires that a 

trader’s maximum sales and purchases 

must not exceed the lesser of the 

approved exemption amount or the 

trader’s current actual anticipated 

transaction. 

i. Benefits and Costs 

As noted above, the Commission 

remains concerned that distinguishing 

whether an over-the-limit position is 

entered into in order to reduce risk 

arising from anticipatory needs, or 

whether it is speculative, may be 

exceedingly difficult if anticipatory 

transactions are not well defined. The 

Commission proposes to add, in its 

discretion, proposed § 150.7 to collect 

vital information to aid in this 

distinction. Advance notice of a trader’s 

intended maximum position in 

commodity derivative contracts to offset 

anticipatory risks would identify—in 

advance—a position as a bona fide 

hedging position, avoiding unnecessary 

contact during the trading day with 

surveillance staff to verify whether a 

hedge exemption application is in 

process, the appropriate level for the 

exemption and whether the exemption 

is being used in a manner that is 

consistent with the requirements. 

Market participants can anticipate 

hedging needs well in advance of 

assuming positions in derivatives 

markets and in many cases need to 

supply the same information after the 

fact; in such cases, providing the 

information in advance allows the 

Commission to better direct its efforts 

towards deterring and detecting 

manipulation. The annual updates in 

proposed § 150.7(f) similarly allow the 

Commission to verify on an ongoing 

basis that the person’s anticipated cash 

market transactions closely track that 

person’s real cash market activities. 

Absent monthly filing pursuant to 

proposed § 150.7(g), the Commission 

would need to issue a special call to 

determine why a person’s commodity 

derivative contract position is, for 

example, larger than the pro rata 

balance of her annually reported 

anticipated production. 

The Commission understands that 

there will be costs associated with 

proposed § 150.7(f) in the filing of Form 

704. Costs of filing that form are 

discussed in the context of the proposed 

part 19 requirements. 

The Commission requests comments 

on its consideration of the costs and 

benefits of proposed § 150.7. Are there 

additional costs or benefits the 

Commission should consider? What 

costs may be incurred beyond those 

incurred to gather information and file 

Form 704? Should the Commission 

consider alternatives to its annual 

updating requirement? The Commission 

also recognizes that alternatives may 

exist to discretionary elements of 

§ 150.7 proposed herein. The 

Commission requests comments on 

whether an alternative to what is 

proposed would result in a superior 

benefit-cost profile, with support for any 

such position provided. 

7. Part 19—Reports 

CEA Section 4i authorizes the 

Commission to require the filing of 

reports, as described in CEA section 4g, 

when positions equal or exceed position 

limits. Current part 19 of the 

Commission’s regulations sets forth 

these reporting requirements for persons 

holding or controlling reportable futures 

and option positions that constitute 

bona fide hedge positions as defined in 

§ 1.3(z) and in markets with federal 

speculative position limits—namely 

those for grains, the soy complex, and 

cotton. Since having a bona fide hedge 

exemption affords a commercial market 

participant the opportunity to hold 

positions that exceed a position limit 

level, it is important for the Commission 

to be able to verify that when an 

exemption is invoked that it is done so 

for legitimate purposes. As such, 

commercial entities that hold positions 

in excess of those limits must file 

information on a monthly basis 

pertaining to owned stocks and 

purchase and sales commitments for 

entities that claim a bona fide hedging 

exemption. 

In order to help ensure that the 

additional exemptions described in 

proposed § 150.3 are used in accordance 

with the requirements of the exemption 

employed, as well as obtain information 

necessary to verify that any futures, 

options and swaps positions established 

in referenced contracts are justified, the 

Commission proposes to make 

conforming and substantive 

amendments to part 19. First, the 

Commission proposes to amend part 19 

by adding new and modified crossreferences to proposed part 150, 

including the new definition of bona 

fide hedging position in proposed 

§ 150.1.809 Second, the Commission 

proposes to amend § 19.00(a) by 

extending reporting requirements to any 

person claiming any exemption from 

federal position limits pursuant to 

proposed § 150.3. The Commission 

proposes to add three new series ’04 

reporting forms to effectuate these 

additional reporting requirements. 

Third, the Commission proposes to 

update the manner of part 19 reporting. 

Lastly, the Commission proposes to 

update both the type of data that would 

be required in series ’04 reports, as well 

as the time allotted for filing such 

reports. 

i. Rule Summary 

a. Extension of Reporting Requirements 

Proposed part 19 will be expanded to 

include reporting requirements for 

positions in swaps, in addition to 

futures and options positions, for any 

instance in which a person relies on an 

exemption. Therefore, positions in 

‘‘commodity derivative contracts,’’ as 

defined in proposed § 150.1, would 

replace ‘‘futures and option positions’’ 

throughout amended part 19 as 

shorthand for any futures, option, or 

swap contract in a commodity (other 

than a security futures product as 

defined in CEA section 1a(45)).810

The Commission also proposes to 

extend the reach of part 19 by requiring 

all persons who avail themselves of any 

exemption from federal position limits 

under proposed § 150.3 to file 

applicable series ’04 reports.811 The list 

of positions set forth in proposed 

§ 150.3 that are eligible for exemption 

from the federal position includes, but 

is not limited to, bona fide hedging 

positions (including pass-through swaps 

and anticipatory bona fide hedge 

positions), qualifying spot month 

positions in cash-settled referenced 

contracts, and qualifying nonenumerated risk-reducing transactions. 

The Commission currently requires 

two monthly reports, CFTC Forms 204 

and 304, which are listed in current 

§ 15.02.812 The reports, collectively 

referred to as the Commission’s ‘‘series 

’04 reports,’’ show a trader’s positions in 

the cash market and are used by the 

Commission to determine whether a 

trader has sufficient cash positions that 

justify futures and option positions 

above the speculative limits. CFTC 

Form 204 is the Statement of Cash 

Positions in Grains, which includes the 

soy complex, and CFTC Form 304 

Report is the Statement of Cash 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75778 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

813See supra discussion of series ’04 forms. 

814See 17 CFR 19.00(b)(1) (providing that ‘‘[i]f the 

regular business practice of the reporting trader is 

to exclude certain products or byproducts in 

determining his cash position for bona fide hedging 

. . . , the same shall be excluded in the report’’). 

815Proposed § 19.00(b)(1) adds a caveat to the 

alternative manner of reporting: when reporting for 

the cash commodity of soybeans, soybean oil, or 

soybean meal, the reporting person shall show the 

cash positions of soybeans, soybean oil and soybean 

meal. This proposed provision for the soybean 

complex is included in the current instructions for 

preparing Form 204. 

816Proposed § 19.00(b)(2) would add the term 

commodity derivative contracts (as defined in 

proposed § 150.1). The proposed definition of crosscommodity hedge in proposed § 150.1 is discussed 

above. 

817The list of data required for persons filing on 

Forms 204 and 304 would be relocated from current 

§ 19.01(a) to proposed § 19.01(a)(3). 

818The Commission believes that enhanced 

reporting for natural gas contracts is warranted 

based on its experience in surveillance of natural 

gas commodity derivative contracts. Absent 

experiential evidence of current need beyond the 

natural gas realm, the Commission proposes to 

initially not impose reporting requirements for 

persons claiming conditional spot month limit 

exemptions in other commodity derivative 

contracts until the Commission gains additional 

experience with the limits in proposed § 150.2. 

However, the Commission retains its authority to 

issue ‘‘special calls’’ under § 18.05. The 

Commission will closely monitor the reporting 

associated with conditional spot-month limit 

exemptions in natural gas, as well as other 

information available to the Commission for other 

commodities, and may require reporting on Form 

504 for other commodity derivative contracts in the 

future. 

Positions in Cotton.813 The Commission 

proposes to add three new series ’04 

reporting forms to effectuate the 

expanded reporting requirements of part 

19. Proposed CFTC Form 504, Statement 

of Cash Positions for Conditional Spot 

Month Exemptions, would be added for 

use by persons claiming the conditional 

spot month limit exemption pursuant to 

proposed § 150.3(c). Proposed CFTC 

Form 604, Statement of Counterparty 

Data for Pass-Through Swap 

Exemptions, would be added for use by 

persons claiming a bona fide hedge 

exemption for either of two specific 

pass-through swap position types, as 

discussed further below. Proposed 

CFTC Form 704, Statement of 

Anticipatory Bona Fide Hedge 

Exemptions, would be added for use by 

persons claiming a bona fide hedge 

exemption for certain anticipatory bona 

fide hedging positions. 

b. Manner of Reporting 

For purposes of reporting cash market 

positions under current part 19, the 

Commission historically has allowed a 

reporting trader to ‘‘exclude certain 

products or byproducts in determining 

his cash positions for bona fide 

hedging’’ if it is ‘‘the regular business 

practice of the reporting trader’’ to do 

so.814 Nevertheless, the Commission 

believes that an entity, when calculating 

the value that is subject to risks from a 

source commodity in order to establish 

a long derivatives position as a hedge 

for unfilled anticipated requirements, 

need take into account large quantities 

of a source commodity that it may hold 

in inventory. Under proposed 

§ 19.00(b)(1), a source commodity itself 

can only be excluded from a calculation 

of a cash position if the amount is de 

minimis, impractical to account for, 

and/or on the opposite side of the 

market from the market participant’s 

hedging position.815

Persons who wish to avail themselves 

of cross-commodity hedges are required 

to file an appropriate series ’04 form. 

Proposed § 19.00(b)(2) sets forth 

instructions, which are consistent with 

the provisions in the current section, for 

reporting a cash position in a 

commodity that is different from the 

commodity underlying the futures 

contract used for hedging.816 Since 

proposed § 19.00(b)(3) would maintain 

the requirement that cross-hedged 

positions be shown both in terms of the 

equivalent amount of the commodity 

underlying the commodity derivative 

contract used for hedging and in terms 

of the actual cash commodity (as 

provided for on the appropriate series 

’04 form), the Commission will be able 

to determine the hedge ratio used 

merely by comparing the reported 

positions. Thus, the Commission will be 

positioned to review whether a hedge 

ratio appears reasonable in comparison 

to, for example, other similarly situated 

traders. 

Proposed § 19.00(b)(3) maintains the 

requirement that standards and 

conversion factors used in computing 

cash positions for reporting purposes 

must be made available to the 

Commission upon request. Proposed 

§ 19.00(b)(3) would clarify that such 

information would include hedge ratios 

used to convert the actual cash 

commodity to the equivalent amount of 

the commodity underlying the 

commodity derivative contract used for 

hedging, and an explanation of the 

methodology used for determining the 

hedge ratio. 

c. Bona Fide Hedgers and Cotton 

Merchants and Dealers 

Current § 19.01(a) sets forth the data 

that must be provided by bona fide 

hedgers (on Form 204) and by 

merchants and dealers in cotton (on 

Form 304). The Commission proposes to 

continue using Forms 204 and 304, with 

minor changes to the types of data to be 

reported.817 Form 204 will be expanded 

to incorporate, in addition to all other 

positions reportable under proposed 

§ 19.00(a)(1)(iii), monthly reporting for 

cotton, including the granularity of 

equity, certificated and non-certificated 

cotton stocks of cotton. Weekly 

reporting for cotton will be retained as 

a separate report made on Form 304 for 

the collection of data required by the 

Commission to publish its weekly 

public cotton ‘‘on call’’ report on 

www.cftc.gov. 

Proposed § 19.01(b) would maintain 

the requirement that reports on Form 

204 be submitted to the Commission on 

a monthly basis, as of the close of 

business on the last Friday of the 

month. 

d. Conditional Spot-Month Limit 

Exemption 

Proposed § 19.01(a)(1) would require 

persons availing themselves of the 

conditional spot month limit exemption 

for natural gas (pursuant to proposed 

§ 150.3(c)) to report certain detailed 

information concerning their cash 

market activities. While traders could 

not directly influence the settlement 

price in the physical-delivery referenced 

contract due to the prohibition of 

holding physical-delivery contract 

positions when invoking the conditional 

spot month exemption, there is no 

similar restriction on holding the 

underlying cash commodity. While the 

Commission is concerned about traders’ 

activities in the underlying cash market 

of any derivative contract, it is 

particularly concerned with respect to 

natural gas where there is an existing 

conditional spot-month limit 

exemption. Accordingly, proposed 

§ 19.01(b) would require that persons 

claiming a conditional spot month limit 

exemption must report on new Form 

504 daily, by 9 a.m. Eastern Time on the 

next business day, for each day that a 

person is over the spot month limit in 

certain commodity contracts specified 

by the Commission. The scope of 

reporting—purchase and sales contracts 

through the delivery area for the core 

referenced futures contract and 

inventory in the delivery area—differs 

from the scope of reporting for bona fide 

hedgers, since the person relying on the 

conditional spot month limit exemption 

need not be hedging a position. 

Initially, the Commission would 

require reporting on new Form 504 for 

exemptions in the natural gas 

commodity derivative contracts only.818

The Commission requests comment as 

to whether the costs and benefits of the 

enhanced reporting regime support 

imposing this requirement on additional 

commodity markets before gaining 


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819See supra discussion of definition of bona fide 

hedging position in proposed § 150.1. 

820Persons holding pass-through swap positions 

that are offset with referenced contracts outside the 

spot month (whether such contracts are for physical 

delivery or are cash-settled) need not report on 

Form 604 because swap positions will be netted 

with referenced contract positions outside the spot 

month pursuant to proposed § 150.2(b). 821See supra discussion of proposed § 150.2. 

822See PRA section below for full details on the 

Commission’s estimates. 

823The Commission’s estimates concerning the 

wage rates are based on 2011 salary information for 

the securities industry compiled by the Securities 

Industry and Financial Markets Association 

(‘‘SIFMA’’). The Commission is using $120 per 

hour, which is derived from a weighted average of 

salaries across different professions from the SIFMA 

Report on Management & Professional Earnings in 

the Securities Industry 2011, modified to account 

for an 1800-hour work-year, adjusted to account for 

the average rate of inflation in 2012, and multiplied 

by 1.33 to account for benefits and 1.5 to account 

for overhead and administrative expenses. The 

Commission anticipates that compliance with the 

provisions would require the work of an 

information technology professional; a compliance 

manager; an accounting professional; and an 

associate general counsel. Thus, the wage rate is a 

weighted national average of salary for 

professionals with the following titles (and their 

Continued 

additional experience with this 

exemption in other commodities. 

e. Pass-Through Swap Exemption 

Under the definition of bona fide 

hedging position in proposed § 150.1, a 

person who uses a swap to reduce risks 

attendant to a position that qualifies for 

a bona fide hedging transaction may 

pass-through those bona fides to the 

counterparty, even if the person’s swap 

position is not in excess of a position 

limit.819 As such, positions in 

commodity derivative contracts that 

reduce the risk of pass-through swaps 

would qualify as bona fide hedging 

transactions. 

Proposed § 19.01(a)(2) would require 

a person relying on the pass-through 

swap exemption who holds either of 

two position types to file a report with 

the Commission on new form 604. The 

first type of position is a swap executed 

opposite a bona fide hedger that is not 

a referenced contract and for which the 

risk is offset with referenced contracts. 

The second type of position is a cashsettled swap executed opposite a bona 

fide hedger that is offset with physicaldelivery referenced contracts held into a 

spot month, or, vice versa, a physicaldelivery swap executed opposite a bona 

fide hedger that is offset with cashsettled referenced contracts held into a 

spot month. 

The information reported on Form 

604 would explain hedgers’ needs for 

large referenced contract positions and 

would give the Commission the ability 

to verify that the positions were a bona 

fide hedge, with heightened daily 

surveillance of spot month offsets. 

Persons holding any type of passthrough swap position other than the 

two described above would report on 

form 204.820

f. Swap Off-Sets 

Proposed § 19.01(a)(2)(i) lists the 

types of data that a person who executes 

a pass-through swap that is not a 

referenced contract and for which the 

risk is offset with referenced contracts 

must report on new Form 604. Under 

proposed § 19.01(b), persons holding 

non-referenced contract swap offset 

would submit reports to the 

Commission on a monthly basis, as of 

the close of business of the last Friday 

of the month. This data collection 

would permit staff to identify offsets of 

non-referenced-contract pass-through 

swaps on an ongoing basis for further 

analysis. 

Under proposed § 150.2(a), a trader in 

the spot month may not net across 

physical-delivery and cash-settled 

contracts for the purpose of complying 

with federal position limits.821 If a 

person executes a cash-settled passthrough swap that is offset with 

physical-delivery contracts held into a 

spot month (or vice versa), then, 

pursuant to proposed § 19.01(a)(2)(ii), 

that person must report additional 

information concerning the swap and 

offsetting referenced contract position 

on new Form 604. Pursuant to proposed 

§ 19.01(b), a person holding a spot 

month swap offset would need to file on 

form 604 as of the close of business on 

each day during a spot month, and not 

later than 9 a.m. Eastern Time on the 

next business day following the date of 

the report. The Commission notes that 

pass-through swap offsets would not be 

permitted during the lesser of the last 

five days of trading or the time period 

for the spot month. However, the 

Commission remains concerned that a 

trader could hold an extraordinarily 

large position early in the spot month in 

the physical-delivery contract along 

with an offsetting short position in a 

cash-settled contract. Hence, the 

Commission proposes to introduce this 

new daily reporting requirement within 

the spot month to identify and monitor 

such offsetting positions. 

ii. Benefits 

The reporting requirements allow the 

Commission to obtain the information 

necessary to verify whether the relevant 

exemption requirements are fulfilled in 

a timely manner. This is needed for the 

Commission to help ensure that any 

person who claims any exemption from 

federal speculative position limits can 

demonstrate a legitimate purpose for 

doing so. In the absence of the reporting 

requirements detailed in proposed part 

19, the Commission would lack critical 

tools to identify abuses related to the 

exemptions afforded in proposed 

§ 150.3 in a timely manner and refer 

them to enforcement. As such, the 

reporting requirements are necessary for 

the Commission to be able to perform its 

essential surveillance functions. These 

reporting requirements therefore 

promote the Commission’s ability to 

achieve, to the maximum extent 

practicable, the statutory factors 

outlined by Congress in CEA section 

4a(a)(3). 

The Commission requests comment 

on its considerations of the benefits of 

reporting under part 19. Has the 

Commission accurately identified the 

benefits of collecting the reported 

information? Are there additional 

benefits the Commission should 

consider? 

iii. Costs 

The Commission recognizes there will 

be costs associated with the proposed 

changes and additions to the report 

filing requirements under part 19. 

Though the Commission anticipates that 

market participants should have ready 

access to much of the required 

information, the Commission expects 

that, at least initially, market 

participants will require additional time 

and effort to become familiar with new 

and amended series ’04 forms, to gather 

the necessary information in the 

required format, and to file reports in 

the proposed timeframes. The 

Commission has attempted to mitigate 

the cost impacts of these reports. 

Actual costs incurred by market 

participants will vary depending on the 

diversity of their cash market positions, 

the experience that the participants 

currently have regarding filing Form 204 

and Form 304 as well as a variety of 

other organizational factors. However, 

the Commission has estimated average 

incremental burdens associated with the 

proposed rules in order to fulfill its 

obligations under the PRA.822

For Form 204, the Commission 

estimates that approximately 400 market 

participants will file an average of 12 

reports annually at an estimated labor 

burden of 2 hours per response for a 

total per-entity hour burden of 

approximately 24 hours, which 

computes to a total annual burden of 

9,600 hours for all affected entities. 

Using an estimated hourly wage of $120 

per hour,823 the Commission estimates 


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relative weight); ‘‘programmer (senior)’’ and 

‘‘programmer (non-senior)’’ (15% weight), ‘‘senior 

accountant’’ (15%) ‘‘compliance manager’’ (30%), 

and ‘‘assistant/associate general counsel’’ (40%). 

All monetary estimates have been rounded to the 

nearest hundred dollars. 

824 Id. 

825 Id. 

826 Id. 827 Id. 

an annual per-entity cost of 

approximately $2,900 and a total annual 

cost of $1,152,000 for all affected 

entities. 

For Form 304, the Commission 

estimates that approximately 400 market 

participants will file an average of 52 

reports annually at an estimated labor 

burden of 1 hours per response for a 

total per-entity hour burden of 

approximately 52 hours, which 

computes to a total annual burden of 

20,800 hours for all affected entities. 

Using an estimated hourly wage of $120 

per hour,824 the Commission estimates 

an annual per-entity cost of 

approximately $6,300 and a total annual 

cost of $2,500,000 for all affected 

entities. 

For the new Form 504, the 

Commission anticipates that 

approximately 40 market participants 

will file an average of 12 reports 

annually at an estimated labor burden of 

15 hours per response for a total perentity hour burden of approximately 

180 hours, which computes to a total 

annual burden of 7,200 hours for all 

affected entities. Using an estimated 

hourly wage of $120 per hour,825 the 

Commission estimates an annual perentity cost of approximately $10,800 

and a total annual cost of $864,000 for 

all affected entities. 

For the new Form 604, the 

Commission anticipates that 

approximately 200 market participants 

will file an average of 10 reports 

annually at an estimated labor burden of 

30 hours per response for a total perentity hour burden of approximately 

300 hours, which computes to a total 

annual burden of 60,000 hours for all 

affected entities. Using an estimated 

hourly wage of $120 per hour,826 the 

Commission estimates an annual perentity cost of approximately $36,000 

and a total annual cost of $7,200,000 for 

all affected entities. 

Finally, for the new Form 704, the 

Commission anticipates that 

approximately 200 market participants 

will file an average of 10 reports 

annually at an estimated labor burden of 

20 hours per response for a total perentity hour burden of approximately 

200 hours, which computes to a total 

annual burden of 40,000 hours for all 

affected entities. Using an estimated 

hourly wage of $120 per hour,827 the 

Commission estimates an annual perentity cost of approximately $24,000 

and a total annual cost of $4,800,000 for 

all affected entities. 

The Commission requests comment 

regarding its consideration of costs 

pertaining to the amendments to part 

19. Has the Commission accurately 

described the ways that market 

participants may incur costs? Are there 

other costs, direct or indirect, that the 

Commission should consider regarding 

the proposed part 19? How does the 

introduction of the new series ’04 

reports affect the likelihood that a trader 

may seek an exemption? What other 

burdens may arise from the filing of 

these reports? Are the Commission’s 

burden estimates under the PRA 

reasonable? Why or why not? 

Commenters are encouraged to submit 

their own estimates of costs, including 

labor burdens and wage estimates, for 

the Commission’s consideration. 

iv. Consideration of Alternatives 

The Commission also recognizes that 

alternatives may exist to discretionary 

elements of the part 19 reporting 

amendments proposed herein. The 

Commission requests comments on 

whether an alternative to what is 

proposed would result in a superior 

benefit-cost profile, with support for any 

such position provided. 

8. CEA Section 15(a) 

As described above, the Commission 

interprets the revised CEA section 4a as 

requiring the imposition of speculative 

position limits during the spot-month, 

any single month, and all-monthscombined on all commodity derivative 

contracts, including swaps, that 

reference the same underlying physical 

commodity on an aggregated basis 

across trading venues. Section 15(a) of 

the Act requires the Commission to 

evaluate the costs and benefits of its 

discretionary actions in light of five 

enumerated factors that represent broad 

areas of market and public concern. The 

Commission welcomes comment on its 

evaluation under CEA section 15(a). 

i. Protection of Market Participants and 

the Public 

Broadly speaking, the Commission’s 

expansion of the federal speculative 

position limits regime to include an 

additional 19 core-referenced futures 

contracts (and the associated referenced 

contracts) will extend protections 

afforded to the existing legacy contracts. 

Namely, the limits are intended as a 

measure to prophylactically deter 

manipulation and to diminish, 

eliminate, or prevent excessive 

speculation in significant price 

discovery contracts. The proposed 

limits in § 150.2, the methodology used 

for determining limits at the spot, single 

and all-months combined levels and the 

determination of distinct levels in 

physically-delivered and cash-settled 

contracts all support the Commission’s 

mission to prevent undue or 

unnecessary burdens on interstate 

commerce resulting from excess 

speculation such as the sudden or 

unreasonable fluctuations or 

unwarranted changes in commodity 

prices. Further, by requiring that market 

participants who avail themselves of the 

exemptions offered under § 150.3 

document their exemption eligibility 

and make such records available on 

request and through regular reporting to 

the Commission, the Commission is 

protecting market participants—hedgers 

and speculators alike—from another 

party abusing the exemptions reserved 

for eligible entities. 

The Commission anticipates that 

market participants engaged in 

speculative trading will incur costs to 

monitor their positions vis-a-vis limit 

levels. The Commission expects that 

market participants will need to invest 

additional time and effort to become 

familiar with new and amended series 

’04 forms, to gather the necessary 

information in the required format, and 

to file reports in the proposed 

timeframes. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Markets 

Position limits help to prevent market 

manipulation or excessive speculation 

that may unduly influence prices at the 

expense of the efficiency and integrity 

of markets. The expansion of the federal 

position limits regime to 28 core 

referenced futures contracts enhances 

the buffer against excessive speculation 

historically afforded to the nine legacy 

contracts exclusively, improving the 

financial integrity of those markets. 

Moreover, the proposed limits in § 150.2 

promote market competitiveness by 

preventing a trader from gaining too 

much market power. 

The stringently defined exemptions in 

§ 150.3 and the reporting requirements 

assigned to those availing themselves of 

the exemptions provided are the 

Commission’s first line of defense in 

ensuring that participants transacting in 

the Commission’s jurisdictional markets 

are doing so in a competitive and 

efficient environment. 

In codifying the Commission’s 

historical practice of temporarily lifting 

position limit restrictions, the proposed 


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

829 7 U.S.C. 12(a)(1). 

830 5 U.S.C. 552a. 

831See proposed §§ 19.00(a)(1)(i) and 19.01(a)(1). 

832See proposed §§ 19.00(a)(1)(ii) and 19.01(a)(2). 

833The requirement of filing a Form 704 in order 

to claim an anticipatory exemption is stipulated in 

proposed § 150.7(a) in addition to its inclusion in 

proposed amendments to part 19. See proposed 

§§ 19.00(a)(1)(iv), 19.01(a)(4) and 150.7(a). 

834See proposed § 19.01(a)(3). 

835See proposed § 150.2(e)(3)(ii). 

836See proposed § 150.5(b)(5)(C). 

837See proposed § 150.3(g). 

838See supra discussion of number of traders over 

the limits. 

§ 150.3(b) financial distress exemption 

strengthens the benefits of 

accommodating transfers of positions 

from financially distressed firms to 

financially secure firms or facilitating 

other necessary remediation measures 

during times of market stress. In 

addition, it provides market participants 

with a degree of confidence which 

contributes to the overall efficiency and 

financial integrity of markets. 

iii. Price Discovery 

Market manipulation or excessive 

speculation may result in artificial 

prices. So, in this sense, position limits 

might also help to prevent the price 

discovery function of the underlying 

commodity markets from being 

disrupted. On the other hand, imposing 

position limits raises the concerns that 

liquidity and price discovery may be 

diminished, because certain market 

segments, i.e., speculative traders, are 

restricted. However, the Commission 

has mitigated some of these concerns by 

proposing various exemptions to 

positions limits. In addition, applying 

current DCM-set limits as federal limits 

means that even though additional 

contract markets will be brought into 

the federal position limits regime, the 

activity of speculative traders, at least 

initially, will be no less restricted than 

under the current regime. 

iv. Sound Risk Management 

Proposed exemptions for bona fide 

hedgers help to ensure that market 

participants with positions that are 

hedging legitimate commercial needs 

are properly recognized as hedgers 

under the Commission’s speculative 

position limits regime. This promotes 

sound risk management practices. In 

addition, the Commission has crafted 

the proposed rules to ensure sufficient 

market liquidity for bona fide hedgers to 

the maximum extent practicable, e.g., 

through the conditional spot month 

limit exemption. 

To the extent that monitoring for 

position limits requires market 

participants to create internal risk limits 

and evaluate position size in relation to 

the market, position limits may also 

provide an incentive for market 

participants to engage in sound risk 

management practices. 

v. Other Public Interest Considerations 

The regulations proposed under 

§ 150.5 require that exchange-set limits 

employ policies that conform to the 

Commission’s general policy both for 

contracts that are subject to federal 

limits under § 150.2 and those that are 

not, thus harmonizing rules for all 

federal and exchange-set speculative 

position limits. 

B. Paperwork Reduction Act 

1. Overview 

The PRA 828 imposes certain 

requirements on Federal agencies in 

connection with their conducting or 

sponsoring any collection of 

information as defined by the PRA. 

Certain provisions of the regulations 

proposed herein will result in 

amendments to approved collection of 

information requirements within the 

meaning of the PRA. An agency may not 

conduct or sponsor, and a person is not 

required to respond to, a collection of 

information unless it displays a 

currently valid control number issued 

by the Office of Management and 

Budget (‘‘OMB’’). Therefore, the 

Commission is submitting this proposal 

to OMB for review in accordance with 

44 U.S.C. 3507(d) and 5 CFR 1320.11. 

The information collection requirements 

proposed in this proposal would amend 

previously-approved collections 

associated with OMB control numbers 

3038–0009 and 3038–0013. 

If adopted, responses to these 

collections of information would be 

mandatory. Several of the reporting 

requirements are mandatory in order to 

obtain exemptive relief, and are thus 

mandatory under the PRA to the extent 

a market participant elects to seek such 

relief. The Commission will protect 

proprietary information according to the 

Freedom of Information Act and 17 CFR 

part 145, headed ‘‘Commission Records 

and Information.’’ In addition, the 

Commission emphasizes that section 

8(a)(1) of the Act strictly prohibits the 

Commission, unless specifically 

authorized by the Act, from making 

public ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ 829 The Commission also is 

required to protect certain information 

contained in a government system of 

records pursuant to the Privacy Act of 

1974.830

Under the proposed regulations, 

market participants with positions in a 

‘‘referenced contract,’’ as defined in 

proposed § 150.1, would be subject to 

the position limit framework established 

under the proposed revisions to parts 19 

and 150. Proposed part 19 prescribes 

new forms and reporting requirements 

for persons claiming a conditional spot 

month limit exemption (proposed Form 

504),831 a pass-through swap exemption 

(proposed Form 604),832 or an 

anticipatory exemption (proposed Form 

704).833 The proposed amendments to 

part 19 also update and change 

reporting obligations and required 

information for Form 204 and Form 

304.834 Proposed part 150 prescribes 

reporting requirements for DCMs listing 

a core referenced futures contract 835

and traders who wish to apply for an 

exemption from DCM- or SEFestablished positions limits in nonreferenced contracts,836 as well as 

recordkeeping requirements for persons 

who claim exemptions from position 

limits or are counterparties to a person 

claiming a pass-through swap offset.837

2. Methodology and Assumptions 

It is not possible at this time to 

precisely determine the number of 

respondents affected by the proposed 

rules. Many of the regulations that 

impose PRA burdens are exemptions 

that a market participant may elect to 

take advantage of, meaning that without 

intimate knowledge of the day-to-day 

business decisions of all its market 

participants, the Commission could not 

know which participants, or how many, 

may elect to obtain such an exemption. 

Further, the Commission is unsure of 

how many participants not currently in 

the market may be required to or may 

elect to incur the estimated burdens in 

the future. Finally, many of the 

regulations proposed herein are 

applying to participants in swaps 

markets for the first time, and, as 

explained supra, the Commission’s lack 

of experience with such markets and 

with many of the participants therein 

hinders its ability to determine with 

precision the number of affected 

entities. 

These limitations notwithstanding, 

the Commission has made best-effort 

estimations regarding the likely number 

of affected entities for the purposes of 

calculating burdens under the PRA. The 

Commission used its proprietary data, 

collected from market participants, to 

estimate the number of respondents for 

each of the proposed obligations subject 

to the PRA. As discussed supra,838 the 


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839Staff believes that such rounding preserves the 

reasonability of the estimate without creating a false 

impression of precision. 

840The Bureau of Labor Statistics reports that an 

average of 32.8% of all compensation in the 

financial services industry is related to benefits. 

This figure may be obtained on the Bureau of Labor 

Statistics Web site, at http://www.bls.gov/

news.release/ecec.t06.htm. The Commission 

rounded this number to 33% to use in its 

calculations. 

841Other estimates of this figure have varied 

dramatically depending on the categorization of the 

expense and the type of industry classification used 

(see, e.g., BizStats at http://www.bizstats.com/

corporation-industry-financials/finance-insurance52/securities-commodity-contracts-other-financialinvestments-523/commodity-contracts-dealing-andbrokerage-523135/show and Damodaran Online at 

http://pages.stern.nyu.edu/∼adamodar/pc/datasets/

uValuedata.xls) The Commission has chosen to use 

a figure of 50% for overhead and administrative 

expenses to attempt to conservatively estimate the 

average for the industry. 

Commission analyzed data covering the 

two year period 2011–2012 to determine 

how many participants would be over 

60, 80, or 100 percent of the proposed 

limit levels in each of the 28 core 

referenced futures contracts, were such 

limit levels to be adopted as proposed. 

For purposes of the PRA, Commission 

staff determined the number of unique 

traders over the proposed spot-month 

position limit level for all of the 28 core 

referenced futures contracts combined. 

The Commission also determined the 

number of traders over the non-spotmonth position limit level for all of the 

28 core referenced futures contracts 

combined. Staff then added those two 

figures and rounded it up to the nearest 

hundred to arrive at an approximation 

of 400 persons.839 This base figure was 

then scaled to estimate, based on the 

Commission’s expertise and experience 

in the administration of position limits, 

how many participants may be affected 

by each specific provision. The analysis 

reviewed by the Commission does not 

account for hedging and other 

exemptions from position limits, which 

leads the Commission to believe that the 

approximate number of traders in excess 

of the limits is a very conservative 

estimate. The Commission welcomes 

comment on its estimates, the 

methodology described above, and its 

conclusion regarding the 

conservativeness of its estimates. 

The Commission’s estimates 

concerning wage rates are based on 2011 

salary information for the securities 

industry compiled by the Securities 

Industry and Financial Markets 

Association (‘‘SIFMA’’). The 

Commission is using a figure of $120 

per hour, which is derived from a 

weighted average of salaries across 

different professions from the SIFMA 

Report on Management & Professional 

Earnings in the Securities Industry 

2011, modified to account for an 1800- 

hour work-year, adjusted to account for 

the average rate of inflation in 2012. 

This figure was then multiplied by 1.33 

to account for benefits 840 and further by 

1.5 to account for overhead and 

administrative expenses.841 The 

Commission anticipates that compliance 

with the provisions would require the 

work of an information technology 

professional; a compliance manager; an 

accounting professional; and an 

associate general counsel. Thus, the 

wage rate is a weighted national average 

of salary for professionals with the 

following titles (and their relative 

weight); ‘‘programmer (average of senior 

and non-senior)’’ (15% weight), ‘‘senior 

accountant’’ (15%) ‘‘compliance 

manager’’ (30%), and ‘‘assistant/

associate general counsel’’ (40%). All 

monetary estimates have been rounded 

to the nearest hundred dollars. The 

Commission welcomes public comment 

on its assumptions regarding its 

estimated hourly wage. 

3. Information Provided by Reporting 

Entities/Persons and Recordkeeping 

Duties 

For purposes of assisting the 

Commission in setting spot-month 

limits no less frequently than every two 

years, proposed § 150.2(e)(3)(ii) adds an 

additional burden cost to information 

collection 3038–0013 by requiring 

DCMs to supply the Commission with 

an estimated spot-month deliverable 

supply for each core referenced futures 

contract listed. The estimate must 

include documentation as to the 

methodology used in deriving the 

estimate, including a description and 

any statistical data employed. The 

Commission estimates that the 

submission would require a labor 

burden of approximately 20 hours per 

estimate. Thus, a DCM that submits one 

estimate may incur a burden of 20 hours 

for a cost, using the estimated hourly 

wage of $120, of approximately $2,400. 

DCMs that submit more than one 

estimate may multiply this per-estimate 

burden by the number of estimates 

submitted to obtain an approximate 

total burden for all submissions, subject 

to any efficiencies and economies of 

scale that may result from submitting 

multiple estimates. The Commission 

welcomes comment regarding the 

estimated burden on DCMs that will 

result from proposed § 150.2(e). 

Proposed § 150.3(g)(1) adds an 

additional burden cost to information 

collection 3038–0013 by requiring any 

person claiming an exemption from 

federal position limits under part 150 to 

keep and maintain books and records 

concerning all details of their related 

cash, forward, futures, options and swap 

positions and transactions to serve as a 

reasonable basis to demonstrate 

reduction of risk on each day that the 

exemption was claimed. These records 

must be comprehensive, in that they 

must cover anticipated requirements, 

production and royalties, contracts for 

services, cash commodity products and 

by-products, and cross-commodity 

hedges. Proposed § 150.3(g)(2) requires 

any person claiming a pass-through 

swap offset hedging exemption to obtain 

a representation that the swap qualifies 

as a pass-through swap for purposes of 

a bona fide hedging position. 

Additionally, proposed § 150.3(g)(3) 

requires any person representing to 

another person that a swap qualifies as 

a pass-through swap for purposes of a 

bona fide hedging position, to keep and 

make available to the Commission upon 

request all relevant books and records 

supporting such a representation for at 

least two years following the expiration 

of the swap. 

The Commission estimates that 

approximately 400 traders will claim an 

average of 50 exemptions each per year 

that fall within the scope of the 

recordkeeping requirements of proposed 

§ 150.3(g). At approximately one hour 

per exemption claimed to keep and 

maintain the required books and 

records, the Commission estimates that 

industry will incur a total of 20,000 

annual labor hours amounting to 

$2,400,000 in additional labor costs. 

The Commission requests public 

comment regarding the burden 

associated with the recordkeeping 

requirements of proposed § 150.3(g) and 

its estimates thereto. 

Proposed § 150.5(b)(5)(iii) adds an 

additional burden cost to information 

collection 3038–0013 by requiring 

traders who wish to avail themselves of 

any exemption from a DCM or SEF’s 

speculative position limit rules that is 

allowed for under § 150.5(b)(5)(A)–(B) to 

submit an application to the DCM or 

SEF explaining how the exemption 

would be in accord with sound 

commercial practices and would allow 

for a position that could be liquidated 

in an orderly fashion. As noted supra, 

the Commission understands that 

requiring traders to apply for exemptive 

relief comports with existing DCM 

practice; thus, the Commission 

anticipates that the codification of this 

requirement will have the practical 

effect of incrementally increasing, rather 

than creating, the burden of applying for 

such exemptive relief. The Commission 

estimates that approximately 400 traders 

will claim exemptions from DCM or 


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842The Commission proposes that initially only 

the natural gas commodity derivative contracts 

would be designated under § 19.03 for Form 504 

reporting. As such, the Commission’s estimates 

reflect only the burden for traders in that 

commodity. The Commission is not able to estimate 

the expanded cost of any future Commission 

determination to designate another commodity 

under § 19.03 as a special commodity for which 

Form 504 filings would be required. See supra 

discussion regarding the proposed conditional spot 

month limit. 

843This estimate was based upon an average wage 

rate of $51 per hour. Adjusted to the hourly wage 

rate used for purposes of this PRA estimate, the 

previous total labor cost would have been $202,500. 

844The Commission notes that the burdens 

associated with Forms 204 and 304 in collection 

3038–0009 represent a fraction of the total burden 

under that collection. 

SEF-established speculative position 

limits each year, with each trader on 

average making 100 related submissions 

to the DCM or SEF each year. Each 

submission is estimated to take 2 hours 

to complete and file, meaning that these 

traders would incur a total burden of 

80,000 labor hours per year for an 

industry-wide additional labor cost of 

$9,600,000. The Commission welcomes 

all comment regarding the estimated 

burden on market participants wishing 

to avail themselves of a DCM or SEF 

exemption. 

Proposed § 19.01(a)(1) adds an 

additional burden cost to information 

collection 3038–0009 for persons 

claiming a conditional spot month limit 

exemption pursuant to § 150.3(c), by 

requiring the filing of Form 504 for 

special commodities so designated by 

the Commission under § 19.03. A Form 

504 filing shows the composition of the 

cash position of each commodity 

underlying a referenced contract that is 

held or controlled for which the 

exemption is claimed,842 including the 

‘‘as of’’ date, the quantity of stocks 

owned of such commodity, the quantity 

of fixed-price purchase commitments 

open providing for receipt of such cash 

commodity, the quantity of fixed-price 

sale commitments open providing for 

delivery of such cash commodity, the 

quantity of unfixed-price purchase 

commitments open providing for receipt 

of such cash commodity, and the 

quantity of unfixed-price sale 

commitments open providing for 

delivery of such cash commodity. The 

Commission estimates that 

approximately 40 traders will claim a 

conditional spot month limit 12 times 

per year, and each corresponding 

submission will take 15 labor hours to 

complete and file. Therefore, the 

Commission estimates that the Form 

504 reporting requirement will result in 

approximately 7,200 total annual labor 

hours for an additional industry-wide 

labor cost of $864,000. The Commission 

requests comment on its estimates 

regarding new Form 504. In particular, 

the Commission welcomes comment 

regarding the number of entities who 

may partake of the conditional limit in 

natural gas and would thus be required 

to file Form 504. 

Proposed § 19.01(a)(2) adds an 

additional burden cost to information 

collection 3038–0009 by requiring 

persons claiming a pass-through swap 

exemption pursuant to § 150.3(a)(1)(i) to 

file Form 604 showing various data 

depending on whether the offset is for 

non-referenced contract swaps or spotmonth swaps including, at a minimum, 

the underlying commodity or 

commodity reference price, the 

applicable clearing identifiers, the 

notional quantity, the gross long or short 

position in terms of futures-equivalents 

in the core referenced futures contracts, 

and the gross long or short positions in 

the referenced contract for the offsetting 

risk position. The Commission estimates 

that approximately 200 traders will 

claim a pass-through swap exemption 

an average of ten times per year each. 

At approximately 30 labor hours to 

complete each corresponding 

submission for a total burden to traders 

of 60,000 annual labor hours, 

compliance with the Form 604 filing 

requirements industry-wide will impose 

an additional $7,200,000 in labor costs. 

The Commission requests comment on 

its estimates regarding new Form 604. In 

particular, the Commission welcomes 

comment regarding the number of 

entities who may utilize the passthrough swap exemption and the 

burden incurred to file Form 604. 

Proposed § 19.01(a)(3) increases 

existing burden costs previously 

approved under information collection 

3038–0009 by expanding the number of 

cash commodities that existing Form 

204 covers. Additionally, proposed 

§ 19.01(a)(3) requires additional data to 

be reported on Form 204 and proposed 

§ 19.02 requires additional data to be 

reported on existing Form 304 (call 

cotton). Both forms are required to be 

filed when a trader accumulates a net 

long or short commodity derivative 

position in a core referenced futures 

contract that exceeds a federal limit, and 

inform the Commission of the trader’s 

cash positions underlying those 

commodity derivative contracts for 

purposes of claiming bona fide hedging 

exemptions. 

The Commission estimates that 

approximately 400 traders will be 

required to file Form 204 12 times per 

year each. At an estimated two labor 

hours to complete and file each Form 

204 report for a total annual burden to 

industry of 9,600 labor hours, the Form 

204 reporting requirement will cost 

industry $1,200,000 in labor costs. The 

Commission also estimates that 

approximately 400 traders will be 

required to make a Form 304 

submission for call cotton 52 times per 

year each. At one hour to complete each 

submission (representing a net increase 

of a half hour from the previous 

estimate) for a total annual burden to 

industry of 20,800 labor hours, the Form 

304 reporting requirement will impose 

upon industry $2,500,000 in labor costs. 

Previously, the Commission estimated 

the combined annual labor hours for 

both forms to be 1,350 hours, which 

amounted to a total labor cost to 

industry of $68,850 per annum.843

Therefore, the Commission is increasing 

its net estimate of labor hours and costs 

associated with existing Form 204 and 

Form 304 for collection 3038–0009 by 

30,400 hours and $3,700,000.844 The 

Commission requests comment with 

respect to its estimates regarding the 

increased number of entities and 

additional information required to file 

Forms 204 and 304. 

Proposed § 19.01(a)(4) adds an 

additional burden cost to information 

collection 3038–0009 by requiring 

traders claiming anticipatory 

exemptions to file Form 704 for the 

initial statement pursuant to § 150.7(d), 

the supplemental statement pursuant to 

§ 150.7(e), and the annual update 

pursuant to § 150.7(f), as well as Form 

204 monthly reporting the remaining 

unsold, unfilled and other anticipated 

activity for the Specified Period in Form 

704, Section A. The Commission 

estimates that approximately 200 traders 

will claim anticipatory exemptions 

every year an average of 10 times each. 

At an estimated 20 labor hours to 

complete and file Form 704 for a total 

annual burden to traders of 40,000 labor 

hours, the anticipatory exemption filing 

requirement will cost industry an 

additional $4,800,000 in labor costs. 

The Commission requests comment on 

its estimates regarding new Form 704. In 

particular, the Commission welcomes 

comment regarding the number of 

entities who may utilize the anticipatory 

hedge exemption and the burden 

incurred to file Form 704. 

4. Comments on Information Collection 

The Commission invites the public 

and other federal agencies to submit 

comments on any aspect of the reporting 

and recordkeeping burdens discussed 

above. Pursuant to 44 U.S.C. 

3506(c)(2)(B), the Commission solicits 

comments in order to: (1) Evaluate 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75784 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

845 5 U.S.C. 601 et seq. 

846 5 U.S.C. 601(2), 603–05. 

847See Policy Statement and Establishment of 

Definitions of ‘‘Small Entities’’ for Purposes of the 

Regulatory Flexibility Act, 47 FR 18618, 18619, 

Apr. 30, 1982 (DCMs, FCMs, and large traders) 

(‘‘RFA Small Entities Definitions’’); Opting Out of 

Segregation, 66 FR 20740, 20743, Apr. 25, 2001 

(ECPs); Position Limits for Futures and Swaps; 

Final Rule and Interim Final Rule, 76 FR 71626, 

71680, Nov. 18, 2011 (clearing members); Core 

Principles and Other Requirements for Swap 

Execution Facilities, 78 FR 33476, 33548, June 4, 

2013 (SEFs); A New Regulatory Framework for 

Clearing Organizations, 66 FR 45604, 45609, Aug. 

29, 2001 (DCOs); Registration of Swap Dealers and 

Major Swap Participants, 77 FR 2613, Jan. 19, 2012, 

(SDs and MSPs); and Special Calls, 72 FR 50209, 

Aug. 31, 2007 (foreign brokers). 

whether the proposed collections of 

information are necessary for the proper 

performance of the functions of the 

Commission, including whether the 

information will have practical utility; 

(2) evaluate the accuracy of the 

Commission’s estimate of the burden of 

the proposed collections of information; 

(3) determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(4) minimize the burden of the 

collections of information on those who 

are to respond, including through the 

use of automated collection techniques 

or other forms of information 

technology. Comments may be 

submitted directly to the Office of 

Information and Regulatory Affairs, by 

fax at (202) 395–6566 or by email at 

OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

comments submitted so that all 

comments can be summarized and 

addressed in the final rule preamble. 

Refer to the Addresses section of this 

notice for comment submission 

instructions to the Commission. A copy 

of the supporting statements for the 

collection of information discussed 

above may be obtained by visiting 

RegInfo.gov. OMB is required to make a 

decision concerning the collection of 

information between 30 and 60 days 

after publication of this release. 

Consequently, a comment to OMB is 

most assured of being fully considered 

if received by OMB (and the 

Commission) within 30 days after the 

publication of this notice of proposed 

rulemaking. 

C. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that Federal agencies 

consider whether the rules they propose 

will have a significant economic impact 

on a substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact.’’ 845 A regulatory flexibility 

analysis or certification typically is 

required for ‘‘any rule for which the 

agency publishes a general notice of 

proposed rulemaking pursuant to’’ the 

notice-and-comment provisions of the 

Administrative Procedure Act, 5 U.S.C. 

553(b).846 The requirements related to 

the proposed amendments fall mainly 

on registered entities, exchanges, futures 

commission merchants, swap dealers, 

clearing members, foreign brokers, and 

large traders. 

The Commission has previously 

determined that registered DCMs, FCMs, 

SDs, MSPs, ECPs, SEFs, clearing 

members, foreign brokers and large 

traders are not small entities for 

purposes of the RFA.847 While the 

requirements under the proposed 

rulemaking may impact non-financial 

end users, the Commission notes that 

position limits levels and filing 

requirements associated with bona fide 

hedging apply only to large traders, 

while requirements to keep records 

supporting a transaction’s qualification 

for pass-through swap treatment incurs 

a marginal burden that is mitigated 

through overlapping recordkeeping 

requirements for reportable futures 

traders (current § 18.05) and reportable 

swap traders (current § 20.6(b)); 

furthermore, these records are ones that 

such entities maintain, as they would 

other documents evidencing material 

financial relationships, in the ordinary 

course of their businesses. 

Accordingly, the Chairman, on behalf 

of the Commission, hereby certifies, 

pursuant to 5 U.S.C. 605(b), that the 

actions proposed to be taken herein 

would not have a significant economic 

impact on a substantial number of small 

entities.’’ 

IV. Appendices 

Appendix A—Studies relating to 

position limits reviewed and evaluated 

by the Commission 

1. Acharya, Viral V.; Ramadorai, Tarun; 

and Lochstoer, Lars, ‘‘Limits to Arbitrage and 

Hedging: Evidence from Commodity 

Markets,’’ January 8, 2013, Journal of 

Financial Economics. 

2. Allen, Franklin; Litov, Lubomir; and 

Mei, Jianping, ‘‘Large Investors, Price 

Manipulation, and Limits to Arbitrage: An 

Anatomy of Market Corners,’’ June 30, 2006, 

Review of Finance. 

3. Anderson, David; Outlaw, Joe L.; Bryant, 

Henry L.; Richardson, James W.; Ernstes, 

David P.; Raulston, J. Marc; Welch, J. Mark; 

Knapek, George M.; Herbst, Brian K.; and 

Allison, Marc S., ‘‘The Effects of Ethanol on 

Texas Food and Feed,’’ January 1, 2008, The 

Agricultural and Food Policy Center 

Research Report 08–1, Texas A&M 

University. 

4. Antoshin, Sergei; Canetti, Elie; and 

Miyajima, Ken, Global Financial Stability 

Report, ‘‘Financial Stress and Deleveraging, 

Macrofinancial Implications and Policy,’’ 

October 1, 2008, Annex 1.2, Financial 

Investment in Commodities Markets, 

International Monetary Fund. 

5. Aurelich, Nicole M.; Irwin, Scott H.; and 

Garcia, Philip, Bubbles, ‘‘Food Prices, and 

Speculation: Evidence from the CFTC’s Daily 

Large Trader Data Files,’’ August 15, 2012, 

NBER Conference on Economics of Food 

Price Volatility. 

6. Avriel, Mordecai and Reisman, Haim, 

‘‘Optimal Option Portfolios in Markets with 

Position Limits and Margin Requirements,’’ 

June 6, 2000, Journal of Risk. 

7. Babula, Ronald A. and Rothenberg, John 

Paul, ‘‘A Dynamic Monthly Model of U.S. 

Pork Product Markets: Testing for and 

Discerning the Role of Hedging on PorkRelated Food Costs,’’ January 1, 2013, Journal 

of International Agricultural Trade and 

Development. 

8. Baffes, John and Haniotos, Tasos, 

‘‘Placing the 2006/08 Commodity Boom into 

Perspective,’’ July 1, 2010, The World Bank 

Policy Research Working Paper 5371. 

9. Basu, Devraj and Miffre, Joelle, 

‘‘Capturing the Risk Premium of Commodity 

Futures: The Role of Hedging Pressure,’’ July 

1, 2013, Journal of Banking and Risk. 

10. Bos, Jaap and van der Molen, Maarten, 

‘‘A Bitter Brew? How Index Fund 

Speculation Can Drive Up Commodity 

Prices,’’ June 6, 2010, Journal of Agricultural 

and Applied Economics. 

11. Boyd, Naomi; Buyuksahin, Bahattin; 

Haigh, Michael; and Harris, Jeffrey, ‘‘The 

Prevalence, Sources, and Effects of Herding,’’ 

February 1, 2013, SSRN Abstract #1359251. 

12. Breitenfellner, Andreas; Crespo 

Cuaresma, Jesus; and Keppel, Catherine, 

‘‘Determinants of Crude Oil Prices: Supply, 

Demand, Cartel, or Speculation?,’’ October 1, 

2009, Monetary Policy and the Economy. 

13. Brennan, Michael J. and Schwartz, 

Eduardo S., ‘‘Arbitrage in Stock Index 

Futures,’’ January 1, 1990, The Journal of 

Business. 

14. Brunetti, Celso and Buyuksahin, 

Bahattin, ‘‘Is Speculation Destabilizing?,’’ 

April 22, 2009, SSRN Abstract # 1393524. 

15. Buyuksahin, Bahattin and Robe, 

Michel, ‘‘Does it Matter Who Trades Energy 

Derivatives?,’’ March 1, 2012, Review of 

Environment, Energy, and Economics. 

16. Buyuksahin, Bahattin and Robe, 

Michel, ‘‘Speculators, Commodities, and 

Cross-Market Linkages,’’ November 8, 2012, 

Working Paper, U.S. Commodity Futures 

Trading Commission. 

17. Buyuksahin, Bahattin and Robe, 

Michel, ‘‘Does ‘Paper Oil’ Matter?,’’ July 28, 

2011, SSRN Abstract # 1855264. 

18. Buyuksahin, Bahattin; Harris, Jeffrey; 

Haigh, Michael; Overdahl, James; and Robe, 

Michel, ‘‘Fundamentals, Trader Activity, and 

Derivatives Pricing,’’ December 4, 2008, 

Working Paper, U.S. Commodity Futures 

Trading Commission. 

19. Byun, Sungje, ‘‘Speculation in 

Commodity Futures Market, Inventories and 

the Price of Crude Oil,’’ January 17, 2013, 

Working Paper, University of California at 

San Diego. 

20. Cagan, Phillip, ‘‘Financial Futures 

Markets: Is More Regulation Needed?,’’ 

August 7, 2006, Journal of Futures Markets. 


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21. Chan, Kalok and Fong, Wai Ming, 

‘‘Trade Size, Order Imbalance, and VolatilityVolume Relation,’’ August 1, 2000, Journal of 

Financial Economics. 

22. Chincarini, Ludwig, ‘‘The Amaranth 

Debacle: Failure of Risk Measures or Failure 

of Risk Management?,’’ April 1, 2007, SSRN 

Abstract #952607. 

23. Chincarini, Ludwig, ‘‘Natural Gas 

Futures and Spread Position Risk: Lessons 

from the Collapse of Amaranth Advisors 

L.L.C.,’’ January 19, 2008, Journal of Applied 

Finance. 

24. Chordia, Tarun; Subrahmanyam, 

Avanidhar; and Roll, Richard, ‘‘Order 

Imbalance, Liquidity, and Market Returns,’’ 

July 1, 2002, Journal of Financial Economics. 

25. Cifarelli, Giulio and Paladino, 

Giovanna, ‘‘Oil Price Dynamics and 

Speculation: a Multivariate Financial 

Approach,’’ March 1, 2010, Energy 

Economics. 

26. Cifarelli, Giulio and Paladino, 

Giovanna, ‘‘Commodity Futures Returns: A 

non-linear Markov Regime Switching Model 

of Hedging and Speculative Pressures,’’ 

November 19, 2010, Working Paper. 

27. CME Group, Inc., ‘‘Excessive 

Speculation and Position Limits in Energy 

Derivatives Markets,’’ CME Group White 

Paper. 

28. Dahl, R.P., ‘‘Futures Markets: The 

Interaction of Economic Analyses and 

Regulation: Discussion,’’ December 1, 1980, 

American Journal of Agricultural Economics. 

29. Dai, Min; Jin, Hanqing; and Liu, Hong, 

‘‘Illiquidity, Position Limits, and Optimal 

Investment,’’ March 15, 2009, SSRN Abstract 

#1360423. 

30. de Schutter, Olivier, ‘‘Food 

Commodities Speculation and Food Price 

Crises,’’ September 1, 2010, United Nations 

Special Report on the Right to Food. 

31. Dutt, Hans R. and Harris, Lawrence E., 

‘‘Position Limits For Cash-Settled Derivative 

Contracts,’’ August 18, 2005, Journal of 

Futures Markets. 

32. Easterbrook, Frank, ‘‘Monopoly, 

Manipulation, and the Regulation of Futures 

Markets,’’ April 1, 1986, The Journal of 

Business. 

33. Ebrahim, Muhammed and Rhys ap 

Gwilym, ‘‘Can Position Limits Restrain Rogue 

Traders?,’’ March 1, 2013, Journal of Banking 

& Finance. 

34. Eckaus, R.S., ‘‘The Oil Price Really is 

a Speculative Bubble,’’ June 1, 2008, MIT 

Center for Energy and Environmental Policy 

Research. 

35. Ederington, Louis and Lee, Jae Ha, 

‘‘Who Trades Futures and How: Evidence 

from the Heating Oil Market,’’ April 1, 2002, 

Journal of Business. 

36. Ederington, Louis; Dewally, Michael; 

and Fernando, Chitru, ‘‘Determinants of 

Trader Profits in Futures Markets,’’ January 

24, 2013, SSRN Abstract #1781975. 

37. Edirsinghe, Chanaka; Naik, Vasanttilak; 

and Uppal, Raman, ‘‘Optimal Replication of 

Options with Transaction Costs and Trading 

Restrictions,’’ March 1, 1993, Journal of 

Financial and Quantitative Analysis. 

38. Einloth, James, ‘‘Speculation and 

Recent Volatility in the Price of Oil,’’ August 

1, 2009, SSRN Abstract #1488792. 

39. Ellis, Katrina; Michaely, Roni; and 

O’Hara, Maureen, ‘‘The Making of a Dealer 

Market: From Entry to Equilibrium in the 

Trading of Nasdaq Stocks,’’ October 1, 2002, 

Journal of Finance. 

40. European Commission, ‘‘Review of the 

Markets in Financial Instruments Directive,’’ 

December 1, 2010, European Commission. 

41. Fattouh, Bassam; Kilian, Lutz; and 

Mahadeva, Lavan, ‘‘The Role of Speculation 

in Oil Markets: What Have We Learned So 

Far?,’’ July 30, 2012, SSRN Abstract 

#2034134. 

42. Frenk, David and Turbeville, Wallace, 

‘‘Commodity Index Traders and the Boom/

Bust Cycle in Commodities Prices,’’ October 

14, 2011, Better Markets. 

43. Froot, Kenneth; Scharfstein, David; and 

Stein, Jeremy, ‘‘Herd on the Street: 

Informational Inefficiencies in a Market with 

Short Term Speculation,’’ February 1, 1990, 

NBER Working Paper. 

44. Gilbert, Christopher, ‘‘Speculative 

Influences on Commodity Futures Prices, 

2006–2008,’’ March 1, 2010, United Nations 

Conference on Trade and Development. 

45. Gilbert, Christopher, ‘‘Commodity 

Speculation and Commodity Investment,’’ 

March 1, 2010, University of Trento. 

46. Gilbert, Christopher, ‘‘How to 

Understand High Food Prices,’’ October 17, 

2008, Journal of Agricultural Economics. 

47. Gorton, Gary; Hayashi, Fumio; and 

Rouwenhorst, K. Geert, ‘‘The Fundamentals 

of Commodity Futures Returns,’’ July 1, 2013, 

Review of Finance. 

48. Government Accountability Office, 

‘‘Issues Involving the Use of the Futures 

Markets to Invest in Commodity Indexes,’’ 

January 1, 2009, Government Accountability 

Office. 

49. Greenberger, Michael, ‘‘The 

Relationship of Unregulated Excessive 

Speculation to Oil Market Price Volatility,’’ 

January 1, 2010, Personal Web page. 

50. Grosche, Stephanie, ‘‘Limitations Of 

Granger Causality Analysis To Assess The 

Price Effects From The Financialization Of 

Agricultural Commodity Markets Under 

Bounded Rationality,’’ January 31, 2012, 

Agricultural and Resource Economics, 

Discussion Paper. 

51. Gupta, Bhaswar and Kazemi, Hossein, 

‘‘Factor Exposures and Hedge Fund 

Operational Risk: The Case of Amaranth,’’ 

November 19, 2009, SSRN Abstract # 

1509769. 

52. Haigh, Michael S.; Hranaiova, Jana; and 

Overdahl, James A., ‘‘Hedge Funds, 

Volatility, and Liquidity Provision in Energy 

Futures Markets,’’ April 1, 2007, The Journal 

of Alternative Investments. 

53. Haigh, Michael S.; Hranaiova, Jana; and 

Overdahl, James A., ‘‘Price Dynamics, Price 

Discovery, and Large Futures Trader 

Interactions in the Energy Complex,’’ April 1, 

2005, Staff Research Report, U.S. Commodity 

Futures Trading Commission. 

54. Haigh, Michael; Harris, Jeffery; 

Overdahl, James A.; and Robe, Michel, 

‘‘Market Growth, Trader Participation and 

Pricing in Energy Futures Markets,’’ February 

1, 2007, Working Paper, U.S. Commodity 

Futures Trading Commission. 

55. Hamilton, James D., ‘‘Causes and 

Consequences of the Oil Shock of 2007–08,’’ 

April 1, 2009, Brookings Papers on Economic 

Activity. 

56. Harris, Jeffrey and Buyuksahin, 

Bahattin, ‘‘The Role of Speculators in the 

Crude Oil Futures Market,’’ June 16, 2009, 

SSRN Abstract # 1435042. 

57. Harris, Lawrence E., ‘‘Circuit Breakers 

and Program Trading Limits: What Have We 

Learned?,’’ December 9, 1997, Brookings 

Institutions Press. 

58. Harrison, J. Michael and Kreps, David 

M., ‘‘Speculative Investor Behavior in a Stock 

Market With Heterogeneous Expectations,’’ 

May 1, 1978, The Quarterly Journal of 

Economics. 

59. Her Majesty’s Treasury, ‘‘Global 

Commodities: A Long Term Vision for Stable, 

Secure, and Sustainable Global Markets,’’ 

June 1, 2008, Her Majesty’s Treasury. 

60. Hirshliefer, David, ‘‘Residual Risk, 

Trading Costs, and Commodity Futures Risk 

Premia,’’ June 6, 1988, Review of Financial 

Studies. 

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List of Subjects 

17 CFR Part 1 

Agricultural commodity, Agriculture, 

Brokers, Committees, Commodity 

futures, Conflicts of interest, Consumer 

protection, Definitions, Designated 

contract markets, Directors, Major swap 

participants, Minimum financial 

requirements for intermediaries, 

Reporting and recordkeeping 

requirements, Swap dealers, Swaps. 

17 CFR Parts 15 and 17 

Brokers, Commodity futures, 

Reporting and recordkeeping 

requirements, Swaps. 

17 CFR Part 19 

Commodity futures, Cottons, Grains, 

Reporting and recordkeeping 

requirements, Swaps. 

17 CFR Part 32 

Commodity futures, Consumer 

protection, Fraud, Reporting and 

recordkeeping requirements. 

17 CFR Part 37 

Registered entities, Registration 

application, Reporting and 

recordkeeping requirements, Swaps, 

Swap execution facilities. 

17 CFR Part 38 

Block transaction, Commodity 

futures, Designated contract markets, 

Reporting and recordkeeping 

requirements, Transactions off the 

centralized market. 

17 CFR Part 140 

Authority delegations (Government 

agencies), Conflict of interests, 

Organizations and functions 

(Government agencies). 

17 CFR Part 150 

Bona fide hedging, Commodity 

futures, Cotton, Grains, Position limits, 

Referenced Contracts, Swaps. 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission proposes to amend 

17 CFR chapter I as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

■ 1. The authority citation for part 1 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 2a, 5, 6, 6a, 6b, 

6c, 6d, 6e, 6f, 6g, 6h, 6i, 6k, 6l, 6m, 6n, 6o, 

6p, 6r, 6s, 7, 7a–1, 7a–2, 7b, 7b–3, 8, 9, 10a, 

12, 12a, 12c, 13a, 13a–1, 16, 16a, 19, 21, 23, 

and 24, as amended by Title VII of the DoddFrank Wall Street Reform and Consumer 

Protection Act, Pub. L. 111–203, 124 Stat. 

1376 (2010). 

§ 1.3 [Amended] 

■ 2. Amend § 1.3 by removing and 

reserving paragraph (z). 

§§ 1.47 and 1.48 [Removed and Reserved] 

■ 3. Remove and reserve §§ 1.47 and 

1.48. 

PART 15—REPORTS—GENERAL 

PROVISIONS 

■ 4. The authority citation for part 15 

continues to read as follows: 

Authority: 7 U.S.C. 2, 5, 6a, 6c, 6f, 6g, 6i, 

6k, 6m, 6n, 7, 7a, 9, 12a, 19, and 21, as 

amended by Title VII of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act, 

Pub. L. 111–203, 124 Stat. 1376 (2010). 

■ 5. Amend § 15.00 by revising 

paragraph (p) to read as follows: 

§ 15.00 Definitions of terms used in parts 

15 to 19, and 21 of this chapter. 

* * * * * 

(p) Reportable position means: 

(1) For reports specified in parts 17 

and 18, and § 19.00(a)(2) and (3), of this 

chapter any open contract position that 

at the close of the market on any 

business day equals or exceeds the 

quantity specified in § 15.03 in either: 

(i) Any one futures of any commodity 

on any one reporting market, excluding 

futures contracts against which notices 

of delivery have been stopped by a 

trader or issued by the clearing 

organization of a reporting market; or 

(ii) Long or short put or call options 

that exercise into the same future of any 

commodity, or long or short put or call 

options for options on physicals that 

have identical expirations and exercise 

into the same physical, on any one 

reporting market. 

(2) For the purposes of reports 

specified in § 19.00(a)(1) of this chapter, 

any position in commodity derivative 

contracts, as defined in § 150.1 of this 

chapter, that exceeds a position limit in 

§ 150.2 of this chapter for the particular 

commodity. 

* * * * * 

■ 6. Amend § 15 .01 by revising 

paragraph (d) to read as follows: 

§ 15.01 Persons required to report. 

* * * * * 

(d) Persons, as specified in part 19 of 

this chapter, either: 

(1) Who hold or control commodity 

derivative contracts (as defined in 

§ 150.1 of this chapter) that exceed a 

position limit in § 150.2 of this chapter 

for the commodities enumerated in that 

section; or 

(2) Who are merchants or dealers of 

cotton holding or controlling positions 

for future delivery in cotton that equal 

or exceed the amount set forth in 

§ 15.03. 

■ 7. Revise § 15.02 to read as follows: 

§ 15.02 Reporting forms. 

Forms on which to report may be 

obtained from any office of the 

Commission or via the Internet (http:// 

www.cftc.gov). Forms to be used for the 

filing of reports follow, and persons 

required to file these forms may be 

determined by referring to the rule 

listed in the column opposite the form 

number. 

Form No. Title Rule 

40 ...................................................... Statement of Reporting Trader ................................................................................................. 18.04 

71 ...................................................... Identification of Omnibus Accounts and Sub-accounts ........................................................... 17.01 

101 .................................................... Positions of Special Accounts .................................................................................................. 17.00 

102 .................................................... Identification of Special Accounts, Volume Threshold Accounts, and Consolidated Accounts 17.01 

204 .................................................... Cash Positions of Hedgers (excluding Cotton) ........................................................................ 19.00 


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Form No. Title Rule 

304 .................................................... Cash Positions of Cotton Traders ............................................................................................ 19.00 

504 .................................................... Cash Positions for Conditional Spot Month Exemptions ......................................................... 19.00 

604 .................................................... Counterparty Data for Pass-Through Swap Exemptions ......................................................... 19.00 

704 .................................................... Statement of Anticipatory Bona Fide Hedge Exemptions ........................................................ 19.00 

(Approved by the Office of Management 

and Budget under control numbers 

3038–0007, 3038–0009, and 3038–0103) 

PART 17—REPORTS BY REPORTING 

MARKETS, FUTURES COMMISSION 

MERCHANTS, CLEARING MEMBERS, 

AND FOREIGN BROKERS 

■ 8. The authority citation for part 17, 

as amended November 18, 2013, at 78 

FR 69230, effective February 18, 2014, 

continues to read as follows: 

Authority: 7 U.S.C. 2, 6a, 6c, 6d, 6f, 6g, 6i, 

6t, 7, 7a, and 12a, as amended by Title VII 

of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376 (2010). 

■ 9. Amend § 17.00 by revising 

paragraph (b) to read as follows: 

§ 17.00 Information to be furnished by 

futures commission merchants, clearing 

members and foreign brokers. 

* * * * * 

(b) Interest in or control of several 

accounts. Except as otherwise 

instructed by the Commission or its 

designee and as specifically provided in 

§ 150.4 of this chapter, if any person 

holds or has a financial interest in or 

controls more than one account, all such 

accounts shall be considered by the 

futures commission merchant, clearing 

member or foreign broker as a single 

account for the purpose of determining 

special account status and for reporting 

purposes. 

* * * * * 

■ 10. Amend § 17.03, as amended 

November 18, 2013, at 78 FR 69232, 

effective February 18, 2014, by adding 

paragraph (h) to read as follows: 

§ 17.03 Delegation of authority to the 

Director of the Office of Data and 

Technology or the Director of the Division 

of Market Oversight. 

* * * * * 

(h) Pursuant to § 17.00(b), and as 

specifically provided in § 150.4 of this 

chapter, the authority shall be 

designated to the Director of the 

Division of Market Oversight to instruct 

an futures commission merchant, 

clearing member or foreign broker to 

consider as a single account for the 

purpose of determining special account 

status and for reporting purposes all 

accounts one person holds or controls, 

or in which the person has a financial 

interest. 

■ 11. Revise part 19 to read as follows: 

PART 19—REPORTS BY PERSONS 

HOLDING POSITIONS EXEMPT FROM 

POSITION LIMITS AND BY 

MERCHANTS AND DEALERS IN 

COTTON 

Sec. 

19.00 General provisions. 

19.01 Reports on stocks and fixed price 

purchases and sales. 

19.02 Reports pertaining to cotton on call 

purchases and sales. 

19.03 Reports pertaining to special 

commodities. 

19.04 Delegation of authority to the Director 

of the Division of Market Oversight. 

19.05–19.10 [Reserved] 

Appendix Appendix A to Part 19—Forms 

204, 304, 504, 604, and 704 

Authority: 7 U.S.C. 6g(a), 6a, 6c(b), 6i, and 

12a(5), as amended by Title VII of the DoddFrank Wall Street Reform and Consumer 

Protection Act, Pub. L. 111–203, 124 Stat. 

1376 (2010). 

§ 19.00 General provisions. 

(a) Who must file series ’04 reports. 

The following persons are required to 

file series ’04 reports: 

(1) Persons filing for exemption to 

speculative position limits. All persons 

holding or controlling positions in 

commodity derivative contracts, as 

defined in § 150.1 of this chapter, in 

excess of any speculative position limit 

provided under § 150.2 of this chapter 

and for any part of which a person relies 

on an exemption to speculative position 

limits under § 150.3 of this chapter as 

follows: 

(i) Conditional spot month limit 

exemption. A conditional spot month 

limit exemption under § 150.3(c) of this 

chapter for any commodity specially 

designated by the Commission under 

§ 19.03 for reporting; 

(ii) Pass-through swap exemption. A 

pass-through swap exemption under 

§ 150.3(a)(1)(i) of this chapter and as 

defined in paragraph (2)(ii) of the 

definition of ‘‘bona fide hedging 

position’’ in § 150.1 of this chapter, 

reporting separately for: 

(A) Non-referenced-contract swap 

offset. A swap that is not a referenced 

contract, as that term is defined in 

§ 150.1 of this chapter, and which is 

executed opposite a counterparty for 

which the swap would qualify as a bona 

fide hedging position and for which the 

risk is offset with a referenced contract; 

and 

(B) Spot-month swap offset. A cashsettled swap, regardless of whether it is 

a referenced contract, executed opposite 

a counterparty for which the swap 

would qualify as a bona fide hedging 

position and for which the risk is offset 

with a physical-delivery referenced 

contract in its spot month; 

(iii) Other exemption. Any other 

exemption from speculative position 

limits under § 150.3 of this chapter, 

including for a bona fide hedging 

position as defined in § 150.1 of this 

chapter or any exemption granted under 

§ 150.3(b) or (d) of this chapter; or 

(iv) Anticipatory exemption. An 

anticipatory exemption under § 150.7 of 

this chapter. 

(2) Persons filing cotton on call 

reports. Merchants and dealers of cotton 

holding or controlling positions for 

futures delivery in cotton that are 

reportable pursuant to § 15.00(p)(1)(i) of 

this chapter; or 

(3) Persons responding to a special 

call. All persons exceeding speculative 

position limits under § 150.2 of this 

chapter or all persons holding or 

controlling positions for future delivery 

that are reportable pursuant to 

§ 15.00(p)(1) of this chapter who have 

received a special call for series ’04 

reports from the Commission or its 

designee. Persons subject to a special 

call shall file CFTC Form 204, 304, 504, 

604 or 704 as instructed in the special 

call. Filings in response to a special call 

shall be made within one business day 

of receipt of the special call unless 

otherwise specified in the call. For the 

purposes of this paragraph, the 

Commission hereby delegates to the 

Director of the Division of Market 

Oversight, or to such other person 

designated by the Director, authority to 

issue calls for series ’04 reports. 

(b) Manner of reporting. The manner 

of reporting the information required in 

§ 19.01 is subject to the following: 

(1) Excluding certain source 

commodities, products or byproducts of 

the cash commodity hedged. If the 

regular business practice of the 

reporting person is to exclude certain 

source commodities, products or 

byproducts in determining his cash 

positions for bona fide hedging 

positions (as defined in § 150.1 of this 

chapter), the same shall be excluded in 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75789 

the report, provided that the amount of 

the source commodity being excluded is 

de minimis, impractical to account for, 

and/or on the opposite side of the 

market from the market participant’s 

hedging position. Such persons shall 

furnish to the Commission or its 

designee upon request detailed 

information concerning the kind and 

quantity of source commodity, product 

or byproduct so excluded. Provided 

however, when reporting for the cash 

commodity of soybeans, soybean oil, or 

soybean meal, the reporting person shall 

show the cash positions of soybeans, 

soybean oil and soybean meal. 

(2) Cross hedges. Cash positions that 

represent a commodity, or products or 

byproducts of a commodity, that is 

different from the commodity 

underlying a commodity derivative 

contract that is used for hedging, shall 

be shown both in terms of the 

equivalent amount of the commodity 

underlying the commodity derivative 

contract used for hedging and in terms 

of the actual cash commodity as 

provided for on the appropriate series 

’04 form. 

(3) Standards and conversion factors. 

In computing their cash position, every 

person shall use such standards and 

conversion factors that are usual in the 

particular trade or that otherwise reflect 

the value-fluctuation-equivalents of the 

cash position in terms of the commodity 

underlying the commodity derivative 

contract used for hedging. Such person 

shall furnish to the Commission upon 

request detailed information concerning 

the basis for and derivation of such 

conversion factors, including: 

(i) The hedge ratio used to convert the 

actual cash commodity to the equivalent 

amount of the commodity underlying 

the commodity derivative contract used 

for hedging; and 

(ii) An explanation of the 

methodology used for determining the 

hedge ratio. 

§ 19.01 Reports on stocks and fixed price 

purchases and sales. 

(a) Information required.—(1) 

Conditional spot month limit 

exemption. Persons required to file ’04 

reports under § 19.00(a)(1)(i) shall file 

CFTC Form 504 showing the 

composition of the cash position of each 

commodity underlying a referenced 

contract that is held or controlled 

including: 

(i) The as of date; 

(ii) The quantity of stocks owned of 

such commodity that either: 

(A) Is in a position to be delivered on 

the physical-delivery core referenced 

futures contract; or 

(B) Underlies the cash-settled core 

referenced futures contract; 

(iii) The quantity of fixed-price 

purchase commitments open providing 

for receipt of such cash commodity in: 

(A) The delivery period for the 

physical-delivery core referenced 

futures contract; or 

(B) The time period for cashsettlement price determination for the 

cash-settled core referenced futures 

contract; 

(iv) The quantity of unfixed-price sale 

commitments open providing for 

delivery of such cash commodity in: 

(A) The delivery period for the 

physical-delivery core referenced 

futures contract; or 

(B) The time period for cashsettlement price determination for the 

cash-settled core referenced futures 

contract; 

(v) The quantity of unfixed-price 

purchase commitments open providing 

for receipt of such cash commodity in: 

(A) The delivery period for the 

physical-delivery core referenced 

futures contract; or 

(B) The time period for cashsettlement price determination for the 

cash-settled core referenced futures 

contract; and 

(vi) The quantity of fixed-price sale 

commitments open providing for 

delivery of such cash commodity in: 

(A) The delivery period for the 

physical-delivery core referenced 

futures contract; or 

(B) The time period for cashsettlement price determination for the 

cash-settled core referenced futures 

contract. 

(2) Pass-through swap exemption. 

Persons required to file ’04 reports 

under § 19.00(a)(1)(ii) shall file CFTC 

Form 604: 

(i) Non-referenced-contract swap 

offset. For each swap that is not a 

referenced contract and which is 

executed opposite a counterparty for 

which the transaction would qualify as 

a bona fide hedging position and for 

which the risk is offset with a 

referenced contract, showing: 

(A) The underlying commodity or 

commodity reference price; 

(B) The applicable clearing identifiers; 

(C) The notional quantity; 

(D) The gross long or short position in 

terms of futures-equivalents in the core 

referenced futures contract; and 

(E) The gross long or short positions 

in the referenced contract for the 

offsetting risk position; and 

(ii) Spot-month swap offset. For each 

cash-settled swap executed opposite a 

counterparty for which the transaction 

would qualify as a bona fide hedging 

position and for which the risk is offset 

with a physical-delivery referenced 

contract held into a spot month, 

showing for such cash-settled swap that 

is not a referenced contract the 

information required under paragraph 

(a)(2)(i) of this section and for such 

cash-settled swap that is a referenced 

contract: 

(A) The gross long or short position 

for such cash-settled swap in terms of 

futures-equivalents in the core 

referenced futures contract; and 

(B) The gross long or short positions 

in the physical-delivery referenced 

contract for the offsetting risk position. 

(3) Other exemptions. Persons 

required to file ’04 reports under 

§ 19.00(a)(1)(iii) shall file CFTC Form 

204 reports showing the composition of 

the cash position of each commodity 

hedged or underlying a reportable 

position including: 

(i) The as of date, an indication of any 

enumerated bona fide hedging position 

exemption(s) claimed, the commodity 

derivative contract held or controlled, 

and the equivalent core reference 

futures contract; 

(ii) The quantity of stocks owned of 

such commodities and their products 

and byproducts; 

(iii) The quantity of fixed-price 

purchase commitments open in such 

cash commodities and their products 

and byproducts; 

(iv) The quantity of fixed-price sale 

commitments open in such cash 

commodities and their products and 

byproducts; 

(v) The quantity of unfixed-price 

purchase and sale commitments open in 

such cash commodities and their 

products and byproducts, in the case of 

offsetting unfixed-price cash commodity 

sales and purchases; and 

(vi) For cotton, additional information 

that includes: 

(A) The quantity of equity in cotton 

held by the Commodity Credit 

Corporation under the provisions of the 

Upland Cotton Program of the 

Agricultural Stabilization and 

Conservation Service of the U.S. 

Department of Agriculture; 

(B) The quantity of certificated cotton 

owned; and 

(C) The quantity of non-certificated 

stocks owned. 

(4) Anticipatory exemptions. Persons 

required to file ’04 reports under 

§ 19.00(a)(1)(iv) shall file: 

(i) CFTC Form 704 for the initial 

statement pursuant to § 150.7(d) of this 

chapter, the supplemental statement 

pursuant to § 150.7(e) of this chapter, 

and the annual update pursuant to 

§ 150.7(f) of this chapter; and 

(ii) CFTC Form 204 monthly on the 

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anticipated activity for the Specified 

Period that was reported on such 

person’s most recently filed Form 704, 

Section A pursuant to § 150.7(g) of this 

chapter. 

(b) Time and place of filing reports.— 

(1) General. Except for reports filed in 

response to special calls made under 

§ 19.00(a)(3) or reports required under 

§ 19.00(a)(1)(i), (a)(1)(ii)(B), or 

§ 19.01(a)(4)(i), each report shall be 

made monthly: 

(i) As of the close of business on the 

last Friday of the month, and 

(ii) As specified in paragraph (b)(3) of 

this section, and not later than 9 a.m. 

Eastern Time on the third business day 

following the date of the report. 

(2) Conditional spot month limit. 

Persons required to file ’04 reports 

under § 19.00(a)(1)(i) shall file each 

report for special commodities as 

specified by the Commission under 

§ 19.03: 

(i) As of the close of business for each 

day the person exceeds the limit during 

a spot period up to and through the day 

the person’s position first falls below 

the position limit; and 

(ii) As specified in paragraph (b)(3) of 

this section, and not later than 9 a.m. 

Eastern Time on the next business day 

following the date of the report. 

(3) Electronic filing. CFTC ’04 reports 

must be transmitted using the format, 

coding structure, and electronic data 

transmission procedures approved in 

writing by the Commission. 

§ 19.02 Reports pertaining to cotton on 

call purchases and sales. 

(a) Information required. Persons 

required to file ’04 reports under 

§ 19.00(a)(2) shall file CFTC Form 304 

reports showing the quantity of call 

cotton bought or sold on which the 

price has not been fixed, together with 

the respective futures on which the 

purchase or sale is based. As used 

herein, call cotton refers to spot cotton 

bought or sold, or contracted for 

purchase or sale at a price to be fixed 

later based upon a specified future. 

(b) Time and place of filing reports. 

Each report shall be made weekly as of 

the close of business on Friday and filed 

using the procedure under § 19.01(b)(3), 

not later than 9 a.m. Eastern Time on 

the third business day following the 

date of the report. 

§ 19.03 Reports pertaining to special 

commodities. 

From time to time to facilitate 

surveillance in certain commodity 

derivative contracts, the Commission 

may designate a commodity derivative 

contract for reporting under 

§ 19.00(a)(1)(i) and will publish such 

determination in the Federal Register 

and on its Web site. Persons holding or 

controlling positions in such special 

commodity derivative contracts must, 

beginning 30 days after notice is 

published in the Federal Register, 

comply with the reporting requirements 

under § 19.00(a)(1)(i) and file Form 504 

for conditional spot month limit 

exemptions. 

§ 19.04 Delegation of authority to the 

Director of the Division of Market Oversight. 

(a) The Commission hereby delegates, 

until it orders otherwise, to the Director 

of the Division of Market Oversight or 

such other employee or employees as 

the Director may designate from time to 

time, the authority in § 19.01 to provide 

instructions or to determine the format, 

coding structure, and electronic data 

transmission procedures for submitting 

data records and any other information 

required under this part. 

(b) The Director of the Division of 

Market Oversight may submit to the 

Commission for its consideration any 

matter which has been delegated in this 

section. 

(c) Nothing in this section prohibits 

the Commission, at its election, from 

exercising the authority delegated in 

this section. 

§§ 19.05–19.10 [Reserved] 

Appendix A to Part 19—Forms 204, 

304, 504, 604, and 704 

Note: This Appendix includes 

representations of the proposed reporting 

forms, which would be submitted in an 

electronic format published pursuant to the 

proposed rules, either via the Commission’s 

web portal or via XML-based, secure FTP 

transmission. 

BILLING CODE 6351–01–P 


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PART 32—REGULATION OF 

COMMODITY OPTION TRANSACTIONS 

■ 12. The authority citation for part 32 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6c, and 12a, 

unless otherwise noted. 

■ 13. Amend § 32.3 by revising 

paragraph (c)(2) to read as follows: 

§ 32.3 Trade options. 

* * * * * 

(c) * * * 

(2) Part 150 (Position Limits) of this 

chapter; 

* * * * * 

PART 37—SWAP EXECUTION 

FACILITIES 

■ 14. The authority citation for part 37 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a– 

2, 7b–3, and 12a, as amended by Titles VII 

and VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Pub. L. 

111–203, 124 Stat. 1376 

■ 15. Revise § 37.601 to read as follows: 

§ 37.601 Additional sources for 

compliance. 

A swap execution facility that is a 

trading facility must meet the 

requirements of part 150 of this chapter, 

as applicable. 

■ 16. In Appendix B to part 37, under 

the heading Core Principle 6 of Section 

5H of the Act, revise the introductory 

text of paragraph (B) and paragraph 

(B)(2)(a) to read as follows: 

Appendix B to Part 37—Guidance on, 

and Acceptable Practices in, 

Compliance with Core Principles 

* * * * * 

CORE PRINCIPLE 6 OF SECTION 5H OF 

THE ACT—POSITION LIMITS OR 

ACCOUNTABILITY 

* * * * * 

(B) Position limits. For any contract that is 

subject to a position limitation established by 

the Commission pursuant to section 4a(a) of 

the Act, the swap execution facility that is a 

trading facility shall: 

* * * * * 

(2) * * * 

(a) Guidance. A swap execution facility 

that is a trading facility must meet the 

requirements of part 150 of this chapter, as 

applicable. A swap execution facility that is 

not a trading facility should consider part 

150 of this chapter as guidance. 

* * * * * 

PART 38—DESIGNATED CONTRACT 

MARKETS 

■ 17. The authority citation for part 38 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 

6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b– 

1, 7b–3, 8, 9, 15, and 21, as amended by the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376. 

■ 18. Revise § 38.301 to read as follows: 

§ 38.301 Position limitations and 

accountability. 

A designated contract market must 

meet the requirements of part 150 of this 

chapter, as applicable. 

PART 140—ORGANIZATION, 

FUNCTIONS, AND PROCEDURES OF 

THE COMMISSION 

■ 19. The authority citation for part 140 

continues to read as follows: 

Authority: 7 U.S.C. 2(a)(12), 13(c), 13(d), 

13(e), and 16(b). 

§ 140.97 [Removed and Reserved] 

■ 20. Remove and reserve § 140.97. 

PART 150—LIMITS ON POSITIONS 

■ 21. The authority citation for part 150 

is revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 

6g, 6t, 12a, 19, as amended by Title VII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376 (2010). 

■ 22. Revise § 150.1 to read as follows: 

§ 150.1 Definitions. 

As used in this part— 

Basis contract means a commodity 

derivative contract that is cash-settled 

based on the difference in: 

(1) The price, directly or indirectly, 

of: 

(i) A particular core referenced futures 

contract; or 

(ii) A commodity deliverable on a 

particular core referenced futures 

contract, whether at par, a fixed 

discount to par, or a premium to par; 

and 

(2) The price, at a different delivery 

location or pricing point than that of the 

same particular core referenced futures 

contract, directly or indirectly, of: 

(i) A commodity deliverable on the 

same particular core referenced futures 

contract, whether at par, a fixed 

discount to par, or a premium to par; or 

(ii) A commodity that is listed in 

Appendix B of this part as substantially 

the same as a commodity underlying the 

same core referenced futures contract. 

Bona fide hedging position means any 

position whose purpose is to offset price 

risks incidental to commercial cash, 

spot, or forward operations, and such 

position is established and liquidated in 

an orderly manner in accordance with 

sound commercial practices, provided 

that: 

(1) Hedges of an excluded commodity. 

For a position in commodity derivative 

contracts in an excluded commodity, as 

that term is defined in section 1a(19) of 

the Act: 

(i) Such position is economically 

appropriate to the reduction of risks in 

the conduct and management of a 

commercial enterprise; and 

(ii)(A) Is enumerated in paragraph (3), 

(4) or (5) of this definition; or 

(B) Such position is recognized as a 

bona fide hedging position by the 

designated contract market or swap 

execution facility that is a trading 

facility, pursuant to such market’s rules 

submitted to the Commission, which 

rules may include risk management 

exemptions consistent with Appendix A 

of this part; and 

(2) Hedges of a physical commodity. 

For a position in commodity derivative 

contracts in a physical commodity: 

(i) Such position: 

(A) Represents a substitute for 

transactions made or to be made, or 

positions taken or to be taken, at a later 

time in a physical marketing channel; 

(B) Is economically appropriate to the 

reduction of risks in the conduct and 

management of a commercial enterprise; 

(C) Arises from the potential change 

in the value of— 

(1) Assets which a person owns, 

produces, manufactures, processes, or 

merchandises or anticipates owning, 

producing, manufacturing, processing, 

or merchandising; 

(2) Liabilities which a person owes or 

anticipates incurring; or 

(3) Services that a person provides, 

purchases, or anticipates providing or 

purchasing; and 

(D) Is enumerated in paragraph (3), (4) 

or (5) of this definition; or 

(ii)(A) Pass-through swap offsets. 

Such position reduces risks attendant to 

a position resulting from a swap in the 

same physical commodity that was 

executed opposite a counterparty for 

which the position at the time of the 

transaction would qualify as a bona fide 

hedging position pursuant to paragraph 

(2)(i) of this definition (a pass-through 

swap counterparty), provided that no 

such risk-reducing position is 

maintained in any physical-delivery 

commodity derivative contract during 

the lesser of the last five days of trading 

or the time period for the spot month in 

such physical-delivery commodity 

derivative contract; and 

(B) Pass-through swaps. Such swap 

position was executed opposite a passthrough swap counterparty and to the 

extent such swap position has been 

offset pursuant to paragraph (2)(ii)(A) of 

this definition. 


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(3) Enumerated hedging positions. A 

bona fide hedging position includes any 

of the following specific positions: 

(i) Hedges of inventory and cash 

commodity purchase contracts. Short 

positions in commodity derivative 

contracts that do not exceed in quantity 

ownership or fixed-price purchase 

contracts in the contract’s underlying 

cash commodity by the same person. 

(ii) Hedges of cash commodity sales 

contracts. Long positions in commodity 

derivative contracts that do not exceed 

in quantity the fixed-price sales 

contracts in the contract’s underlying 

cash commodity by the same person and 

the quantity equivalent of fixed-price 

sales contracts of the cash products and 

by-products of such commodity by the 

same person. 

(iii) Hedges of unfilled anticipated 

requirements. Provided that such 

positions in a physical-delivery 

commodity derivative contract, during 

the lesser of the last five days of trading 

or the time period for the spot month in 

such physical-delivery contract, do not 

exceed the person’s unfilled anticipated 

requirements of the same cash 

commodity for that month and for the 

next succeeding month: 

(A) Long positions in commodity 

derivative contracts that do not exceed 

in quantity unfilled anticipated 

requirements of the same cash 

commodity, and that do not exceed 

twelve months for an agricultural 

commodity, for processing, 

manufacturing, or use by the same 

person; and 

(B) Long positions in commodity 

derivative contracts that do not exceed 

in quantity unfilled anticipated 

requirements of the same cash 

commodity for resale by a utility that is 

required or encouraged to hedge by its 

public utility commission on behalf of 

its customers’ anticipated use. 

(iv) Hedges by agents. Long or short 

positions in commodity derivative 

contracts by an agent who does not own 

or has not contracted to sell or purchase 

the offsetting cash commodity at a fixed 

price, provided that the agent is 

responsible for merchandising the cash 

positions that are being offset in 

commodity derivative contracts and the 

agent has a contractual arrangement 

with the person who owns the 

commodity or holds the cash market 

commitment being offset. 

(4) Other enumerated hedging 

positions. A bona fide hedging position 

also includes the following specific 

positions, provided that no such 

position is maintained in any physicaldelivery commodity derivative contract 

during the lesser of the last five days of 

trading or the time period for the spot 

month in such physical-delivery 

contract: 

(i) Hedges of unsold anticipated 

production. Short positions in 

commodity derivative contracts that do 

not exceed in quantity unsold 

anticipated production of the same 

commodity, and that do not exceed 

twelve months of production for an 

agricultural commodity, by the same 

person. 

(ii) Hedges of offsetting unfixed-price 

cash commodity sales and purchases. 

Short and long positions in commodity 

derivative contracts that do not exceed 

in quantity that amount of the same 

cash commodity that has been bought 

and sold by the same person at unfixed 

prices: 

(A) Basis different delivery months in 

the same commodity derivative 

contract; or 

(B) Basis different commodity 

derivative contracts in the same 

commodity, regardless of whether the 

commodity derivative contracts are in 

the same calendar month. 

(iii) Hedges of anticipated royalties. 

Short positions in commodity derivative 

contracts offset by the anticipated 

change in value of mineral royalty rights 

that are owned by the same person, 

provided that the royalty rights arise out 

of the production of the commodity 

underlying the commodity derivative 

contract. 

(iv) Hedges of services. Short or long 

positions in commodity derivative 

contracts offset by the anticipated 

change in value of receipts or payments 

due or expected to be due under an 

executed contract for services held by 

the same person, provided that the 

contract for services arises out of the 

production, manufacturing, processing, 

use, or transportation of the commodity 

underlying the commodity derivative 

contract, and which may not exceed one 

year for agricultural commodities. 

(5) Cross-commodity hedges. 

Positions in commodity derivative 

contracts described in paragraph (2)(ii), 

paragraphs (3)(i) through (iv) and 

paragraphs (4)(i) through (iv) of this 

definition may also be used to offset the 

risks arising from a commodity other 

than the same cash commodity 

underlying a commodity derivative 

contract, provided that the fluctuations 

in value of the position in the 

commodity derivative contract, or the 

commodity underlying the commodity 

derivative contract, are substantially 

related to the fluctuations in value of 

the actual or anticipated cash position 

or pass-through swap and no such 

position is maintained in any physicaldelivery commodity derivative contract 

during the lesser of the last five days of 

trading or the time period for the spot 

month in such physical-delivery 

contract. 

Commodity derivative contract 

means, for this part, any futures, option, 

or swap contract in a commodity (other 

than a security futures product as 

defined in section 1a(45) of the Act). 

Core referenced futures contract 

means a futures contract that is listed in 

§ 150.2(d). 

Eligible affiliate. An eligible affiliate 

means an entity with respect to which 

another person: 

(1) Directly or indirectly holds either: 

(i) A majority of the equity securities 

of such entity, or 

(ii) The right to receive upon 

dissolution of, or the contribution of, a 

majority of the capital of such entity; 

(2) Reports its financial statements on 

a consolidated basis under Generally 

Accepted Accounting Principles or 

International Financial Reporting 

Standards, and such consolidated 

financial statements include the 

financial results of such entity; and 

(3) Is required to aggregate the 

positions of such entity under § 150.4 

and does not claim an exemption from 

aggregation for such entity. 

Eligible entity means a commodity 

pool operator; the operator of a trading 

vehicle which is excluded or which 

itself has qualified for exclusion from 

the definition of the term ‘‘pool’’ or 

‘‘commodity pool operator,’’ 

respectively, under § 4.5 of this chapter; 

the limited partner, limited member or 

shareholder in a commodity pool the 

operator of which is exempt from 

registration under § 4.13 of this chapter; 

a commodity trading advisor; a bank or 

trust company; a savings association; an 

insurance company; or the separately 

organized affiliates of any of the above 

entities: 

(1) Which authorizes an independent 

account controller independently to 

control all trading decisions with 

respect to the eligible entity’s client 

positions and accounts that the 

independent account controller holds 

directly or indirectly, or on the eligible 

entity’s behalf, but without the eligible 

entity’s day-to-day direction; and 

(2) Which maintains: 

(i) Only such minimum control over 

the independent account controller as is 

consistent with its fiduciary 

responsibilities to the managed 

positions and accounts, and necessary 

to fulfill its duty to supervise diligently 

the trading done on its behalf; or 

(ii) If a limited partner, limited 

member or shareholder of a commodity 

pool the operator of which is exempt 

from registration under § 4.13 of this 


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chapter, only such limited control as is 

consistent with its status. 

Entity means a ‘‘person’’ as defined in 

section 1a of the Act. 

Excluded commodity means an 

‘‘excluded commodity’’ as defined in 

section 1a of the Act. 

Futures-equivalent means 

(1) An option contract, whether an 

option on a future or an option that is 

a swap, which has been adjusted by an 

economically reasonable and 

analytically supported risk factor, or 

delta coefficient, for that option 

computed as of the previous day’s close 

or the current day’s close or 

contemporaneously during the trading 

day, and; 

(2) A swap which has been converted 

to an economically equivalent amount 

of an open position in a core referenced 

futures contract. 

Independent account controller 

means a person— 

(1) Who specifically is authorized by 

an eligible entity, as defined in this 

section, independently to control 

trading decisions on behalf of, but 

without the day-to-day direction of, the 

eligible entity; 

(2) Over whose trading the eligible 

entity maintains only such minimum 

control as is consistent with its 

fiduciary responsibilities for managed 

positions and accounts to fulfill its duty 

to supervise diligently the trading done 

on its behalf or as is consistent with 

such other legal rights or obligations 

which may be incumbent upon the 

eligible entity to fulfill; 

(3) Who trades independently of the 

eligible entity and of any other 

independent account controller trading 

for the eligible entity; 

(4) Who has no knowledge of trading 

decisions by any other independent 

account controller; and 

(5) Who is 

(i) Registered as a futures commission 

merchant, an introducing broker, a 

commodity trading advisor, or an 

associated person of any such registrant, 

or 

(ii) A general partner, managing 

member or manager of a commodity 

pool the operator of which is excluded 

from registration under § 4.5(a)(4) of this 

chapter or § 4.13 of this chapter, 

provided that such general partner, 

managing member or manager complies 

with the requirements of § 150.4(c). 

Intermarket spread position means a 

long position in a commodity derivative 

contract in a particular commodity at a 

particular designated contract market or 

swap execution facility and a short 

position in another commodity 

derivative contract in that same 

commodity away from that particular 

designated contract market or swap 

execution facility. 

Intramarket spread position means a 

long position in a commodity derivative 

contract in a particular commodity and 

a short position in another commodity 

derivative contract in the same 

commodity on the same designated 

contract market or swap execution 

facility. 

Long position means a long call 

option, a short put option or a long 

underlying futures contract, or a long 

futures-equivalent swap. 

Physical commodity means any 

agricultural commodity as that term is 

defined in § 1.3 of this chapter or any 

exempt commodity as that term is 

defined in section 1a(20) of the Act. 

Pre-enactment swap means any swap 

entered into prior to enactment of the 

Dodd-Frank Act of 2010 (July 21, 2010), 

the terms of which have not expired as 

of the date of enactment of that Act. 

Pre-existing position means any 

position in a commodity derivative 

contract acquired in good faith prior to 

the effective date of any bylaw, rule, 

regulation or resolution that specifies an 

initial speculative position limit level or 

a subsequent change to that level. 

Referenced contract means, on a 

futures equivalent basis with respect to 

a particular core referenced futures 

contract, a core referenced futures 

contract listed in § 150.2(d), or a futures 

contract, options contract, or swap, and 

excluding any guarantee of a swap, a 

basis contract, or a commodity index 

contract: 

(1) That is: 

(i) Directly or indirectly linked, 

including being partially or fully settled 

on, or priced at a fixed differential to, 

the price of that particular core 

referenced futures contract; or 

(ii) Directly or indirectly linked, 

including being partially or fully settled 

on, or priced at a fixed differential to, 

the price of the same commodity 

underlying that particular core 

referenced futures contract for delivery 

at the same location or locations as 

specified in that particular core 

referenced futures contract; and 

(2) Where: 

(i) Calendar spread contract means a 

cash-settled agreement, contract, or 

transaction that represents the 

difference between the settlement price 

in one or a series of contract months of 

an agreement, contract or transaction 

and the settlement price of another 

contract month or another series of 

contract months’ settlement prices for 

the same agreement, contract or 

transaction; 

(ii) Commodity index contract means 

an agreement, contract, or transaction 

that is not a basis or any type of spread 

contract, based on an index comprised 

of prices of commodities that are not the 

same or substantially the same; 

(iii) Spread contract means either a 

calendar spread contract or an 

intercommodity spread contract; and 

(iv) Intercommodity spread contract 

means a cash-settled agreement, 

contract or transaction that represents 

the difference between the settlement 

price of a referenced contract and the 

settlement price of another contract, 

agreement, or transaction that is based 

on a different commodity. 

Short position means a short call 

option, a long put option or a short 

underlying futures contract, or a short 

futures-equivalent swap. 

Speculative position limit means the 

maximum position, either net long or 

net short, in a commodity derivatives 

contract that may be held or controlled 

by one person, absent an exemption, 

such as an exemption for a bona fide 

hedging position. This limit may apply 

to a person’s combined position in all 

commodity derivative contracts in a 

particular commodity (all-monthscombined), a person’s position in a 

single month of commodity derivative 

contracts in a particular commodity, or 

a person’s position in the spot month of 

commodity derivative contacts in a 

particular commodity. Such a limit may 

be established under federal regulations 

or rules of a designated contract market 

or swap execution facility. An exchange 

may also apply other limits, such as a 

limit on gross long or gross short 

positions, or a limit on holding or 

controlling delivery instruments. 

Spot month means— 

(1) For physical-delivery commodity 

derivative contracts, the period of time 

beginning at the earlier of the close of 

trading on the trading day preceding the 

first day on which delivery notices can 

be issued to the clearing organization of 

a contract market, or the close of trading 

on the trading day preceding the thirdto-last trading day, until the contract is 

no longer listed for trading (or available 

for transfer, such as through exchange 

for physical transactions). 

(2) For cash-settled contracts, spot 

month means the period of time 

beginning at the earlier of the close of 

trading on the trading day preceding the 

period in which the underlying cashsettlement price is calculated, or the 

close of trading on the trading day 

preceding the third-to-last trading day, 

until the contract cash-settlement price 

is determined and published; provided 

however, if the cash-settlement price is 

determined based on prices of a core 

referenced futures contract during the 

spot month period for that core 


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75826 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

referenced futures contract, then the 

spot month for that cash-settled contract 

is the same as the spot month for that 

core referenced futures contract. 

Swap means ‘‘swap’’ as that term is 

defined in section 1a of the Act and as 

further defined in § 1.3 of this chapter. 

Swap dealer means ‘‘swap dealer’’ as 

that term is defined in section 1a of the 

Act and as further defined in § 1.3 of 

this chapter. 

Transition period swap means a swap 

entered into during the period 

commencing after the enactment of the 

Dodd-Frank Act of 2010 (July 21, 2010), 

and ending 60 days after the publication 

in the Federal Register of final 

amendments to part 150 of this chapter 

implementing section 737 of the DoddFrank Act of 2010. 

■ 23. Revise § 150.2 to read as follows: 

§ 150.2 Speculative position limits. 

(a) Spot-month speculative position 

limits. No person may hold or control 

positions in referenced contracts in the 

spot month, net long or net short, in 

excess of the level specified by the 

Commission for: 

(1) Physical-delivery referenced 

contracts; and, separately, 

(2) Cash-settled referenced contracts; 

(b) Single-month and all-monthscombined speculative position limits. 

No person may hold or control 

positions, net long or net short, in 

referenced contracts in a single month 

or in all months combined (including 

the spot month) in excess of the levels 

specified by the Commission. 

(c) For purposes of this part: 

(1) The spot month and any single 

month shall be those of the core 

referenced futures contract; and 

(2) An eligible affiliate is not required 

to comply separately with speculative 

position limits. 

(d) Core referenced futures contracts. 

Speculative position limits apply to 

referenced contracts based on the core 

referenced futures contracts listed in the 

following table: 

CORE REFERENCED FUTURES CONTRACTS

Commodity type Designated contract market Core referenced futures 

contract 1

(1) Legacy Agricultural.

Chicago Board of Trade.

Corn (C). 

Oats (O). 

Soybeans (S). 

Soybean Meal (SM). 

Soybean Oil (SO). 

Wheat (W). 

Kansas City Board of Trade.

Hard Winter Wheat (KW). 

ICE Futures U.S.

Cotton No. 2 (CT). 

Minneapolis Grain Exchange.

Hard Red Spring Wheat (MWE). 

(2) Other Agricultural.

Chicago Board of Trade.

Rough Rice (RR). 

Chicago Mercantile Exchange.

Class III Milk (DA). 

Feeder Cattle (FC). 

Lean Hog (LH). 

Live Cattle (LC). 

ICE Futures U.S.

Cocoa (CC). 

Coffee C (KC). 

FCOJ–A (OJ). 

U.S. Sugar No. 11 (SB). 

U.S. Sugar No. 16 (SF). 

(3) Energy.

New York Mercantile Exchange.

Light Sweet Crude Oil (CL). 

NY Harbor ULSD (HO). 

RBOB Gasoline (RB). 

Henry Hub Natural Gas (NG). 

(4) Metals.

Commodity Exchange, Inc.

Gold (GC). 

Silver (SI). 

Copper (HG). 

New York Mercantile Exchange.

Palladium (PA). 

Platinum (PL). 

1The core referenced futures contract includes any successor contracts. 

(e) Levels of speculative position 

limits. (1) Initial levels. The initial levels 

of speculative position limits are fixed 

by the Commission at the levels listed 

in Appendix D of this part and shall be 

effective 60 days after publication in the 

Federal Register. 

(2) Subsequent levels. (i) The 

Commission shall fix subsequent levels 

of speculative position limits in 

accordance with the procedures in this 


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section and publish such levels on the 

Commission’s Web site at http://

www.cftc.gov. 

(ii) Such subsequent speculative 

position limit levels shall each apply 

beginning on the close of business of the 

last business day of the second complete 

calendar month after publication of 

such levels; provided however, if such 

close of business is in a spot month of 

a core referenced futures contract, the 

subsequent spot-month level shall apply 

beginning with the next spot month for 

that contract. 

(iii) All subsequent levels of 

speculative position limits shall be 

rounded up to the nearest hundred 

contracts. 

(3) Procedure for computing levels of 

spot-month limits. (i) No less frequently 

than every two calendar years, the 

Commission shall fix the level of the 

spot-month limit no greater than onequarter of the estimated spot-month 

deliverable supply in the relevant core 

referenced futures contract. Unless the 

Commission determines to rely on its 

own estimate of deliverable supply, the 

Commission shall utilize the estimated 

spot-month deliverable supply provided 

by a designated contract market. 

(ii) Each designated contract market 

in a core referenced futures contract 

shall supply to the Commission an 

estimated spot-month deliverable 

supply. A designated contract market 

may use the guidance regarding 

deliverable supply in Appendix C of 

part 38 of this chapter. Each estimate 

must be accompanied by a description 

of the methodology used to derive the 

estimate and any statistical data 

supporting the estimate, and must be 

submitted no later than the following: 

(A) For energy commodities, January 

31 of the second calendar year following 

the most recent Commission action 

establishing such limit levels; 

(B) For metals commodities, March 31 

of the second calendar year following 

the most recent Commission action 

establishing such limit levels; 

(C) For legacy agricultural 

commodities, May 31 of the second 

calendar year following the most recent 

Commission action establishing such 

limit levels; and 

(D) For other agricultural 

commodities, August 31 of the second 

calendar year following the most recent 

Commission action establishing such 

limit levels. 

(4) Procedure for computing levels of 

single-month and all-months-combined 

limits. No less frequently than every two 

calendar years, the Commission shall fix 

the level, for each referenced contract, 

of the single-month limit and the allmonths-combined limit. Each such limit 

shall be based on 10 percent of the 

estimated average open interest in 

referenced contracts, up to 25,000 

contracts, with a marginal increase of 

2.5 percent thereafter. 

(i) Time periods for average open 

interest. The Commission shall estimate 

average open interest in referenced 

contracts based on the largest annual 

average open interest computed for each 

of the past two calendar years. The 

Commission may estimate average open 

interest in referenced contracts using 

either month-end open contracts or 

open contracts for each business day in 

the time period, as practical. 

(ii) Data sources for average open 

interest. The Commission shall estimate 

average open interest in referenced 

contracts using data reported to the 

Commission pursuant to part 16 of this 

chapter, and open swaps reported to the 

Commission pursuant to part 20 of this 

chapter or data obtained by the 

Commission from swap data 

repositories collecting data pursuant to 

part 45 of this chapter. Options listed on 

designated contract markets shall be 

adjusted using an option delta reported 

to the Commission pursuant to part 16 

of this chapter. Swaps shall be counted 

on a futures equivalent basis, equal to 

the economically equivalent amount of 

core referenced futures contracts 

reported pursuant to part 20 of this 

chapter or as calculated by the 

Commission using swap data collected 

pursuant to part 45 of this chapter. 

(iii) Publication of average open 

interest. The Commission shall publish 

estimates of average open interest in 

referenced contracts on a monthly basis, 

as practical, after such data is submitted 

to the Commission. 

(iv) Minimum levels. Provided 

however, notwithstanding the above, the 

minimum levels shall be the greater of 

the level of the spot month limit 

determined under paragraph (e)(3) of 

this section and 1,000 for referenced 

contracts in an agricultural commodity 

or 5,000 for referenced contracts in an 

exempt commodity. 

(f) Pre-existing Positions—(1) Preexisting positions in a spot-month. 

Other than pre-enactment and transition 

period swaps exempted under 

§ 150.3(d), a person shall comply with 

spot month speculative position limits. 

(2) Pre-existing positions in a nonspot-month. A single-month or allmonths-combined speculative position 

limit established under this section 

shall not apply to any commodity 

derivative contract acquired in good 

faith prior to the effective date of such 

limit, provided, however, that if such 

position is not a pre-enactment or 

transition period swap then that 

position shall be attributed to the person 

if the person’s position is increased after 

the effective date of such limit. 

(g) Positions on Foreign Boards of 

Trade. The aggregate speculative 

position limits established under this 

section shall apply to a person with 

positions in referenced contracts 

executed on, or pursuant to the rules of 

a foreign board of trade, provided that: 

(1) Such referenced contracts settle 

against any price (including the daily or 

final settlement price) of one or more 

contracts listed for trading on a 

designated contract market or swap 

execution facility that is a trading 

facility; and 

(2) The foreign board of trade makes 

available such referenced contracts to its 

members or other participants located in 

the United States through direct access 

to its electronic trading and order 

matching system. 

(h) Anti-evasion provision. For the 

purposes of applying the speculative 

position limits in this section, a 

commodity index contract used to 

circumvent speculative position limits 

shall be considered to be a referenced 

contract. 

(1) Delegation of authority to the 

Director of the Division of Market 

Oversight. (i) The Commission hereby 

delegates, until it orders otherwise, to 

the Director of the Division of Market 

Oversight or such other employee or 

employees as the Director may designate 

from time to time, the authority in 

paragraph (e) of this section to fix and 

publish subsequent levels of speculative 

position limits. 

(ii) The Director of the Division of 

Market Oversight may submit to the 

Commission for its consideration any 

matter which has been delegated in this 

section. 

(iii) Nothing in this section prohibits 

the Commission, at its election, from 

exercising the authority delegated in 

this section. 

(iv) The Commission will periodically 

update these initial levels for 

speculative position limits and publish 

such subsequent levels on its Web site 

at: http://www.cftc.gov. 

(2) Reserved. 

■ 24. Revise § 150.3 to read as follows: 

§ 150.3 Exemptions. 

(a) Positions which may exceed limits. 

The position limits set forth in § 150.2 

may be exceeded to the extent that: 

(1) Such positions are: 

(i) Bona fide hedging positions as 

defined in § 150.1, provided that for 

anticipatory bona fide hedge positions 

under paragraphs (3)(iii), (4)(i), (4)(iii), 

and (4)(iv) of the bona fide hedging 

position definition in § 150.1 the person 


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complies with the filing procedure 

found in § 150.7; 

(ii) Financial distress positions 

exempted under paragraph (b) of this 

section; 

(iii) Conditional spot-month limit 

positions exempted under paragraph (c) 

of this section; or 

(iv) Other positions exempted under 

paragraph (e) of this section; and that 

(2) The recordkeeping requirements of 

paragraph (g) of this section are met; 

and further that 

(3) The reporting requirements of part 

19 of this chapter are met. 

(b) Financial distress exemptions. 

Upon specific request made to the 

Commission, the Commission may 

exempt a person or related persons 

under financial distress circumstances 

for a time certain from any of the 

requirements of this part. Financial 

distress circumstances include 

situations involving the potential 

default or bankruptcy of a customer of 

the requesting person or persons, an 

affiliate of the requesting person or 

persons, or a potential acquisition target 

of the requesting person or persons. 

(c) Conditional spot-month limit 

exemption. The position limits set forth 

in § 150.2 may be exceeded for cashsettled referenced contracts provided 

that such positions do not exceed five 

times the level of the spot-month limit 

specified by the Commission and the 

person holding or controlling such 

positions does not hold or control 

positions in spot-month physicaldelivery referenced contracts. 

(d) Pre-enactment and transition 

period swaps exemption. The 

speculative position limits set forth in 

§ 150.2 shall not apply to positions 

acquired in good faith in any preenactment swap, or in any transition 

period swap, in either case as defined 

by § 150.1, provided, however, that a 

person may net such positions with 

post-effective date commodity 

derivative contracts for the purpose of 

complying with any non-spot-month 

speculative position limit. 

(e) Other exemptions. Any person 

engaging in risk-reducing practices 

commonly used in the market, which 

they believe may not be specifically 

enumerated in the definition of bona 

fide hedging position in § 150.1, may 

request: 

(1) An interpretative letter from 

Commission staff, under § 140.99 of this 

chapter, concerning the applicability of 

the bona fide hedging position 

exemption; or 

(2) Exemptive relief from the 

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

the Act. 

(3) Appendix C of this part provides 

a non-exhaustive list of examples of 

bona fide hedging positions as defined 

under § 150.1. 

(f) Previously granted exemptions. 

Exemptions granted by the Commission 

under § 1.47 of this chapter for swap 

risk management shall not apply to 

swap positions entered into after the 

effective date of initial position limits 

implementing section 737 of the DoddFrank Act of 2010. 

(g) Recordkeeping. (1) Persons who 

avail themselves of exemptions under 

this section, including exemptions 

granted under section 4a(a)(7) of the 

Act, shall keep and maintain complete 

books and records concerning all details 

of their related cash, forward, futures, 

futures options and swap positions and 

transactions, including anticipated 

requirements, production and royalties, 

contracts for services, cash commodity 

products and by-products, and crosscommodity hedges, and shall make such 

books and records, including a list of 

pass-through swap counterparties, 

available to the Commission upon 

request under paragraph (h) of this 

section. 

(2) Further, a party seeking to rely 

upon the pass-through swap offset in 

paragraph (2)(ii) of the definition of 

‘‘bona fide hedging position’’ in § 150.1, 

in order to exceed the position limits of 

§ 150.2 with respect to such a swap, 

may only do so if its counterparty 

provides a written representation (e.g., 

in the form of a field or other 

representation contained in a mutually 

executed trade confirmation) that, as to 

such counterparty, the swap qualifies in 

good faith as a ‘‘bona fide hedging 

position,’’ as defined in § 150.1, at the 

time the swap was executed. That 

written representation shall be retained 

by the parties to the swap for a period 

of at least two years following the 

expiration of the swap and furnished to 

the Commission upon request. 

(3) Any person that represents to 

another person that a swap qualifies as 

a pass-through swap under paragraph 

(2)(ii) of the definition of ‘‘bona fide 

hedging position’’ in § 150.1 shall keep 

and make available to the Commission 

upon request all relevant books and 

records supporting such a 

representation for a period of at least 

two years following the expiration of the 

swap. 

(h) Call for information. Upon call by 

the Commission, the Director of the 

Division of Market Oversight or the 

Director’s delegate, any person claiming 

an exemption from speculative position 

limits under this section must provide 

to the Commission such information as 

specified in the call relating to the 

positions owned or controlled by that 

person; trading done pursuant to the 

claimed exemption; the commodity 

derivative contracts or cash market 

positions which support the claim of 

exemption; and the relevant business 

relationships supporting a claim of 

exemption. 

(i) Aggregation of accounts. Entities 

required to aggregate accounts or 

positions under § 150.4 shall be 

considered the same person for the 

purpose of determining whether they 

are eligible for a bona fide hedging 

position exemption under paragraph 

(a)(1)(i) of this section with respect to 

such aggregated account or position. 

(j) Delegation of authority to the 

Director of the Division of Market 

Oversight. (1) The Commission hereby 

delegates, until it orders otherwise, to 

the Director of the Division of Market 

Oversight or such other employee or 

employees as the Director may designate 

from time to time, the authority in 

paragraph (b) of this section to provide 

exemptions in circumstances of 

financial distress. 

(2) The Director of the Division of 

Market Oversight may submit to the 

Commission for its consideration any 

matter which has been delegated in this 

section. 

(3) Nothing in this section prohibits 

the Commission, at its election, from 

exercising the authority delegated in 

this section. 

■ 25. Revise § 150.5 to read as follows: 

§ 150.5 Exchange-set speculative position 

limits. 

(a) Requirements and acceptable 

practices for commodity derivative 

contracts subject to federal position 

limits. (1) For any commodity derivative 

contract that is subject to a speculative 

position limit under § 150.2, the 

designated contract market or swap 

execution facility that is a trading 

facility shall set a speculative position 

limit no higher than the level specified 

in § 150.2. 

(2) Exemptions. (i) Hedge exemption. 

Any hedge exemption rules adopted by 

a designated contract markets or a swap 

execution facility that is a trading 

facility must conform to the definition 

of bona fide hedging position in § 150.1. 

(ii) Other exemptions. In addition to 

the express exemptions specified in 

§ 150.3, a designated contract market or 

swap execution facility that is a trading 

facility may grant other exemptions for: 

(A) Intramarket spread positions as 

defined in § 150.1, provided that such 

positions must be outside of the spot 

month for physical-delivery contracts 

and must not exceed the all-months 

limit set forth in § 150.2 when combined 


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with any other net positions in the 

single month; 

(B) Intermarket spread positions as 

defined in § 150.1, provided that such 

positions must be outside of the spot 

month for physical-delivery contracts. 

(iii) Application for exemption. 

Traders must apply to the designated 

contract market or swap execution 

facility that is a trading facility for any 

exemption from its speculative position 

limit rules. The designated contract 

market or swap execution facility that is 

a trading facility may limit bona fide 

hedging positions, or any other 

positions that have been exempted 

pursuant to § 150.3, which it determines 

are not in accord with sound 

commercial practices, or which exceed 

an amount that may be established and 

liquidated in an orderly fashion. 

(3) Pre-enactment and transition 

period swap positions. Speculative 

position limits set forth in § 150.2 shall 

not apply to positions acquired in good 

faith in any pre-enactment swap, or in 

any transition period swap, in either 

case as defined by § 150.1. Provided, 

however, that a designated contract 

market or swap execution facility that is 

a trading facility shall allow a person to 

net such position with post-effective 

date commodity derivative contracts for 

the purpose of complying with any nonspot-month speculative position limit. 

(4) Pre-existing positions. (i) Preexisting positions in a spot-month. A 

designated contract market or swap 

execution facility that is a trading 

facility must require compliance with 

spot month speculative position limits 

for pre-existing positions in commodity 

derivative contracts other than preenactment and transition period swaps. 

(ii) Pre-existing positions in a nonspot-month. A single-month or allmonths-combined speculative position 

limit established under § 150.2 shall not 

apply to any commodity derivative 

contract acquired in good faith prior to 

the effective date of such limit, 

provided, however, that such position 

shall be attributed to the person if the 

person’s position is increased after the 

effective date of such limit. 

(5) Aggregation. Designated contract 

markets and swap execution facilities 

that are trading facilities must have 

aggregation rules that conform to 

§ 150.4. 

(6) Additional acceptable practices. A 

designated contract market or swap 

execution facility that is a trading 

facility may: 

(i) Impose additional restrictions on a 

person with a long position in the spot 

month of a physical-delivery contract 

who stands for delivery, takes that 

delivery, then re-establishes a long 

position; 

(ii) Establish limits on the amount of 

delivery instruments that a person may 

hold in a physical-delivery contract; and 

(iii) Impose such other restrictions as 

it deems necessary to reduce the 

potential threat of market manipulation 

or congestion, to maintain orderly 

execution of transactions, or for such 

other purposes consistent with its 

responsibilities. 

(b) Requirements and acceptable 

practices for commodity derivative 

contracts that are not subject to the 

limits set forth in § 150.2, including 

derivative contracts in a physical 

commodity as defined in § 150.1 and in 

an excluded commodity as defined in 

section 1a(19) of the Act—(1) Levels at 

initial listing. At the time of each 

commodity derivative contract’s initial 

listing, a designated contract market or 

swap execution facility that is a trading 

facility should base speculative position 

limits on the following: 

(i) Spot month position limits. (A) 

Commodities with a measurable 

deliverable supply. For all commodity 

derivative contracts not subject to the 

limits set forth in § 150.2 that are based 

on a commodity with a measurable 

deliverable supply, the spot month limit 

level should be established at a level 

that is no greater than one-quarter of the 

estimated spot month deliverable 

supply, calculated separately for each 

month to be listed (Designated Contract 

Markets and Swap Execution Facilities 

may refer to the guidance in paragraph 

(b)(1)(i) of Appendix C of part 38 for 

guidance on estimating spot-month 

deliverable supply); 

(B) Commodities without a 

measurable deliverable supply. For 

commodity derivative contracts that are 

based on a commodity with no 

measurable deliverable supply, the spot 

month limit level should be set at a 

level that is necessary and appropriate 

to reduce the potential threat of market 

manipulation or price distortion of the 

contract’s or the underlying 

commodity’s price or index. 

(ii) Individual non-spot or all-monthscombined position limits. (A) 

Agricultural commodity derivative 

contracts. For agricultural commodity 

derivative contracts not subject to the 

limits set forth in § 150.2, the individual 

non-spot or all-months-combined levels 

should be no greater than 1,000 

contracts, when the notional quantity 

per contract is no larger than a typical 

cash market transaction in the 

underlying commodity. If the notional 

quantity per contract is larger than the 

typical cash market transaction, then the 

individual non-spot month limit or allmonths combined limit level should be 

scaled down accordingly. If the 

commodity derivative contract is 

substantially the same as a pre-existing 

designated contract market or swap 

execution facility commodity derivative 

contract, then the designated contract or 

swap execution facility may adopt the 

same limit as applies to that pre-existing 

commodity derivative contract; 

(B) Exempt or excluded commodity 

derivative contracts. For exempt 

commodity derivative contracts not 

subject to the limits set forth in § 150.2 

or excluded commodity derivative 

contracts, the individual non-spot or allmonths-combined levels should be no 

greater than 5,000 contracts, when the 

notional quantity per contract is no 

larger than a typical cash market 

transaction in the underlying 

commodity. If the notional quantity per 

contract is larger than the typical cash 

market transaction, then the individual 

non-spot month limit or all-months 

combined limit level should be scaled 

down accordingly. If the commodity 

derivative contract is substantially the 

same as a pre-existing commodity 

derivative contract, then the designated 

contract market or swap execution 

facility may adopt the same limit as 

applies to that pre-existing commodity 

derivative contract. 

(iii) Commodity derivative contracts 

that are cash-settled by referencing a 

daily settlement price of an existing 

contract. For commodity derivative 

contracts that are cash-settled by 

referencing a daily settlement price of 

an existing contract listed on a 

designated contract market or swap 

execution facility that is a trading 

facility, the cash-settled contract should 

adopt the same spot-month, individual 

non-spot-month, and all-monthscombined position limits as the original 

price referenced contract. 

(2) Adjustments to levels. Designated 

contract markets and swap execution 

facilities that are trading facilities 

should adjust their speculative limit 

levels as follows: 

(i) Spot month position limits. The 

spot month position limit level should 

be reviewed no less than once every 

twenty-four months from the date of 

initial listing and should be maintained 

at a level that is: 

(A) No greater than one-quarter of the 

estimated spot month deliverable 

supply, calculated separately for each 

month to be listed; or 

(B) In the case of a commodity 

derivative contract based on a 

commodity without a measurable 

deliverable supply, necessary and 

appropriate to reduce the potential 

threat of market manipulation or price 


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distortion of the contract’s or the 

underlying commodity’s price or index. 

(ii) Individual non-spot or all-monthscombined position limits. Individual 

non-spot or all-months-combined levels 

should be no greater than 10% of the 

average combined futures and deltaadjusted option month-end open 

interest for the most recent calendar 

year up to 25,000 contracts, with a 

marginal increase of 2.5% thereafter, or 

be based on position sizes customarily 

held by speculative traders on the 

contract market. In any case, such levels 

should be reviewed no less than once 

every twenty-four months from the date 

of initial listing. 

(3) Position accountability in lieu of 

speculative position limits. A designated 

contract market or swap execution 

facility that is a trading facility may 

adopt a bylaw, rule, regulation, or 

resolution, substituting for the exchange 

set speculative position limits specified 

under this paragraph (b), an exchange 

rule requiring traders to consent to 

provide information about their position 

upon request by the exchange and to 

consent to halt increasing further a 

trader’s position or to reduce their 

positions in an orderly manner, in each 

case upon request by the exchange as 

follows: 

(i) Physical commodity derivative 

contracts. On a physical commodity 

derivative contract that is not subject to 

the limits set forth in § 150.2, having an 

average month-end open interest of 

50,000 contracts and an average daily 

volume of 5,000 or more contracts 

during the most recent calendar year 

and a liquid cash market, a designated 

contract market or swap execution 

facility that is a trading facility may 

adopt individual non-spot month or allmonths-combined position 

accountability levels, provided, 

however, that such designated contract 

market or swap execution facility that is 

a trading facility should adopt a spot 

month speculative position limit with a 

level no greater than one-quarter of the 

estimated spot month deliverable 

supply; 

(ii) Excluded commodity derivative 

contracts—(A) Spot month. On an 

excluded commodity derivative contract 

for which there is a highly liquid cash 

market and no legal impediment to 

delivery, a designated contract market 

or swap execution facility that is a 

trading facility may adopt position 

accountability in lieu of position limits 

in the spot month. For an excluded 

commodity derivative contract based on 

a commodity without a measurable 

deliverable supply, a designated 

contract market or swap execution 

facility that is a trading facility may 

adopt position accountability in lieu of 

position limits in the spot month. For 

all other excluded commodity 

derivative contracts, a designated 

contract market or swap execution 

facility that is a trading facility should 

adopt a spot-month position limit with 

a level no greater than one-quarter of the 

estimated deliverable supply; 

(B) Individual non-spot or all-monthscombined position limits. On an 

excluded commodity derivative 

contract, a designated contract market or 

swap execution facility that is a trading 

facility may adopt position 

accountability levels in lieu of position 

limits in the individual non-spot month 

or all-months-combined. 

(iii) New commodity derivative 

contracts that are substantially the same 

as an existing contract. On a new 

commodity derivative contract that is 

substantially the same as an existing 

commodity derivative contract listed for 

trading on a designated contract market 

or swap execution facility that is a 

trading facility, which has adopted 

position accountability in lieu of 

position limits, the designated contract 

market or swap execution facility may 

adopt for the new contract when it is 

initially listed for trading the position 

accountability levels of the existing 

contract. 

(4) Calculation of trading volume and 

open interest. For purposes of this 

paragraph, trading volume and open 

interest should be calculated by: 

(i) Open interest. (A) Averaging the 

month-end open positions in a futures 

contract and its related option contract, 

on a delta-adjusted basis, for all months 

listed during the most recent calendar 

year; and 

(B) Averaging the month-end futuresequivalent amount of open positions in 

swaps in a particular commodity (such 

as, for swaps that are not referenced 

contracts, by combining the notional 

month-end open positions in swaps in 

a particular commodity, including 

options in that same commodity that are 

swaps on a delta-adjusted basis, and 

dividing by a notional quantity per 

contract that is no larger than a typical 

cash market transaction in the 

underlying commodity). 

(ii) Trading volume. (A) Counting the 

number of contracts in a futures contract 

and its related option contract, on a 

delta-adjusted basis, transacted during 

the most recent calendar year; and 

(B) Counting the futures-equivalent 

number of swaps in a particular 

commodity transacted during the most 

recent calendar year. 

(5) Exemptions—(i) Hedge exemption. 

Any hedge exemption rules adopted by 

a designated contract market or a swap 

execution facility that is a trading 

facility must conform to the definition 

of bona fide hedging position in § 150.1. 

(ii) Other exemptions. In addition to 

the exemptions for bona fide hedging 

positions that conform to paragraph 

(b)(5)(i) of this section, a designated 

contract market or swap execution 

facility that is a trading facility may 

grant other exemptions for: 

(A) Financial distress. Upon specific 

request made to the designated contract 

market or swap execution facility that is 

a trading facility, the designated 

contract market or swap execution 

facility that is a trading facility may 

exempt a person or related persons 

under financial distress circumstances 

for a time certain from any of the 

requirements of this part. Financial 

distress circumstances include 

situations involving the potential 

default or bankruptcy of a customer of 

the requesting person or persons, an 

affiliate of the requesting person or 

persons, or a potential acquisition target 

of the requesting person or persons; 

(B) Conditional spot-month limit 

exemption. Exchange-set speculative 

position limits may be exceeded for 

cash-settled contracts provided that 

such positions should not exceed five 

times the level of the spot-month limit 

specified by the designated contract 

market or swap execution facility that is 

a trading facility and the person holding 

or controlling such positions should not 

hold or control positions in referenced 

spot-month physical-delivery contracts; 

(C) Intramarket spread positions as 

defined in § 150.1, provided that such 

positions should be outside of the spot 

month for physical-delivery contracts 

and should not exceed the all-months 

limit when combined with any other net 

positions in the single month; 

(D) Intermarket spread positions as 

defined in § 150.1, provided that such 

positions should be outside of the spot 

month for physical-delivery contracts; 

and/or 

(E) For excluded commodities, a 

designated contract market or swap 

execution facility that is a trading 

facility may grant a limited risk 

management exemption pursuant to 

rules submitted to the Commission, 

consistent with the guidance in 

Appendix A of this part. 

(iii) Application for exemption. 

Traders must apply to the designated 

contract market or swap execution 

facility that is a trading facility for any 

exemption from its speculative position 

limit rules. In considering whether to 

grant such an application for exemption, 

a designated contract market or swap 

execution facility that is a trading 

facility should take into account 


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whether the requested exemption is in 

accord with sound commercial practices 

and results in a position that does not 

exceed an amount that may be 

established and liquidated in an orderly 

fashion. 

(6) Pre-enactment and transition 

period swap positions. Speculative 

position limits should not apply to 

positions acquired in good faith in any 

pre-enactment swap, or in any transition 

period swap, in either case as defined 

by § 150.1. Provided, however, that a 

designated contract market or swap 

execution facility that is a trading 

facility may allow a person to net such 

position with post-effective date 

commodity derivative contracts for the 

purpose of complying with any nonspot-month speculative position limit. 

(7) Pre-existing positions—(i) Preexisting positions in a spot-month. A 

designated contract market or swap 

execution facility that is a trading 

facility should require compliance with 

spot month speculative position limits 

for pre-existing positions in commodity 

derivative contracts other than preenactment and transition period swaps. 

(ii) Pre-existing positions in a nonspot-month. A single-month or allmonths-combined speculative position 

limit should not apply to any 

commodity derivative contract acquired 

in good faith prior to the effective date 

of such limit, provided, however, that 

such position should be attributed to the 

person if the person’s position is 

increased after the effective date of such 

limit. 

(8) Aggregation. Designated contract 

markets and swap execution facilities 

that are trading facilities must have 

aggregation rules that conform to 

§ 150.4. 

(9) Additional acceptable practices. 

Particularly in the spot month, a 

designated contract market or swap 

execution facility that is a trading 

facility may: 

(i) Impose additional restrictions on a 

person with a long position in the spot 

month of a physical-delivery contract 

who stands for delivery, takes that 

delivery, then re-establishes a long 

position; 

(ii) Establish limits on the amount of 

delivery instruments that a person may 

hold in a physical-delivery contract; and 

(iii) Impose such other restrictions as 

it deems necessary to reduce the 

potential threat of market manipulation 

or congestion, to maintain orderly 

execution of transactions, or for such 

other purposes consist with its 

responsibilities. 

(c) Securities futures products. For 

security futures products, position 

limitations and position accountability 

provisions are specified in § 41.25(a)(3) 

of this chapter. 

■ 26. Revise § 150.6 to read as follows: 

§ 150.6 Ongoing application of the Act and 

Commission regulations. 

This part shall only be construed as 

having an effect on position limits set by 

the Commission or a designated contract 

market or swap execution facility. 

Nothing in this part shall be construed 

to affect any other provisions of the Act 

or Commission regulations including 

but not limited to those relating to 

manipulation, attempted manipulation, 

corners, squeezes, fraudulent or 

deceptive conduct or prohibited 

transactions. 

■ 27. Add § 150.7 to read as follows: 

§ 150.7 Requirements for anticipatory 

bona fide hedging position exemptions. 

(a) Statement. Any person who 

wishes to avail himself of exemptions 

for unfilled anticipated requirements, 

unsold anticipated production, 

anticipated royalties, anticipated 

services contract payments or receipts, 

or anticipatory cross-commodity hedges 

under the provisions of paragraphs 

(3)(iii), (4)(i), (4)(iii), (4)(iv), or (5), 

respectively, of the definition of bona 

fide hedging position in § 150.1 shall 

file Form 704 with the Commission in 

advance of the date the person expects 

to exceed the position limits established 

under this part. Filings in conformity 

with the requirements of this section 

shall be effective ten days after 

submission, unless otherwise notified 

by the Commission. 

(b) Commission notification. At any 

time, the Commission may, by notice to 

any person filing a Form 704, specify its 

determination as to what portion, if any, 

of the amounts described in such filing 

does not meet the requirements for bona 

fide hedging positions. In no case shall 

such person’s anticipatory bona fide 

hedging positions exceed the levels 

specified in paragraph (f) of this section. 

(c) Call for additional information. At 

any time, the Commission may request 

a person who has on file a Form 704 

under paragraph (a) of this section to 

file specific additional or updated 

information with the Commission to 

support a determination that the Form 

704 on file accurately reflects unsold 

anticipated production, unfilled 

anticipated requirements, anticipated 

royalties, or anticipated services 

contract payments or receipts. 

(d) Initial statement. Initial Form 704 

concerning the classification of 

positions as bona fide hedging pursuant 

to paragraphs (3)(iii), or (4)(i), (4)(iii), 

(4)(iv) or anticipatory cross-commodity 

hedges under paragraph (5) of the 

definition of bona fide hedging position 

in § 150.1 shall be filed with the 

Commission at least ten days in advance 

of the date that such positions would be 

in excess of limits then in effect 

pursuant to section 4a of the Act. Such 

statements shall set forth in detail for a 

specified operating period, not in excess 

of one year for an agricultural 

commodity, the person’s anticipated 

activity, i.e., unfilled anticipated 

requirements, unsold anticipated 

production, anticipated royalties, or 

anticipated services contract payments 

or receipts, and explain the method of 

determination thereof, including, but 

not limited to, the following 

information: 

(1) Anticipated activity. For each 

anticipated activity: 

(i) The type of cash commodity 

underlying the anticipated activity; 

(ii) The name of the actual cash 

commodity underlying the anticipated 

activity and the units in which the cash 

commodity is measured; 

(iii) An indication of whether the cash 

commodity is the same commodity 

(grade and quality) that underlies a core 

referenced futures contract or whether a 

cross-hedge will be used and, if so, 

additional information for cross hedges 

specified in paragraph (d)(2) of this 

section; 

(iv) Annual production, requirements, 

royalty receipts or service contract 

payments or receipts, in terms of futures 

equivalents, of such commodity for the 

three complete fiscal years preceding 

the current fiscal year; 

(v) The specified time period for 

which the anticipatory hedge exemption 

is claimed; 

(vi) Anticipated production, 

requirements, royalty receipts or service 

contract payments or receipts, in terms 

of futures equivalents, of such 

commodity for such specified time 

period, not in excess of one year for an 

agricultural commodity; 

(vii) Fixed-price forward sales, 

inventory, and fixed-price forward 

purchases of such commodity, 

including any quantity in process of 

manufacture and finished goods and 

byproducts of manufacture or 

processing (in terms of such 

commodity); 

(viii) Unsold anticipated production, 

unfilled anticipated requirements, 

unsold anticipated royalty receipts,, and 

anticipated service contract payments or 

receipts the risks of which have not 

been offset with cash positions, of such 

commodity for the specified time 

period, not in excess of one year for an 

agricultural commodity; and 

(ix) The maximum number of long 

positions and short positions in 


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75832 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

referenced contracts expected to be used 

to offset the risks of such anticipated 

activity. 

(2) Additional information for cross 

hedges. Cash positions that represent a 

commodity, or products or byproducts 

of a commodity, that is different from 

the commodity underlying a commodity 

derivative contract that is expected to be 

used for hedging, shall be shown both 

in terms of the equivalent amount of the 

commodity underlying the commodity 

derivative contract used for hedging and 

in terms of the actual cash commodity 

as provided for on Form 704. In 

computing their cash position, every 

person shall use such standards and 

conversion factors that are usual in the 

particular trade or that otherwise reflect 

the value-fluctuation-equivalents of the 

cash position in terms of the commodity 

underlying the commodity derivative 

contract used for hedging. Such person 

shall furnish to the Commission upon 

request detailed information concerning 

the basis for and derivation of such 

conversion factors, including: 

(i) The hedge ratio used to convert the 

actual cash commodity to the equivalent 

amount of the commodity underlying 

the commodity derivative contract used 

for hedging; and 

(ii) An explanation of the 

methodology used for determining the 

hedge ratio. 

(e) Supplemental reports. Whenever 

the amount which a person wishes to 

consider as a bona fide hedging position 

shall exceed the amount in the most 

recent filing pursuant to this section or 

such lesser amount as determined by 

the Commission pursuant to paragraph 

(b) of this section, such person shall file 

with the Commission a Form 704 which 

updates the information provided in the 

person’s most recent filing and supplies 

the reason for this change at least ten 

days in advance of the date that person 

wishes to exceed such amount. 

(f) Annual update. Each person that 

has filed an initial statement on Form 

704 for an anticipatory bona fide hedge 

exemption shall provide annual updates 

on the utilization of the anticipatory 

exemption. Each person shall report 

actual cash activity utilizing the 

anticipatory exemption for the 

preceding year, as well as the 

cumulative utilization since the filing of 

the initial or most recent supplemental 

statement. Each person shall also 

provide a good faith estimate of the 

remaining anticipatory exemption. Such 

reports shall set forth in detail the 

person’s activity related to the 

anticipated exemption and shall 

include, but not be limited to the 

following information: 

(1) Information to be included:. For 

each anticipated activity: 

(i) The type of cash commodity 

underlying the anticipated activity; 

(ii) The name of the actual cash 

commodity underlying the anticipated 

activity and the units in which the cash 

commodity is measured; 

(iii) An indication of whether the cash 

commodity is the same commodity 

(grade and quality) that underlies a core 

referenced futures contract or whether a 

cross-hedge will be used and, if so, 

additional information for cross hedges 

specified in paragraph (d)(2) of this 

section; 

(iv) Actual production, requirements, 

royalty receipts or service contract 

payments or receipts, in terms of futures 

equivalents, of such commodity for the 

reporting month; 

(v) Cumulative actual production, 

requirements, royalty receipts or service 

contract payments or receipts, in terms 

of futures equivalents, of such 

commodity since the initial or 

supplemental statement; 

(vi) Estimated anticipated production, 

requirements, royalty receipts or service 

contract payments or receipts, in terms 

of futures equivalents, of such 

commodity for the remainder of such 

specified time period, not in excess of 

one year for an agricultural commodity; 

(vii) Fixed-price forward sales, 

inventory, and fixed-price forward 

purchases of such commodity, 

including any quantity in process of 

manufacture and finished goods and 

byproducts of manufacture or 

processing (in terms of such 

commodity) for the reporting month; 

(viii) Remaining unsold anticipated 

production, unfilled anticipated 

requirements, unsold anticipated 

royalty receipts, and anticipated service 

contract payments or receipts the risks 

of which have not been offset with cash 

positions, of such commodity for the 

specified time period, not in excess of 

one year for an agricultural commodity; 

and 

(ix) The maximum number of long 

positions and short positions in 

referenced contracts expected to be used 

to offset the risks of such anticipated 

activity for the remainder of the 

specified time period. 

(2) Reserved. 

(g) Monthly reporting. Monthly 

reporting of remaining anticipated 

hedge exemption shall be reported on 

Form 204, along with reporting other 

exemptions pursuant to 

§ 19.01(a)(3)(vii). 

(h) Maximum sales and purchases. 

Sales or purchases of commodity 

derivative contracts considered to be 

bona fide hedging positions under 

paragraphs (3)(iii)(A) or (4)(i) of the 

bona fide hedging position definition in 

§ 150.1 shall at no time exceed the lesser 

of: 

(1) A person’s anticipated activity 

(including production, requirements, 

royalties and services) as described by 

the information most recently filed 

pursuant to this section that has not 

been offset with cash positions; or 

(2) Such lesser amount as determined 

by the Commission pursuant to 

paragraph (b) of this section. 

(i) Delegation of authority to the 

Director of the Division of Market 

Oversight. (1) The Commission hereby 

delegates, until it orders otherwise, to 

the Director of the Division of Market 

Oversight or such other employee or 

employees as the Director may designate 

from time to time, the authority: 

(i) In paragraph (b) of this section to 

provide notice to a person that some or 

all of the amounts described in a Form 

704 filing does not meet the 

requirements for bona fide hedging 

positions; 

(ii) In paragraph (c) of this section to 

request a person who has filed a Form 

704 under paragraph (a) of this section 

to file specific additional or updated 

information with the Commission to 

support a determination that the Form 

704 filed accurately reflects unsold 

anticipated production, unfilled 

anticipated requirements, anticipated 

royalties, or anticipated services 

contract payments or receipts; and 

(iii) In paragraph (d)(2) of this section 

to request detailed information 

concerning the basis for and derivation 

of conversion factors used in computing 

the cash position provided in Form 704. 

(2) The Director of the Division of 

Market Oversight may submit to the 

Commission for its consideration any 

matter which has been delegated in this 

section. 

(3) Nothing in this section prohibits 

the Commission, at its election, from 

exercising the authority delegated in 

this section. 

■ 28. Add § 150.8 to read as follows: 

§ 150.8 Severability. 

If any provision of this part, or the 

application thereof to any person or 

circumstances, is held invalid, such 

invalidity shall not affect other 

provisions or application of such 

provision to other persons or 

circumstances which can be given effect 

without the invalid provision or 

application. 

■ 29. Add appendix A to part 150 to 

read as follows: 


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Appendix A to Part 150—Guidance on 

Risk Management Exemptions for 

Commodity Derivative Contracts in 

Excluded Commodities 

(1) This appendix provides non-exclusive 

interpretative guidance on risk management 

exemptions for commodity derivative 

contracts in excluded commodities permitted 

under the definition of bona fide hedging 

position in § 150.1. The rules of a designated 

contract market or swap execution facility 

that is a trading facility may recognize 

positions consistent with this guidance as 

bona fide hedging positions. The 

Commission recognizes that risk reducing 

positions in commodity derivative contracts 

in excluded commodities may not conform to 

the general definition of bona fide hedging 

positions applicable to commodity derivative 

contracts in physical commodities, as 

provided under section 4a(c)(2) of the Act, 

and may not conform to enumerated bona 

fide hedging positions applicable to 

commodity derivative contracts in physical 

commodities under the definition of bona 

fide hedging position in § 150.1. 

This interpretative guidance for core 

principle 5 for designated contract markets, 

section 5(d)(5) of the Act, and core principle 

6 for swap execution facilities that are 

trading facilities, section 5h(f)(6) of the Act, 

is illustrative only of the types of positions 

for which a trading facility may elect to 

provide a risk management exemption and is 

not intended to be used as a mandatory 

checklist. Other positions might also be 

included appropriately within a risk 

management exemption. 

(2)(a) No temporary substitute criterion. 

Risk management positions in commodity 

derivative contracts in excluded commodities 

need not be expected to represent a substitute 

for a subsequent transaction or position in a 

physical marketing channel. There need not 

be any requirement to replace a commodity 

derivative contract with a cash market 

position in order to qualify for a risk 

management exemption. 

(b) Cross-commodity hedging is permitted. 

Risks that are offset in commodity derivative 

contracts in excluded commodities need not 

arise from the same commodities underlying 

the commodity derivative contracts. For 

example, a trading facility may recognize a 

risk management exemption based on the net 

interest rate risk arising from a bank’s 

balance sheet of loans and deposits that is 

offset using Treasury security futures 

contracts or short-term interest rate futures 

contracts. 

(3) Examples of risk management 

positions. This section contains examples of 

risk management positions that may be 

economically appropriate to the reduction of 

risk in the operation of a commercial 

enterprise. 

(a) Balance sheet hedging. A commercial 

enterprise may have risks arising from its net 

position in assets and liabilities. 

(i) Foreign currency translation. Once form 

of balance sheet hedging involves offsetting 

net exposure to changes in currency 

exchange rates for the purpose of stabilizing 

the domestic dollar accounting value of net 

assets and/or liabilities which are 

denominated in a foreign currency. For 

example, a bank may make loans in a foreign 

currency and take deposits in that same 

foreign currency. Such a bank is exposed to 

net foreign currency translation risk when 

the amount of loans is not equal to the 

amount of deposits. A bank with a net long 

exposure to a foreign currency may hedge by 

establishing an offsetting short position in a 

foreign currency commodity derivative 

contract. 

(ii) Interest rate risk. Another form of 

balance sheet hedging involves offsetting net 

exposure to changes in values of assets and 

liabilities of differing durations. Examples 

include: 

(A) A pension fund may invest in short 

term securities and have longer term 

liabilities. Such a pension fund has a 

duration mismatch. Such a pension fund may 

hedge by establishing a long position in 

Treasury security futures contracts to 

lengthen the duration of its assets to match 

the duration of its liabilities. This is 

economically equivalent to using a long 

position in Treasury security futures 

contracts to shorten the duration of its 

liabilities to match the duration of its assets. 

(B) A bank may make a certain amount of 

fixed-rate loans of one maturity and fund 

such assets through taking fixed-rate deposits 

of a shorter maturity. Such a bank is exposed 

to interest rate risk, in that an increase in 

interest rates may result in a greater decline 

in value of the assets than the decline in 

value of the deposit liabilities. A bank may 

hedge by establishing a short position in 

short-term interest rate futures contracts to 

lengthen the duration of its liabilities to 

match the duration of its assets. This is 

economically equivalent to using a short 

position in short-term interest rate futures 

contracts, for example, to shorten the 

duration of its assets to match the duration 

of its liabilities. 

(b) Unleveraged synthetic positions. An 

investment fund may have risks arising from 

a delayed investment in an asset allocation 

promised to investors. Such a fund may 

synthetically gain exposure to an asset class 

using a risk management strategy of 

establishing a long position in commodity 

derivative contracts that does not exceed 

cash set aside in an identifiable manner, 

including short-term investments, any funds 

deposited as margin and accrued profits on 

such commodity derivative contract 

positions. For example: 

(i) A collective investment fund that 

invests funds in stocks pursuant to an asset 

allocation strategy may obtain immediate 

stock market exposure upon receipt of new 

monies by establishing a long position in 

stock index futures contracts (‘‘equitizing 

cash’’). Such a long position may qualify as 

a risk management exemption under trading 

facility rules provided such long position 

does not exceed the cash set aside. The long 

position in stock index futures contracts need 

not be converted to a position in stock. 

(ii) Upon receipt of new funds from 

investors, an insurance company that invests 

in bond holdings for a separate account 

wishes to lengthen synthetically the duration 

of the portfolio by establishing a long 

position in Treasury futures contracts. Such 

a long position may qualify as a risk 

management exemption under trading 

facility rules provided such long position 

does not exceed the cash set aside. The long 

position in Treasury futures contracts need 

not be converted to a position in bonds. 

(c) Temporary asset allocations. A 

commercial enterprise may have risks arising 

from potential transactional costs in 

temporary asset allocations (altering portfolio 

exposure to certain asset classes such as 

equity securities and debt securities). Such 

an enterprise may hedge existing assets 

owned by establishing a short position in an 

appropriate commodity derivative contract 

and synthetically gain exposure to an 

alternative asset class using a risk 

management strategy of establishing a long 

position in another commodity derivative 

contract that does not exceed: the value of 

the existing asset at the time the temporary 

asset allocation is established or, in the 

alternative, the hedged value of the existing 

asset plus any accrued profits on such risk 

management positions. For example: 

(i) A collective investment fund that 

invests funds in bonds and stocks pursuant 

to an asset allocation strategy may believe 

that market considerations favor a temporary 

increase in the fund’s equity exposure 

relative to its bond holdings. The fund 

manager may choose to accomplish the 

reallocation using commodity derivative 

contracts, such as a short position in 

Treasury security futures contracts and a long 

position in stock index futures contracts. The 

short position in Treasury security futures 

contracts may qualify as a hedge of interest 

rate risk arising from the bond holdings. A 

trading facility may adopt rules to recognize 

as a risk management exemption such a long 

position in stock index futures. 

(ii) Reserved. 

(4) Clarification of bona fides of short 

positions. 

(a) Calls sold. A seller of a call option 

establishes a short call option. A short call 

option is a short position in a commodity 

derivative contract with respect to the 

underlying commodity. A bona fide hedging 

position includes such a written call option 

that does not exceed in quantity the 

ownership or fixed-price purchase contracts 

in the contract’s underlying cash commodity 

by the same person. 

(b) Puts purchased and portfolio insurance. 

A buyer of a put option establishes a long put 

option. However, a long put option is a short 

position in a commodity derivative contract 

with respect to the underlying commodity. A 

bona fide hedging position includes such an 

owned put that does not exceed in quantity 

the ownership or fixed-price purchase 

contracts in the contract’s underlying cash 

commodity by the same person. 

The Commission also recognizes as bona 

fide hedging positions strategies that provide 

protection against a price decline equivalent 

to an owned position in a put option for an 

existing portfolio of securities owned. A 

dynamically managed short position in a 

futures contract may replicate the 

characteristics of a long position in a put 

option. Hedgers are reminded of their 

obligation to enter and exit the market in an 

orderly manner. 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75834 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

(c) Synthetic short futures contracts. A 

person may establish a synthetic short 

futures position by purchasing a put option 

and selling a call option, when each option 

has the same notional amount, strike price, 

expiration date and underlying commodity. 

Such a synthetic short futures position is a 

short position in a commodity derivative 

contract with respect to the underlying 

commodity. A bona fide hedging position 

includes such a synthetic short futures 

position that does not exceed in quantity the 

ownership or fixed-price purchase contracts 

in the contract’s underlying cash commodity 

by the same person. 

■ 30. Add appendix B to part 150 to 

read as follows: 

Appendix B to Part 150—Commodities 

Listed as Substantially the Same for 

Purposes of the Definition of Basis 

Contract 

The following table lists core referenced 

futures contracts and commodities that are 

treated as substantially the same as a 

commodity underlying a core referenced 

futures contract for purposes of the definition 

of basis contract in § 150.1. 

BASIS CONTRACT LIST OF SUBSTANTIALLY THE SAME COMMODITIES

Core referenced futures contract Commodities considered substantially the same 

(regardless of location) Source(s) for specification of quality 

NYMEX Light Sweet Crude 

Oil futures contract (CL).

1. Light Louisiana Sweet (LLS) Crude Oil ...................... NYMEX Argus LLS vs. WTI (Argus) Trade Month futures contract (E5). 

NYMEX LLS (Argus) vs. WTI Financial futures contract 

(WJ). 

ICE Futures Europe Crude Diff—Argus LLS vs WTI 1st 

Line Swap futures contract (ARK). 

ICE Futures Europe Crude Diff—Argus LLS vs WTI 

Trade Month Swap futures contract (ARL). 

NYMEX New York Harbor 

ULSD Heating Oil futures 

contract (HO).

1. Chicago ULSD ............................................................ NYMEX Chicago ULSD (Platts) vs. NY Harbor ULSD 

Heating Oil futures contract (5C). 

2. Gulf Coast ULSD ........................................................ NYMEX Group Three ULSD (Platts) vs. NY Harbor 

ULSD Heating Oil futures contract (A6). 

NYMEX Gulf Coast ULSD (Argus) Up-Down futures 

contract (US). 

NYMEX Gulf Coast ULSD (Argus) Up-Down BALMO 

futures contract (GUD). 

NYMEX Gulf Coast ULSD (Platts) Up-Down BALMO futures contract (1L). 

NYMEX Gulf Coast ULSD (Platts) Up-Down Spread futures contract (LT). 

ICE Futures Europe Diesel Diff- Gulf Coast vs Heating 

Oil 1st Line Swap futures contract (GOH). 

CME Clearing Europe Gulf Coast ULSD( Platts) vs. 

New York Heating Oil (NYMEX) Spread Calendar 

swap (ELT). 

CME Clearing Europe New York Heating Oil (NYMEX) 

vs. European Gasoil (IC) Spread Calendar swap 

(EHA). 

3. California Air Resources Board Spec ULSD (CARB 

no. 2 oil).

NYMEX Los Angeles CARB Diesel (OPIS) vs. NY Harbor ULSD Heating Oil futures contract (KL). 

4. Gas Oil Deliverable in Antwerp, Rotterdam, or Amsterdam Area.ICE Futures Europe Gasoil futures contract (G). 

ICE Futures Europe Heating Oil Arb—Heating Oil 1st 

Line vs. Gasoil 1st Line Swap futures contract (HOT). 

ICE Futures Europe Heating Oil Arb—Heating Oil 1st 

Line vs. Low Sulphur Gasoil 1st Line Swap futures 

contract (ULL). 

NYMEX NY Harbor ULSD Heating Oil vs. Gasoil futures contract (HA). 

NYMEX RBOB Gasoline futures contract (RB).

1. Chicago Unleaded 87 gasoline ...................................

NYMEX Chicago Unleaded Gasoline (Platts) vs. RBOB 

Gasoline futures contract (3C). 

NYMEX Group Three Unleaded Gasoline (Platts) vs. 

RBOB Gasoline futures contract (A8). 

2. Gulf Coast Conventional Blendstock for Oxygenated 

Blending (CBOB) 87.

NYMEX Gulf Coast CBOB Gasoline A1 (Platts) vs. 

RBOB Gasoline futures contract (CBA). 

NYMEX Gulf Coast Unl 87 (Argus) Up-Down futures 

contract (UZ). 

3. Gulf Coast CBOB 87 (Summer Assessment) ............


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75835 

1Participant A could also choose to hedge on a 

gross basis. In that event, Participant A could 

establish a short position in the March Chicago 

Board of Trade Corn futures contract equivalent to 

seven million bushels of corn to offset the price risk 

of its inventory and establish a long position in the 

May Chicago Board of Trade Corn futures contract 

equivalent to five million bushels of corn to offset 

the price risk of its fixed-price forward sale 

contracts. 

BASIS CONTRACT LIST OF SUBSTANTIALLY THE SAME COMMODITIES—Continued 

Core referenced futures contract Commodities considered substantially the same 

(regardless of location) Source(s) for specification of quality 

NYMEX Gulf Coast CBOB Gasoline A2 (Platts) vs. 

RBOB Gasoline futures contract (CRB). 

4. Gulf Coast Unleaded 87 (Summer Assessment) .......

NYMEX Gulf Coast 87 Gasoline M2 (Platts) vs. RBOB 

Gasoline futures contract (RVG). 

NYMEX Gulf Coast 87 Gasoline M2 (Platts) vs. RBOB 

Gasoline BALMO futures contract (GBB). 

NYMEX Gulf Coast 87 Gasoline M2 (Argus) vs. RBOB 

Gasoline BALMO futures contract (RBG). 

5. Gulf Coast Unleaded 87 .............................................

NYMEX Gulf Coast Unl 87 (Platts) Up-Down BALMO 

futures contract (1K). 

NYMEX Gulf Coast Unl 87 Gasoline M1 (Platts) vs. 

RBOB Gasoline futures contract (RV). 

CME Clearing Europe Gulf Coast Unleaded 87 Gasoline M1 (Platts) vs. New York RBOB Gasoline 

(NYMEX) Spread Calendar swap (ERV). 

6. Los Angeles California Reformulated Blendstock for 

Oxygenate Blending (CARBOB) Regular.

NYMEX Los Angeles CARBOB Gasoline (OPIS) vs. 

RBOB Gasoline futures contract (JL). 

7. Los Angeles California Reformulated Blendstock for 

Oxygenate Blending (CARBOB) Premium.

NYMEX Los Angeles CARBOB Gasoline (OPIS) vs. 

RBOB Gasoline futures contract (JL). 

8. Euro-BOB OXY NWE Barges .....................................

NYMEX RBOB Gasoline vs. Euro-bob Oxy NWE 

Barges (Argus) (1000mt) futures contract (EXR). 

CME Clearing Europe New York RBOB Gasoline 

(NYMEX) vs. European Gasoline Euro-bob Oxy 

Barges NWE (Argus) (1000mt) Spread Calendar 

swap (EEXR). 

9. Euro-BOB OXY FOB Rotterdam ................................

ICE Futures Europe Gasoline Diff—RBOB Gasoline 1st 

Line vs. Argus Euro-BOB OXY FOB Rotterdam 

Barge Swap futures contract (ROE). 

■ 31. Add appendix C to part 150 to 

read as follows: 

Appendix C to Part 150—Examples of 

Bona Fide Hedging Positions for 

Physical Commodities 

A non-exhaustive list of examples meeting 

the definition of bona fide hedging position 

under § 150.1 is presented below. With 

respect to a position that does not fall within 

an example in this appendix, a person 

seeking to rely on a bona fide hedging 

position exemption under § 150.3 may seek 

guidance from the Division of Market 

Oversight. References to paragraphs in the 

examples below are to the definition of bona 

fide hedging position in § 150.1. 

1. Portfolio Hedge Under Paragraph (3)(i) of 

the Bona Fide Hedging Position Definition 

Fact Pattern: It is currently January and 

Participant A owns seven million bushels of 

corn located in its warehouses. Participant A 

has entered into fixed-price forward sale 

contracts with several processors for a total 

of five million bushels of corn that will be 

delivered by May of this year. Participant A 

has no fixed-price corn purchase contracts. 

Participant A’s gross long cash position is 

equal to seven million bushels of corn. 

Because Participant A has sold forward five 

million bushels of corn, its net cash position 

is equal to long two million bushels of corn. 

To reduce price risk associated with 

potentially lower corn prices, Participant A 

chooses to establish a short position of 400 

contracts in the CBOT Corn futures contract, 

equivalent to two million bushels of corn, in 

the same crop year as the inventory. 

Analysis: The short position in a contract 

month in the current crop year for the CBOT 

Corn futures contract, equivalent to the 

amount of inventory held, satisfies the 

general requirements for a bona fide hedging 

position under paragraphs (2)(i)(A)–(C) and 

the provisions associated with owning a 

commodity under paragraph (3)(i).1 Because 

the firm’s net cash position is two million 

bushels of unsold corn, the firm is exposed 

to price risk. Participant A’s hedge of the two 

million bushels represents a substitute for a 

fixed-price forward sale at a later time in the 

physical marketing channel. The position is 

economically appropriate to the reduction of 

price risk because the short position in a 

referenced contract does not exceed the 

quantity equivalent risk exposure (on a net 

basis) in the cash commodity in the current 

crop year. Last, the hedge arises from a 

potential change in the value of corn owned 

by Participant A. 

2. Lending a Commodity and Hedge of Price 

Risk Under Paragraph (3)(i) of the Bona Fide 

Hedging Position Definition 

Fact Pattern: Bank B owns 1,000 ounces of 

gold that it lends to Jewelry Fabricator J at 

LIBOR plus a differential. Under the terms of 

the loan, Jewelry Fabricator J may later 

purchase the gold from Bank B at a 

differential to the prevailing price of the 

Commodity Exchange, Inc. (COMEX) Gold 

futures contract (i.e., an open-price purchase 

agreement is embedded in the terms of the 

loan). Jewelry Fabricator J intends to use the 

gold to make jewelry and reimburse Bank B 

for the loan using the proceeds from jewelry 

sales and either purchase gold from Bank B 

by paying the market price for gold or return 

the equivalent amount of gold to Bank B by 

purchasing gold at the market price. Because 

Bank B has retained the price risk on gold, 

the bank is concerned about its potential loss 

if the price of gold drops. The bank reduces 

the risk of a potential loss in the value of the 

gold by establishing a ten contract short 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75836 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

position in the COMEX Gold futures contract, 

which has a unit of trading of 100 ounces of 

gold. The ten contract short position is 

equivalent to 1,000 ounces of gold. 

Analysis: This position meets the general 

requirements for bona fide hedging positions 

under paragraphs (2)(i)(A)–(C) and the 

requirements associated with owning a cash 

commodity under paragraph (3)(i). The 

physical commodity that is being hedged is 

the underlying cash commodity for the 

COMEX Gold futures contract. Bank B’s short 

hedge of the gold represents a substitute for 

a transaction to be made in the physical 

marketing channel (e.g., completion of the 

open-price sale to Jewelry Fabricator J). 

Because the notional quantity of the short 

position in the gold futures contract is equal 

to the amount of gold that Bank B owns, the 

hedge is economically appropriate to the 

reduction of risk. Finally, the short position 

in the commodity derivative contract offsets 

the potential change in the value of the gold 

owned by Bank B. 

3. Repurchase Agreements and Hedge of 

Inventory Under Paragraph (3)(i) of the Bona 

Fide Hedging Position Definition 

Fact Pattern: Elevator A purchased 500,000 

bushels of wheat in April and reduced its 

price risk by establishing a short position of 

100 contracts in the CBOT Wheat futures 

contract, equivalent to 500,000 bushels of 

wheat. Because the price of wheat rose 

steadily since April, Elevator A had to make 

substantial maintenance margin payments. 

To alleviate its cash flow concern about 

meeting further margin calls, Elevator A 

decides to enter into a repurchase agreement 

with Bank B and offset its short position in 

the wheat futures contract. The repurchase 

agreement involves two separate contracts: A 

fixed-price sale from Elevator A to Bank B at 

today’s spot price; and an open-price 

purchase agreement that will allow Elevator 

A to repurchase the wheat from Bank B at the 

prevailing spot price three months from now. 

Because Bank B obtains title to the wheat 

under the fixed-price purchase agreement, it 

is exposed to price risk should the price of 

wheat drop. Bank B establishes a short 

position of 100 contracts in the CBOT Wheat 

futures contract, equivalent to 500,000 

bushels of wheat. 

Analysis: Bank B’s position meets the 

general requirements for a bona fide hedging 

position under paragraphs (2)(i)(A)–(C) and 

the provisions for owning the cash 

commodity under paragraph (3)(i). The short 

position in referenced contracts by Bank B is 

a substitute for a fixed-price sales transaction 

to be taken at a later time in the physical 

marketing channel either to Elevator A or to 

another commercial party. The position is 

economically appropriate to the reduction of 

risk in the conduct and management of the 

commercial enterprise (Bank B) because the 

notional quantity of the short position in 

referenced contracts held by Bank B is not 

larger than the quantity of cash wheat 

purchased by Bank B. Finally, the short 

position in the CBOT Wheat futures contract 

reduces the price risk associated with owning 

cash wheat. 

4. Utility Hedge of Anticipated Customer 

Requirements Under Paragraph (3)(iii)(B) of 

the Bona Fide Hedging Position Definition 

Fact Pattern: Natural Gas Utility A is 

encouraged to hedge its purchases of natural 

gas by the State Public Utility Commission in 

order to reduce natural gas price risk to 

residential customers. State Public Utility 

Commission considers the hedging practice 

to be prudent and allows gains and losses 

from hedging to be passed on to Natural Gas 

Utility A’s regulated natural gas customers. 

Natural Gas Utility A has about one million 

residential customers who have average 

historical usage of about 71.5 mmBTUs of 

natural gas per year per residence. The utility 

decides to hedge about 70 percent of its 

residential customers’ anticipated 

requirements for the following year, 

equivalent to a 5,000 contract long position 

in the NYMEX Henry Hub Natural Gas 

futures contract. To reduce the risk of higher 

prices to residential customers, Natural Gas 

Utility A establishes a 5,000 contract long 

position in the NYMEX Henry Hub Natural 

Gas futures contract. Since the utility is only 

hedging 70 percent of historical usage, 

Natural Gas Utility A is highly certain that 

realized demand will exceed its hedged 

anticipated residential customer 

requirements. 

Analysis: Natural Gas Utility A’s position 

meets the general requirements for a bona 

fide hedging position under paragraphs 

(2)(i)(A)–(C) and the provisions for hedges of 

unfilled anticipated requirements by a utility 

under paragraph (3)(iii)(B). The physical 

commodity that is being hedged involves a 

commodity underlying the NYMEX Henry 

Hub Natural Gas futures contract. The long 

position in the commodity derivative 

contract represents a substitute for 

transactions to be taken at a later time in the 

physical marketing channel. The position is 

economically appropriate to the reduction of 

price risk because the price of natural gas 

may increase. The commodity derivative 

contract position offsets the price risk of 

natural gas that the utility anticipates 

purchasing on behalf of its residential 

customers. As provided under paragraph 

(3)(iii), the risk-reducing position qualifies as 

a bona fide hedging position in the natural 

gas physical-delivery referenced contract 

during the spot month provided that the 

position does not exceed the unfilled 

anticipated requirements for that month and 

for the next succeeding month. 

5. Processor Margins Hedge Using Unfilled 

Anticipated Requirements Under Paragraph 

(3)(iii)(A) of the Bona Fide Hedging Position 

Definition and Anticipated Production 

Under Paragraph (4)(i) of the Definition 

Fact Pattern: Soybean Processor A has a 

total throughput capacity of 200 million 

bushels of soybeans per year (equivalent to 

40,000 CBOT soybean futures contracts). 

Soybean Processor A crushes soybeans into 

products (soybean oil and soybean meal). It 

currently has 40 million bushels of soybeans 

in storage and has offset that risk through 

fixed-price forward sales of the amount of 

products expected to be produced from 

crushing 40 million bushels of soybeans, thus 

locking in its processor margin on one 

million metric tons of soybeans. Because it 

has consistently operated its plants at full 

capacity over the last three years, it 

anticipates purchasing another 160 million 

bushels of soybeans to be delivered to its 

storage facility over the next year. It has not 

sold the 160 million bushels of anticipated 

production of crushed products forward. 

Processor A faces the risk that the difference 

in price relationships between soybeans and 

the crushed products (i.e., the crush spread) 

could change adversely, resulting in reduced 

anticipated processing margins. To hedge its 

processing margins and lock in the crush 

spread, Processor A establishes a long 

position of 32,000 contracts in the CBOT 

Soybean futures contract (equivalent to 160 

million bushels of soybeans) and 

corresponding short positions in CBOT 

Soybean Meal and Soybean Oil futures 

contracts, such that the total notional 

quantity of soybean meal and soybean meal 

futures contracts are equivalent to the 

expected production from crushing 160 

million bushels of soybeans into soybean 

meal and soybean oil. 

Analysis: These positions meet the general 

requirements for bona fide hedging positions 

under paragraphs (2)(i)(A)–(C) and the 

provisions for hedges of unfilled anticipated 

requirements under paragraph (3)(iii)(A) and 

unsold anticipated production under 

paragraph (4)(i). The physical commodities 

being hedged are commodities underlying 

the CBOT Soybean, Soybean Meal, and 

Soybean Oil futures contracts. Long positions 

in the soybean futures contract and 

corresponding short positions in soybean 

meal and soybean oil futures contracts 

qualify as bona fide hedging positions 

provided they do not exceed the unfilled 

anticipated requirements of the cash 

commodity for twelve months (in this case 4 

million tons) as required in paragraph 

(3)(iii)(A) and the quantity equivalent of 

twelve months unsold anticipated 

production of cash products and by-products 

as required in paragraph (4)(i). Such 

positions are a substitute for purchases and 

sales to be made at a later time in the 

physical marketing channel and are 

economically appropriate to the reduction of 

risk. The positions in referenced contracts 

offset the potential change in the value of 

soybeans that the processor anticipates 

purchasing and the potential change in the 

value of products and by-products the 

processor anticipates producing and selling. 

The size of the permissible long hedge 

position in the soybean futures contract must 

be reduced by any inventories and fixedprice purchases because they would reduce 

the processor’s unfilled requirements. 

Similarly, the size of the permissible short 

hedge positions in soybean meal and soybean 

oil futures contracts must be reduced by any 

fixed-price sales because they would reduce 

the processor’s unsold anticipated 

production. As provided under paragraph 

(3)(iii)(A), the risk reducing long position in 

the soybean futures contract that is not in 

excess of the anticipated requirements for 

soybeans for that month and the next 

succeeding month qualifies as a bona fide 

hedging position during the last five days of 

trading in the physical-delivery referenced 


emcdonald on DSK67QTVN1PROD with PROPOSALS2
Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75837 

2Put-call parity describes the mathematical 

relationship between price of a put and call with 

identical strike prices and expiry. 

contract. As provided under paragraph (4)(i), 

the risk reducing short position in the 

soybean meal and oil futures contract do not 

qualify as a bona fide hedging position in a 

physical-delivery referenced contract during 

the last five days of trading in the event the 

Soybean Processor A does not have unsold 

products in inventory. 

The combination of the long and short 

positions in soybean, soybean meal, and 

soybean oil futures contracts are 

economically appropriate to the reduction of 

risk. However, unlike in this example, an 

unpaired position (e.g., only a long position 

in a commodity derivative contract) that is 

not offset by either a cash market position 

(e.g., a fixed-price sales contract) or 

derivative position (e.g., a short position in 

a commodity derivative contract) would not 

represent an economically appropriate 

reduction of risk. This is because the 

commercial enterprise’s crush spread risk is 

relatively low in comparison to the price risk 

from taking an outright long position in the 

futures contract in the underlying commodity 

or an outright short position in the futures 

contracts in the products and by-products of 

processing. The price fluctuations of the 

crush spread, that is, the risk faced by the 

commercial enterprise, would not be 

expected to be substantially related to the 

price fluctuations of either an outright long 

or outright short futures position. 

6. Agent Hedge Under Paragraph (3)(iv) of 

the Bona Fide Hedging Position Definition 

Fact Pattern: Agent A is in the business of 

merchandising (selling) the cash grain owned 

by multiple warehouse operators and 

forwarding the merchandising revenues back 

to the warehouse operators less the agent’s 

fees. Agent A does not own any cash 

commodity, but is responsible for 

merchandising of the cash grain positions of 

the warehouse operators pursuant to 

contractual arrangements. The contractual 

arrangements also authorize Agent A to 

hedge the price risks of the grain owned by 

the warehouse operators. For the volumes of 

grain it is authorized to hedge, the agent 

enters into short positions in grain 

commodity derivative contracts that offset 

the price risks of the cash commodities. 

Analysis: The positions meet the 

requirements of paragraphs (2)(1)(A)–(C) for 

hedges of a physical commodity and 

paragraph (3)(iv) for hedges by an agent. The 

positions represent a substitute for 

transactions to be made in the physical 

marketing channel, are economically 

appropriate to the reduction of risks arising 

from grain owned by the agent’s contractual 

counterparties, and arise from the potential 

change in the value of such grain. The agent 

does not own and has not contacted to 

purchase such grain at a fixed price, but is 

responsible for merchandising the cash 

positions that are being offset in commodity 

derivative contracts. The agent has a 

contractual arrangement with the persons 

who own the grain being offset. 

7. Sovereign Hedge of Unsold Anticipated 

Production Under Paragraph (4)(i) of the 

Bona Fide Hedging Position Definition and 

Position Aggregation Under § 150.4 

Fact Pattern: A Sovereign induces a farmer 

to sell his anticipated production of 100,000 

bushels of corn forward to User A at a fixed 

price for delivery during the expected 

harvest. In return for the farmer entering into 

the fixed-price forward sale, the Sovereign 

agrees to pay the farmer the difference 

between the market price at the time of 

harvest and the price of the fixed-price 

forward, in the event that the market price at 

the time of harvest is above the price of the 

forward. The fixed-price forward sale of 

100,000 bushels of corn reduces the farmer’s 

downside price risk associated with his 

anticipated agricultural production. The 

Sovereign faces commodity price risk as it 

stands ready to pay the farmer the difference 

between the market price and the price of the 

fixed-price contract. To reduce that risk, the 

Sovereign establishes a long position of 20 

call options on the Chicago Board of Trade 

(CBOT) Corn futures contract, equivalent to 

100,000 bushels of corn. 

Analysis: Because the Sovereign and the 

farmer are acting together pursuant to an 

express agreement, the aggregation 

provisions of § 150.4 apply and they are 

treated as a single person for purposes of 

position limits. Taking the positions of the 

Sovereign and farmer jointly, the risk profile 

of the combination of the forward sale and 

the long call is approximately equivalent to 

the risk profile of a synthetic long put.2 A 

synthetic long put offsets the downside price 

risk of anticipated production. Thus, the 

position of that person satisfies the general 

requirements for a bona fide hedging position 

under paragraphs (2)(i)(A)–(C) and meets the 

requirements for anticipated agricultural 

production under paragraph (4)(i). The 

agreement between the Sovereign and the 

farmer involves the production of a 

commodity underlying the CBOT Corn 

futures contract. The synthetic long put is a 

substitute for transactions that the farmer has 

made in the physical marketing channel. The 

synthetic long put reduces the price risk 

associated with anticipated agricultural 

production. The size of the Sovereign’s 

position is equivalent to the size of the 

farmer’s anticipated production. As provided 

under paragraph (4), the Sovereign’s riskreducing position would not qualify as a 

bona fide hedging position in a physicaldelivery futures contract during the last five 

days of trading; however, since the CBOT 

Corn option will exercise into a physicaldelivery CBOT Corn futures contract prior to 

the last five days of trading in that physicaldelivery futures contract, the Sovereign may 

continue to hold its option position as a bona 

fide hedging position through option expiry. 

8. Hedge of Offsetting Unfixed Price Sales 

and Purchases Under Paragraph (4)(ii) of the 

Bona Fide Hedging Position Definition 

Fact Pattern: Currently it is October and 

Oil Merchandiser A has entered into cash 

forward contracts to purchase 600,000 of 

crude oil at a floating price that references 

the January contract month (in the next 

calendar year) for the ICE Futures Brent 

Crude futures contract and to sell 600,000 

barrels of crude oil at a price that references 

the February contract month (in the next 

calendar year) for the NYMEX Light Sweet 

Crude Oil futures contract. Oil Merchandiser 

A is concerned about an adverse change in 

the price spread between the January ICE 

Futures Brent Crude futures contract and the 

February NYMEX Light Sweet Crude Oil 

futures contract. To reduce that risk, Oil 

Merchandiser A establishes a long position of 

600 contracts in the January ICE Futures 

Brent Crude futures contract, price risk 

equivalent to buying 600,000 barrels of oil, 

and a short position of 600 contracts in the 

February NYMEX Light Sweet Crude Oil 

futures contract, price risk equivalent to 

selling 600,000 barrels of oil. 

Analysis: Oil Merchandiser A’s positions 

meet the general requirements for bona fide 

hedging positions under paragraphs (2)(i)(A)– 

(C) and the provisions for offsetting sales and 

purchases in referenced contracts under 

paragraph (4)(ii). The physical commodity 

that is being hedged involves a commodity 

underlying the NYMEX Light Sweet Crude 

Oil futures contract. The long and short 

positions in commodity derivative contracts 

represent substitutes for transactions to be 

taken at a later time in the physical 

marketing channel. The positions are 

economically appropriate to the reduction of 

risk because the price spread between the ICE 

Futures Brent Crude futures contract and the 

NYMEX Light Sweet Crude Oil futures 

contract could move adversely to Oil 

Merchandiser A’s interests in the two cash 

forward contracts, that is, the price of the ICE 

Futures Brent Crude futures contract could 

increase relative to the price of the NYMEX 

Light Sweet Crude Oil futures contract. The 

positions in commodity derivative contracts 

offset the price risk in the cash forward 

contracts. As provided under paragraph (4), 

the risk-reducing position does not qualify as 

a bona fide hedging position in the crude oil 

physical-delivery referenced contract during 

the spot month. 

9. Anticipated Royalties Hedge Under 

Paragraph (4)(iii) of the Bona Fide Hedging 

Position Definition and Pass-Through Swaps 

Hedge Under Paragraph (2)(ii) of the 

Definition 

a. Fact Pattern: In order to develop an oil 

field, Company A approaches Bank B for 

financing. To facilitate the loan, Bank B first 

establishes an independent legal entity 

commonly known as a special purpose 

vehicle (SPV). Bank B then provides a loan 

to the SPV. The SPV is obligated to repay 

principal and interest to the Bank based on 

a fixed price for crude oil. The SPV in turn 

makes a production loan to Company A. The 

terms of the production loan require 

Company A to provide the SPV with 

volumetric production payments (VPPs) 

based on a specified share of the production 

to be sold at the prevailing price of crude oil 

(i.e., the index price) as oil is produced. 

Because the price of crude oil may fall, the 

SPV reduces that risk by entering into a 


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crude oil swap with Swap Dealer C. The 

swap requires the SPV to pay Swap Dealer 

C the floating price of crude oil (i.e., the 

index price) and for Swap Dealer C to pay a 

fixed price to the SPV. The notional quantity 

for the swap is equal to the expected 

production underlying the VPPs to the SPV. 

The SPV will receive a floating price at index 

on the VPP and will pay a floating price at 

index on the swap, which will offset. The 

SPV will receive a fixed price payment on 

the swap and repay the loan’s principal and 

interest to Bank B. The SPV is highly certain 

that the VPP production volume will occur, 

since the SPV’s engineer has reviewed the 

forecasted production from Company A and 

required the VPP volume to be set with a 

cushion (i.e., a hair-cut) below the forecasted 

production. 

Analysis: For the SPV, the swap between 

Swap Dealer C and the SPV meets the general 

requirements for a bona fide hedging position 

under paragraphs (2)(i)(A)–(C) and the 

requirements for anticipated royalties under 

paragraph (4)(iii). The SPV will receive 

payments under the VPP royalty contract 

based on the unfixed price sale of anticipated 

production of the physical commodity 

underlying the royalty contract, i.e., crude 

oil. The swap represents a substitute for the 

price of sales transactions to be made in the 

physical marketing channel. The SPV’s swap 

position qualifies as a hedge because it is 

economically appropriate to the reduction of 

price risk. The swap reduces the price risk 

associated with a change in value of a royalty 

asset. The fluctuations in value of the SPV’s 

anticipated royalties are substantially related 

to the fluctuations in value of the crude oil 

swap with Swap Dealer C. 

b. Continuation of Fact Pattern: Swap 

Dealer C offsets the price risk associated with 

the swap to the SPV by establishing a short 

position in cash-settled crude oil futures 

contracts. The notional quantity of the short 

position in futures contracts held by Swap 

Dealer C exactly matches the notional 

quantity of the swap with the SPV. 

Analysis: For the swap dealer, because the 

SPV enters the cash-settled swap as a bona 

fide hedger under paragraph (4)(iii) (i.e., a 

pass-through swap counterparty), the offset 

of the risk of the swap in a futures contract 

by Swap Dealer C qualifies as a bona fide 

hedging position (i.e., a pass-through swap 

offset) under paragraph (2)(ii)(A). Since the 

swap was executed opposite a pass-through 

swap counterparty and was offset, the swap 

itself also qualifies as a bona fide hedging 

position (i.e., a pass-through swap) under 

paragraph (2)(ii)(B). If the cash-settled swap 

is not a referenced contract, then the passthrough swap offset may qualify as a crosscommodity hedge under paragraph (5), 

provided the fluctuations in value of the 

pass-through swap offset are substantially 

related to the fluctuations in value of the 

pass-through swap. 

10. Anticipated Royalties Hedge Under 

Paragraph (4)(iii) of the Bona Fide Hedging 

Position Definition and Cross-Commodity 

Hedge Under Paragraph (5) of the Definition 

Fact Pattern: An eligible contract 

participant (ECP) owns royalty interests in a 

portfolio of oil wells. Royalties are paid at the 

prevailing (floating) market price for the 

commodities produced and sold at major 

trading hubs, less transportation and 

gathering charges. The large portfolio and 

well-established production history for most 

of the oil wells provide a highly certain 

production stream for the next 24 months. 

The ECP also determined that changes in the 

cash market prices of 50 percent of the oil 

production underlying the portfolio of 

royalty interests historically have been 

closely correlated with changes in the 

calendar month average of daily settlement 

prices of the nearby NYMEX Light Sweet 

Crude Oil futures contract. The ECP decided 

to hedge some of the royalty price risk by 

entering into a cash-settled swap with a term 

of 24 months. Under terms of the swap, the 

ECP will receive a fixed payment and make 

monthly payments based on the calendar 

month average of daily settlement prices of 

the nearby NYMEX Light Sweet Crude Oil 

futures contract and notional amounts equal 

to 50 percent of the expected production 

volume of oil underlying the royalties. 

Analysis: This position meets the 

requirements of paragraphs (2)(i)(A)–(C) for 

hedges of a physical commodity, paragraph 

(4)(iii) for hedges of anticipated royalties, and 

paragraph (5) for cross-commodity hedges. 

The long position in the commodity 

derivative contract represents a substitute for 

transactions to be taken at a later time in the 

physical marketing channel. The position is 

economically appropriate to the reduction of 

price risk because the price of oil may 

decrease. The commodity derivative contract 

position offsets the price risk of royalty 

payments, based on oil production, that the 

ECP anticipates receiving. The ECP is 

exposed to price risk arising from the 

anticipated production volume of oil 

attributable to her royalty interests. The 

physical commodity underlying the royalty 

portfolio that is being hedged involves a 

commodity with fluctuations in value that 

are substantially related to the fluctuations in 

value of the swap. 

11. Hedges of Services Under Paragraph 

(4)(iv) of the Bona Fide Hedging Position 

Definition 

a. Fact Pattern: Company A enters into a 

risk service agreement to drill an oil well 

with Company B. The risk service agreement 

provides that a portion of the revenue 

receipts to Company A depends on the value 

of the light sweet crude oil produced. 

Company A is exposed to the risk that the 

price of oil may fall, resulting in lower 

anticipated revenues from the risk service 

agreement. To reduce that risk, Company A 

establishes a short position in the New York 

Mercantile Exchange (NYMEX) Light Sweet 

Crude Oil futures contract, in a notional 

amount equivalent to the firm’s anticipated 

share of the expected quantity of oil to be 

produced. Company A is highly certain of its 

anticipated share of the expected quantity of 

oil to be produced. 

Analysis: Company A’s hedge of a portion 

of its revenue stream from the risk service 

agreement meets the general requirements for 

bona fide hedging positions under 

paragraphs (2)(i)(A)–(C) and the provisions 

for services under paragraph (4)(iv). The 

contract for services involves the production 

of a commodity underlying the NYMEX Light 

Sweet Crude Oil futures contract. A short 

position in the NYMEX Light Sweet Crude 

Oil futures contract is a substitute for 

transactions to be taken at a later time in the 

physical marketing channel, with the value 

of the revenue receipts to Company A 

dependent on the price of the oil sales in the 

physical marketing channel. The short 

position in the futures contract held by 

Company A is economically appropriate to 

the reduction of risk, because the total 

notional quantity underlying the short 

position in the futures contract held by 

Company A is equivalent to its share of the 

expected quantity of future production under 

the risk service agreement. Because the price 

of oil may fall, the short position in the 

futures contract reduces price risk from a 

potential reduction in the payments to 

Company A under the service contract with 

Company B. Under paragraph (4)(iv), the 

risk-reducing position will not qualify as a 

bona fide hedging position during the spot 

month of the physical-delivery oil futures 

contract. 

b. Fact Pattern: A City contracts with Firm 

A to provide waste management services. 

The contract requires that the trucks used to 

transport the solid waste use natural gas as 

a power source. According to the contract, 

the City will pay for the cost of the natural 

gas used to transport the solid waste by Firm 

A. In the event that natural gas prices rise, 

the City’s waste transport expenses will 

increase. To mitigate this risk, the City 

establishes a long position in the NYMEX 

Henry Hub Natural Gas futures contract in an 

amount equivalent to the expected volume of 

natural gas to be used over the life of the 

service contract. 

Analysis: This position meets the general 

requirements for bona fide hedging positions 

under paragraphs (2)(i)(A)–(C) and the 

provisions for services under paragraph 

(4)(iv). The contract for services involves the 

use of a commodity underlying the NYMEX 

Henry Hub Natural Gas futures contract. 

Because the City is responsible for paying the 

cash price for the natural gas used under the 

services contract, the long hedge is a 

substitute for transactions to be taken at a 

later time in the physical marketing channel. 

The position is economically appropriate to 

the reduction of price risk because the total 

notional quantity of the long position in a 

commodity derivative contract equals the 

expected volume of natural gas to be used 

over the life of the contract. The position in 

the commodity derivative contract reduces 

the price risk associated with an increase in 

anticipated costs that the City may incur 

under the services contract in the event that 

the price of natural gas increases. As 

provided under paragraph (4), the risk 

reducing position will not qualify as a bona 

fide hedge during the spot month of the 

physical-delivery futures contract. 

12. Cross-Commodity Hedge Under 

Paragraph (5) of the Bona Fide Hedging 

Position Definition and Inventory Hedge 

Under Paragraph (3)(i) of the Definition 

Fact Pattern: Copper Wire Fabricator A is 

concerned about possible reductions in the 


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price of copper. Currently it is November and 

it owns inventory of 100 million pounds of 

copper and five million pounds of finished 

copper wire. Currently, deferred futures 

prices are lower than the nearby futures 

price. Copper Wire Fabricator A expects to 

sell 150 million pounds of finished copper 

wire in February of the following year. To 

reduce its price risk, Copper Wire Fabricator 

A establishes a short position of 6000 

contracts in the February COMEX Copper 

futures contract, equivalent to selling 150 

million pounds of copper. The fluctuations 

in value of copper wire are expected to be 

substantially related to fluctuations in value 

of copper. 

Analysis: The Copper Wire Fabricator A’s 

position meets the general requirements for 

a bona fide hedging position under 

paragraphs (2)(i)(A)–(C) and the provisions 

for owning a commodity under paragraph 

(3)(i) and for a cross-hedge of the finished 

copper wire under paragraph (5). The short 

position in a referenced contract represents a 

substitute for transactions to be taken at a 

later time in the physical marketing channel. 

The short position is economically 

appropriate to the reduction of price risk in 

the conduct and management of the 

commercial enterprise because the price of 

copper could drop. The short position in the 

referenced contract offsets the risk of a 

possible reduction in the value of the 

inventory that it owns. Since the finished 

copper wire is a product of copper that is not 

deliverable on the commodity derivative 

contract, 200 contracts of the short position 

are a cross-commodity hedge of the finished 

copper wire and 400 contracts of the short 

position are a hedge of the copper inventory. 

13. Cross-Commodity Hedge Under 

Paragraph (5) of the Bona Fide Hedging 

Position Definition and Anticipated 

Requirements Hedge Under Paragraph 

(3)(iii)(A) of the Definition 

Fact Pattern: Airline A anticipates using a 

predictable volume of jet fuel every month 

based on scheduled flights and decides to 

hedge 80 percent of that volume for each of 

the next 12 months. After a review of various 

commodity derivative contract hedging 

strategies, Airline A decides to cross hedge 

its anticipated jet fuel requirements in ultralow sulfur diesel (ULSD) commodity 

derivative contracts. Airline A determined 

that price fluctuations in its average cost for 

jet fuel were substantially related to the price 

fluctuations of the calendar month average of 

the first nearby physical-delivery NYMEX 

New York Harbor ULSD Heating Oil (HO) 

futures contract and determined an 

appropriate hedge ratio, based on a 

regression analysis, of the HO futures 

contract to the quantity equivalent amount of 

its anticipated requirements. Airline A 

decided that it would use the HO futures 

contract to cross hedge part of its jet fuel 

price risk. In addition, Airline A decided to 

protect against jet fuel price increases by 

cross hedging another part of its anticipated 

jet fuel requirements with a long position in 

cash-settled calls in the NYMEX Heating Oil 

Average Price Option (AT) contract. The AT 

call option is settled based on the price of the 

HO futures contract. The sum of the notional 

amounts of the long position in AT call 

options and the long position in the HO 

futures contract will not exceed the quantity 

equivalent of 80 percent of Airline A’s 

anticipated requirements for jet fuel. 

Analysis: The positions meet the 

requirements of paragraphs (2)(i)(A)–(C) for 

hedges of a physical commodity, paragraph 

(3)(iii)(A) for unfilled anticipated 

requirements and paragraph (5) for crosscommodity hedges. The positions represent a 

substitute for transactions to be made in the 

physical marketing channel, are 

economically appropriate to the reduction of 

risks arising from anticipated requirements 

for jet fuel, and arise from the potential 

change in the value of such jet fuel. The 

aggregation notional amount of the airline’s 

positions in the call option and the futures 

contract does not exceed the quantity 

equivalent of anticipated requirements for jet 

fuel. The value fluctuations in jet fuel are 

substantially related to the value fluctuations 

in the HO futures contract. 

Airline A may hold its long position in the 

cash-settled AT call option contract as a cross 

hedge against jet fuel price risk without 

having to exit the contract during the spot 

month. 

14. Position Aggregation Under § 150.4 and 

Inventory Hedge Under Paragraph (3)(i) of 

the Bona Fide Hedging Position Definition 

Fact Pattern: Company A owns 100 percent 

of Company B. Company B buys and sells a 

variety of agricultural products, including 

wheat. Company B currently owns five 

million bushels of wheat. To reduce some of 

its price risk, Company B establishes a short 

position of 600 contracts in the CBOT Wheat 

futures contract, equivalent to three million 

bushels of wheat. After communicating with 

Company B, Company A establishes an 

additional short position of 400 CBOT Wheat 

futures contracts, equivalent to two million 

bushels of wheat. 

Analysis: The aggregate short position in 

the wheat referenced contract held by 

Company A and Company B meets the 

general requirements for a bona fide hedging 

position under paragraphs (2)(i)(A)–(C) and 

the provisions for owning a cash commodity 

under paragraph (3)(i). Because Company A 

owns more than 10 percent of Company B, 

Company A and B are aggregated together as 

one person under § 150.4. Entities required to 

aggregate accounts or positions under § 150.4 

are the same person for the purpose of 

determining whether a person is eligible for 

a bona fide hedging position exemption 

under § 150.3. The aggregate short position in 

the futures contract held by Company A and 

Company B represents a substitute for 

transactions to be taken at a later time in the 

physical marketing channel. The aggregate 

short position in the futures contract held by 

Company A and Company B is economically 

appropriate to the reduction of price risk 

because the aggregate short position in the 

CBOT Wheat futures contract held by 

Company A and Company B, equivalent to 

five million bushels of wheat, does not 

exceed the five million bushels of wheat that 

is owned by Company B. The price risk 

exposure for Company A and Company B 

results from a potential change in the value 

of that wheat. 

■ 32. Add appendix D to part 150 to 

read as follows: 

Appendix D to Part 150—Initial 

Position Limit Levels 

Contract Spot-month 

Single 

month and 

all months 

Legacy Agricultural 

Chicago Board of Trade Corn (C) ................................................................................................................................... 600 53,500 

Chicago Board of Trade Oats (O) ................................................................................................................................... 600 1,600 

Chicago Board of Trade Soybeans (S) ........................................................................................................................... 600 26,900 

Chicago Board of Trade Soybean Meal (SM) ................................................................................................................. 720 9,000 

Chicago Board of Trade Soybean Oil (SO) .................................................................................................................... 540 11,900 

Chicago Board of Trade Wheat (W) ................................................................................................................................ 600 16,200 

ICE Futures U.S. Cotton No. 2 (CT) ............................................................................................................................... 300 8,800 

Kansas City Board of Trade Hard Winter Wheat (KW) .................................................................................................. 600 6,500 

Minneapolis Grain Exchange Hard Red Spring Wheat (MWE) ...................................................................................... 600 3,300 

Other Agricultural 

Chicago Board of Trade Rough Rice (RR) ..................................................................................................................... 600 2,200 

Chicago Mercantile Exchange Class III Milk (DA) .......................................................................................................... 1500 3,400 

Chicago Mercantile Exchange Feeder Cattle (FC) ......................................................................................................... 300 3,000 

Chicago Mercantile Exchange Lean Hog (LH) ................................................................................................................ 950 9,400 


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Contract Spot-month 

Single 

month and 

all months 

Chicago Mercantile Exchange Live Cattle (LC) .............................................................................................................. 450 12,900 

ICE Futures U.S. Cocoa (CC) ......................................................................................................................................... 1,000 7,100 

ICE Futures U.S. Coffee C (KC) ..................................................................................................................................... 500 7,100 

ICE Futures U.S. FCOJ–A (OJ) ...................................................................................................................................... 300 2,900 

ICE Futures U.S. Sugar No. 11 (SB) .............................................................................................................................. 5,000 23,500 

ICE Futures U.S. Sugar No. 16 (SF) .............................................................................................................................. 1,000 1,200 

Energy 

New York Mercantile Exchange Henry Hub Natural Gas (NG) ...................................................................................... 1,000 149,600 

New York Mercantile Exchange Light Sweet Crude Oil (CL) ......................................................................................... 3,000 109,200 

New York Mercantile Exchange NY Harbor ULSD (HO) ................................................................................................ 1,000 16,100 

New York Mercantile Exchange RBOB Gasoline (RB) ................................................................................................... 1,000 11,800 

Metal 

Commodity Exchange, Inc. Copper (HG) ........................................................................................................................ 1,200 5,600 

Commodity Exchange, Inc. Gold (GC) ............................................................................................................................ 3,000 21,500 

Commodity Exchange, Inc. Silver (SI) ............................................................................................................................ 1,500 6,400 

New York Mercantile Exchange Palladium (PA) ............................................................................................................. 650 5,000 

New York Mercantile Exchange Platinum (PL) ............................................................................................................... 500 5,000 

Issued in Washington, DC, on November 7, 

2013, by the Commission. 

Melissa D. Jurgens, 

Secretary of the Commission. 

Note: The following appendices will not 

appear in the Code of Federal Regulations. 

Appendices to Position Limits for 

Derivatives—Commission Voting 

Summary and Statements of 

Commissioners 

Appendix 1—Commission Voting 

Summary 

On this matter, Chairman Gensler and 

Commissioners Chilton and Wetjen voted in 

the affirmative. Commissioner O’Malia voted 

in the negative. 

Appendix 2—Statement of Chairman 

Gary Gensler 

I support the proposed rule to establish 

position limits for physical commodity 

derivatives. 

The CFTC does not set or regulate prices. 

The Commission is charged with promoting 

the integrity of the futures and swaps 

markets. The Commission is charged with 

protecting the public from fraud, 

manipulation and other abuses. 

Since the Commodity Exchange Act passed 

in 1936, position limits have been a tool to 

curb or prevent excessive speculation that 

may burden interstate commerce. 

For a fuller understanding of this long 

history, refer to the excellent testimony of 

our former General Counsel Dan Berkovitz 

from July of 2009 titled: ‘‘Position Limits and 

the Hedge Exemption, Brief Legislative 

History.’’ 

In the Dodd-Frank Act, Congress directed 

the Commission to impose limits on 

speculative positions in physical commodity 

futures and options contracts and 

economically equivalent swaps. 

The CFTC finalized a rule in October 2011 

that addressed Congress’ direction to prevent 

any single trader from obtaining too large a 

share of the market to ensure that derivatives 

markets remain fair and competitive. Last 

fall, a federal court vacated the rule. 

It is critically important, however, that 

these position limits be established as 

Congress required. 

The agency has historically interpreted our 

obligations to promote market integrity to 

include ensuring that markets do not become 

too concentrated. When the CFTC set 

position limits in the past, it sought to ensure 

that the markets were made up of a broad 

group of participants with no one speculator 

having an outsized position. This promotes 

the integrity of the price discovery function 

in the market by limiting the size of any one 

speculator’s footprint in the market. 

Position limits further protect the markets 

and clearinghouses, as such limits diminish 

the possible burdens when any individual 

participant may need to sell or liquidate a 

position in times of individual stress. 

Thus, position limits help to protect the 

markets both in times of clear skies and when 

there is a storm on the horizon. 

With a strong proposal ready for the 

Commission’s consideration today, we 

determined that the best path forward to 

expedite position limits implementation was 

to pursue the new rule and dismiss the 

appeal of the court’s ruling, subject to the 

Commission’s approval of this proposal. 

Today’s proposed rule is consistent with 

congressional intent. The rule would 

establish position limits in 28 referenced 

commodities in agricultural, energy and 

metals markets as part of a phased approach. 

It would establish one position limits 

regime for the spot month and another for 

single-month and all-months-combined 

limits. 

Spot-month limits would be set for futures 

contracts that can be physically settled, as 

well as those swaps and futures that can only 

be cash settled. We are seeking additional 

comment on alternatives to a conditional 

spot-month limit exemption with regard to 

cash-settled contracts. 

Single-month and all-months-combined 

limits, which the Commission currently sets 

only for certain agricultural contracts, would 

be reestablished in the energy and metals 

markets and be extended to swaps. These 

limits would be set using a formula that is 

consistent with that which the CFTC has 

used to set position limits for decades. The 

limits will be set based upon data on the total 

size of the swaps and futures market 

collected through the position reporting rules 

for futures, options on futures, and swaps. 

Consistent with congressional direction, 

the rule also would allow for a bona fide 

hedging exemption for agricultural and 

exempt commodities. Also following 

congressional direction, there is a narrower 

exemption for swap dealers with regard to 

their use of futures and swaps to facilitate the 

bona fide hedging of their customers. 

Today’s proposed position limits rule 

builds on over four years of significant public 

input. In fact, this is the ninth public meeting 

during my tenure as Chairman to consider 

position limits. 

We held three public meetings on this 

issue in the summer of 2009 and got a great 

deal of input from market participants and 

the broader public. 

We also benefited from the more than 

8,200 comments we received in response to 

the January 2010 proposed rulemaking to 

reestablish position limits in the energy 

markets. 

We further benefited from input received 

from the public after a March 2010 meeting 

on the metals markets. In response to the 

January 2011 proposal, we received more 

than 15,100 comments. 

Appendix 3—Statement of 

Commissioner Bart Chilton 

For two reasons, this is a significant day for 

me. I am reminded of that great Etta James 

song, At Last. 

The first reason is that, at last, we are 

considering what I believe to be the signal 

rule of my tenure here at the Commission; 

I’ve been working on speculative position 


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Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 75841 

1 7 U.S.C. 6a(a). 

2 ISDA & SIFMA v. CFTC, No. 12–5362 (D.C. Cir.). 

3 76 Fed. Reg. 71626 (Nov. 18, 2011). 

4 Int’l Swaps & Derivations Ass’n v. CFTC, 887 F. 

Supp. 2d 259, 280–82 (D.D.C. 2012). 

5http://www.cftc.gov/PressRoom/Speeches

Testimony/omaliastatement102913. 

6http://www.cftc.gov/PressRoom/Speeches

Testimony/omaliadissentstatement111512. 

7 Dodd-Frank Wall Street Reform and Consumer 

Protection Act, Pub. L. 111–203, 124 Stat. 1376 

(2010). 

8 7 U.S.C. 6a(a)(1). 

9NPRM pp. 12–14, 24, 32, 171. 

10 17 C.F.R. part 20. 

11Letter from Chairman Christopher Dodd, 

Committee on Banking, Housing, and Urban Affairs, 

United States Senate, and Chairman Blanche 

Lincoln, Committee on Agriculture, Nutrition, and 

Forestry, United States Senate, to Chairman Barney 

Frank, Financial Services Committee, United States 

House of Representatives, and Chairman Colin 

Peterson, Committee on Agriculture, United States 

House of Representatives (June 30, 2010). 

limits since 2008. The second reason today 

is noteworthy is that this will be my last 

Dodd-Frank meeting. Early this morning, I 

sent a letter to the President expressing my 

intent to leave the Agency in the near future. 

I’ve waited until now—today—to get this 

proposed rule out the door, and now—at 

last—with the process coming nearly full 

circle, I can leave. It’s with incredible 

excitement and enthusiasm that I look 

forward to being able to move on to other 

endeavors. 

With that, here is a bit of history on the 

position limits journey that has led us, and 

me, to this day. The early spring of 2008 was 

a peculiar time at the Commission. None of 

my current colleagues were here. I and my 

colleagues at that time watched Bear Stearns 

fail. We had watched commodity prices rise 

as investors sought diversified financial 

havens. When I asked Commission staff 

about the influence of speculation on prices, 

some said speculative positions couldn’t 

impact prices. It didn’t ring true, and as 

numerous independent studies have 

confirmed since, it was not true. 

I began urging the Commission to 

implement speculative position limits under 

our then-existing authority. And I was, at that 

time, the only Commissioner to support 

position limits. Given the concerns, I urged 

Congress to mandate limits in legislation. A 

Senate bill was blocked on a cloture vote that 

summer, but late in the session, the House 

actually passed legislation. Finally, in 2010, 

as part of the Dodd-Frank law, Congress 

mandated the Commission to implement 

position limits by early in 2011. 

Within the Commission, I supported 

passing a rule that would have complied 

with the time-frame established by 

Congress—by any other name—federal law. 

A position limits rule was proposed in 

January of 2011 and finally approved in 

November. 

In September 2012, literally days before 

limits were to be effective, a federal district 

court ruling tossed the rule out, claiming the 

CFTC had not sufficiently provided rationale 

for imposing the rule. We appealed and I 

urged us to address the concerns of the court 

by proposing and quickly passing another 

new and improved rule. I thought and hoped 

that we could move rapidly. After months of 

delay and deferral, it became clear: We could 

not. 

But today—at last—more than three years 

since Dodd-Frank’s passage, we are here to 

take it to the limits one more time. 

Thankfully, we have it right in the text 

before us. The Commission staff has 

ultimately done an admirable job of devising 

a proposed regulation that should be 

unassailable in court, good for markets and 

good for consumers. 

I thank everyone who has worked upon the 

rule: Steve Sherrod, Riva Adriance, Ajay 

Sutaria, Scott Mixon, Mary Connelly, and 

many others for their good work. In addition, 

I especially thank Elizabeth Ritter, my Chief 

of Staff, Nancy Doyle, and also Salman 

Banaei who has left the Agency for greener 

pastures. I thank them for their tireless efforts 

on the single most important, and perhaps to 

me the most frustrating, policy issue of my 

tenure with the Commission. I have had the 

true honor of working with Elizabeth since 

prior to my confirmation. I would be remiss 

if I did not reiterate here what I have often 

said; nowhere do I believe there is a brighter, 

smarter, more knowledgeable and hardworking derivatives counsel. She has served 

the public and me phenomenally well. Thank 

you, Elizabeth. 

And finally to my colleagues, past and 

present, my respect to those whom we have 

been unable to persuade to vote with us on 

this issue, and my thanks to those who will 

vote in support of this needed and mandated 

rule. At last! 

Thank you. 

Appendix 4—Dissenting Statement of 

Commissioner Scott D. O’Malia 

I respectfully dissent from the 

Commission’s decision to approve the Notice 

of Proposed Rulemaking for Position Limits 

for Derivatives. I have a number of serious 

concerns with the position limits proposed 

rule and its interpretation of section 4a(a) of 

the Commodity Exchange Act (‘‘CEA’’ or 

‘‘Act’’).1 Regrettably, this proposal continues 

to chip away at the commercial and business 

operations of end-users and the vital hedging 

function of the futures and swaps markets. 

I cannot support the position limits 

proposed rule that is before the Commission 

today because the proposal: (1) Fails to 

utilize current, forward-looking data and 

other empirical evidence as a justification for 

position limits; (2) fails to provide enough 

flexibility for commercial end-users to engage 

in necessary hedging activities; and (3) fails 

to establish a useful process for end-users to 

seek hedging exemptions. 

We are the experts, but where’s the 

evidence? 

Recently, in connection with the 

Commission’s vote to dismiss its appeal 2 of 

the vacated 2011 position limits rule,3 I 

reiterated that the federal district court 4 had 

instructed the Commission to go back to the 

drawing board and do its homework.5 As I 

have consistently stated, the Commission 

must perform a rigorous and objective factbased analysis in order to determine whether 

position limits will effectively prevent or 

deter excessive speculation.6 Not only that, 

but the Commission must also, in 

establishing any limits, ensure that there is 

sufficient market liquidity for hedgers and 

prevent disruption of the price discovery 

function of the underlying market. 

Unfortunately, the position limits rule that is 

being proposed today is not based upon a 

careful, disciplined review of market 

dynamics or the new data collected under 

our expanded oversight responsibilities 

provided for by the Dodd-Frank Act.7

In its second attempt at establishing a 

broad position limit regime that is in 

accordance with the statutory language 

amended by Dodd-Frank, the Commission 

relies on a new legal strategy—but not new 

data—in order to circumvent the spirit of the 

district court’s decision. Surprisingly, the 

Commission now accepts that the statutory 

language in CEA section 4a(a)(1) 8 is 

ambiguous and that there is not a clear 

mandate from Congress to set position limits, 

contrary to the arguments made by the 

Commission both in court and in the vacated 

rule. Notwithstanding that concession, the 

proposed rule now hides behind Chevron 

deference and invokes the Commission’s 

‘‘experience and expertise’’ in order to justify 

setting position limits without performing an 

ex ante analysis using current market data.9

I am troubled that the proposal uses only 

two examples from the past—one of them as 

far back as the 1970s—to cobble together a 

weak, after-the-fact justification that position 

limits would have prevented market 

disruption. This is glaringly insufficient. 

Instead, the Commission should have taken 

the time to analyze the new data, especially 

from the swaps market, that has been 

collected under the Dodd-Frank Act. It is 

especially troubling that the large trader data 

being reported under Part 20 of Commission 

regulations10 is still unreliable and 

unsuitable for setting position limit levels, 

almost two full years after entities began 

reporting data, and that we are forced to 

resort to using data from 2011 and 2012 as 

a poor and inexact substitute. 

Today, the Commission proposes to set 

position limits for the futures and swaps 

markets in the future, not the past. I fail to 

see how we can be ‘‘experts’’ if we do not 

have the data to back us up. I fear that this 

reliance on a new legal strategy, instead of 

evidence-based standards, does little to 

affirm the Commission’s self-proclaimed 

‘‘expertise’’ and could result in another long 

and costly court challenge that will strain our 

limited resources. 

Preserving Flexibility for Commercial EndUsers 

I am also concerned that the position limits 

proposed rule may not preserve enough 

flexibility for commercial end-users to hedge 

risks inherent in their business operations. 

Hedging is the foundation of our markets, 

and the intent of the Dodd-Frank Act was not 

to place excessive and unnecessary new 

regulatory burdens on end-users and make it 

more complicated and more costly to 

undertake risk management. That was 

strongly underlined in the letter sent to the 

Commission by Senators Dodd and Lincoln 

in June 2010.11


emcdonald on DSK67QTVN1PROD with PROPOSALS2
75842 Federal Register / Vol. 78, No. 239 / Thursday, December 12, 2013 / Proposed Rules 

12 17 CFR 1.3(z). 13 17 CFR 1.3(z)(3) and 1.47. 

Regrettably, the Commission’s rules 

implementing Dodd-Frank have not adhered 

to that directive. This position limits 

proposal is just the latest in this disturbing 

trend of narrowly interpreting the statute to 

foreclose viable risk management functions 

that did not contribute to the financial crisis. 

This trend is nowhere more apparent than in 

how narrowly the proposal defines the 

concept of bona fide hedging. 

The position limits proposed rule does 

away with Commission regulation 1.3(z),12

which has been in effect since the 1970s, and 

sets forth new regulations that narrow the 

bona fide hedging definition, in particular 

the treatment of anticipatory hedging. This is 

despite the fact that the vacated position 

limits rule explicitly recognized certain 

anticipatory hedging transactions as falling 

within the statutory definition of bona fide 

hedging and consistent with the purposes of 

section 4a of the Act, and provided 

exemptions for such transactions given the 

condition that the trader was ‘‘reasonably 

certain’’ of engaging in the anticipated 

activity. In this proposal, based on an 

unsatisfactory ‘‘further review,’’ the 

Commission has changed its mind and has 

scaled back exemptions for anticipatory 

hedging. In all, the Commission has rejected 

half of the common hedging scenarios 

described by a working group of end-users in 

their petition for exemption. 

I question whether the Commission has 

fulfilled Congress’ intent to protect end-users 

by proposing a new position limits rule that 

articulates a far too narrow conception of 

bona fide hedging and does not reflect the 

realities of end-users’ commercial and 

business operations. 

A Workable, Practical Process for NonEnumerated Hedging Exemptions 

I am especially troubled by the proposed 

rule’s elimination of Commission regulations 

1.3(z)(3) and 1.47,13 which is the framework 

for market participants to seek a nonenumerated hedging exemption. I question 

whether eliminating a workable, practical 

process that has been outlined in 

Commission regulations for decades will 

make it more difficult for end-users to seek 

exemptions for legitimate hedging 

transactions and will cause unnecessary 

delay and interference with business 

operations. 

Aggregation Proposed Rule 

While I believe that today’s aggregation 

proposed rule is more responsive than the 

vacated rule to the realities that market 

participants face in their utilization of the 

futures and swaps markets, some important 

concerns still remain. 

First, the aggregation standards in the 

proposal present significant technology 

challenges for compliance, especially across 

affiliates. I would support a phase-in period 

to meet those challenges. 

Second, I am concerned that there is 

insufficient consideration and flexibility in 

the ownership tiers that are used as a proxy 

for control. I would be interested in 

reviewing comments on pro rata aggregation, 

banding/tiering of ownership interest instead 

of full aggregation, and other issues with 

beneficial ownership. Further, I question 

whether the possible exemption for 

ownership in excess of 50% is of use to any 

market participants, given the additional 

conditions that are imposed. 

Cost-Benefit Considerations 

It is imperative that market participants 

carefully review the new position limits and 

aggregation proposed rules and provide 

comments. I especially encourage market 

participants to include any comments on the 

cost impact of the proposed position limits. 

I would also like to receive input from 

market participants about the cost of changes 

to their operations that were undertaken in 

order to prepare for compliance with the 

previous position limit rules, before those 

rules were vacated by the court. While the 

Commission failed to give enough weight to 

these consequences, I intend to carefully 

consider the comments and the critical 

information they provide in evaluating any 

draft final rule put before the Commission. 

Conclusion 

It is rare to get a second chance to do 

things right. I am disappointed by the 

Commission’s approach today because the 

Commission has not taken advantage of the 

opportunity for a second chance presented by 

the district court decision to vacate the 2011 

position limits rule. The Commission has 

failed in its duty as a responsible market 

regulator by not taking the time to gather the 

evidence and establish sound justifications 

for position limits ex ante that are based on 

data. Because of this failure, as well as the 

narrowing of the bona fide hedging definition 

and the elimination of the existing process 

for end-users to seek non-enumerated 

hedging exemptions, I cannot support this 

proposal. 

[FR Doc. 2013–27200 Filed 12–11–13; 8:45 am] 

BILLING CODE 6351–01–P 


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