Tuesday, 

January 26, 2010 

Part II 

Commodity Futures 

Trading Commission 

17 CFR Parts 1, 20 and 151 

Federal Speculative Position Limits for 

Referenced Energy Contracts and 

Associated Regulations; Proposed Rule 

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4144 Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules 

1The CME Group is the parent company of four 

DCMs: NYMEX, the Chicago Board of Trade 

(‘‘CBOT’’), the Chicago Mercantile Exchange 

(‘‘CME’’), and the Commodity Exchange (‘‘COMEX’’). 

2Under section 2(h)(7) of the Act, ECM contracts 

that have been determined by the Commission to 

be significant price discovery contracts (‘‘SPDCs’’) 

are subject to Commission regulation. 7 U.S.C. 

2(h)(7). ECMs listing SPDCs (‘‘ECM–SPDCs’’) are 

also deemed to be registered entities with selfregulatory responsibilities with respect to such 

contracts. To date, ICE’s Henry Financial LD1 Fixed 

Price natural gas contract is the first and only ECM 

contract to have been determined by the 

Commission to be a SPDC under section 2(h)(7) of 

the Act. 74 FR 37988 (July 30, 2009). 

3US-based traders also enter into various energy 

contracts listed by the ICE Futures Europe Exchange 

(‘‘ICE Futures Europe’’), a London-based exchange. 

These energy contracts include futures on West 

Texas Intermediate (WTI) light sweet crude oil, a 

New York Harbor heating oil futures contract and 

a New York Harbor unleaded gasoline blendstock 

futures contract. All of the listed contracts directly 

cash-settle to the price of NYMEX futures contracts 

that are physically-settled. ICE Futures Europe is a 

foreign board of trade (‘‘FBOT’’) and, unlike NYMEX 

and ICE, is not registered in any capacity with the 

Commission. Instead, ICE Futures Europe and its 

predecessor, the International Petroleum Exchange, 

have operated in the US since 1999 pursuant to 

Commission staff no-action relief. CFTC Staff Letter 

No. 99–69 (November 12, 1999). Since 2008, ICE 

Futures Europe’s no-action relief has been 

conditioned on, among other things, the 

requirement that the Exchange implement position 

limit requirements for its NYMEX-linked contracts 

that are comparable to the position limits that 

NYMEX applies to its contracts. CFTC Staff Letter 

No. 08–09 (June 17, 2008); CFTC Staff Letter No. 

08–10 (July 3, 2008). Generally, comparable 

position limits for FBOT contracts that link to 

CFTC-regulated contracts serve to ensure the 

integrity of prices for CFTC-regulated contracts. 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 1, 20 and 151 

RIN 3038–AC85 

Federal Speculative Position Limits for 

Referenced Energy Contracts and 

Associated Regulations 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘CFTC’’ or 

‘‘Commission’’) is proposing to 

implement speculative position limits 

for futures and option contracts in 

certain energy commodities. The 

Commodity Exchange Act of 1936 

(‘‘CEA’’ or ‘‘Act’’) gives the Commission 

the authority to establish limits on 

positions to diminish, eliminate or 

prevent excessive speculation causing 

sudden or unreasonable fluctuations in 

the price of a commodity, or 

unwarranted changes in the price of a 

commodity. In addition to identifying 

the affected energy contracts and the 

position limits that would apply to 

them, the notice of proposed rulemaking 

includes provisions relating to 

exemptions from the position limits for 

bona fide hedging transactions and for 

certain swap dealer risk management 

transactions. The notice of proposed 

rulemaking also sets out an application 

process that would apply to swap 

dealers seeking a risk management 

exemption from the position limits, as 

well as related definitions and reporting 

requirements. In addition, the notice of 

proposed rulemaking includes 

provisions regarding the aggregation of 

positions under common ownership for 

the purpose of applying the limits. 

DATES: Comments must be received on 

or before April 26, 2010. 

ADDRESSES: Comments should be 

submitted to David Stawick, Secretary, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. Comments also may be sent by 

facsimile to (202) 418–5521, or by 

electronic mail to secretary@cftc.gov. 

Reference should be made to ‘‘Proposed 

Federal Speculative Position Limits for 

Referenced Energy Contracts and 

Associated Regulations.’’ Comments 

may also be submitted by connecting to 

the Federal eRulemaking Portal at 

http://www.regulations.gov and 

following comment submission 

instructions. 

FOR FURTHER INFORMATION CONTACT: 

Stephen Sherrod, Acting Director of 

Surveillance, (202) 418–5452, 

ssherrod@cftc.gov, David P. Van 

Wagner, Chief Counsel, (202) 418–5481, 

dvanwagner@cftc.gov, Donald Heitman, 

Senior Special Counsel, (202) 418–5041, 

dheitman@cftc.gov, or Bruce Fekrat, 

Special Counsel, (202) 418–5578, 

bfekrat@cftc.gov, Division of Market 

Oversight, Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581, facsimile number (202) 418– 

5527. 

SUPPLEMENTARY INFORMATION: 

I. Overview 

The majority of futures and options 

trading on energy commodities in the 

United States occurs on the New York 

Mercantile Exchange (‘‘NYMEX’’), a 

designated contract market (‘‘DCM’’) that 

operates as part of the CME Group.1

Energy commodity trading also takes 

place on the Intercontinental Exchange 

(‘‘ICE’’), an Atlanta-based exchange that 

operates as an exempt commercial 

market (‘‘ECM’’) and is, as of July 2009, 

a registered entity with respect to its 

Henry Financial LD1 Fixed Price natural 

gas contract.2 NYMEX currently lists 

physically-delivered and cash-settled 

futures contracts (and options on such 

futures contracts) in crude oil, natural 

gas, gasoline and heating oil. ICE lists a 

cash-settled look-alike contract on 

natural gas, and options thereon, that 

settles directly to the settlement price of 

NYMEX’s physically-delivered natural 

gas futures contract.3

ICE’s Henry Financial LD1 Fixed 

Price natural gas contract and virtually 

all NYMEX energy contracts are 

currently subject to exchange-set spotmonth speculative position limits that 

are in effect for the last three days of 

trading of the respective contracts. 

Under an exchange’s speculative 

position limit rules, no trader, whether 

commercial or noncommercial, may 

exceed a specified limit unless the 

trader has requested and received an 

exemption from the exchange. Outside 

of a contract’s spot month, these energy 

contracts are subject to exchange allmonths-combined and single-month 

position accountability rules. Under an 

exchange’s position accountability 

rules, once a trader exceeds an 

accountability level in terms of 

outstanding contracts held, the 

exchange has the right to request 

supporting justification from the trader 

for the size of its position, and may 

order a trader to reduce or not increase 

its positions further. 

As described in detail in section VI of 

this release, the Commission is 

proposing to impose all-monthscombined, single-month, and spotmonth speculative position limits for 

contracts based on a defined set of 

energy commodities. Broadly described, 

the Commission’s proposal, for nonspot-month positions, would apply 

exchange-specific speculative position 

limits to a set of economically similar 

contracts that settle in the same manner. 

In addition, the Commission is 

proposing to implement and enforce 

aggregate non-spot-month speculative 

position limits that would apply across 

registered entities that list substantially 

similar energy contracts. As discussed 

in the Paperwork Reduction Act section 

of this notice of proposed rulemaking, 

should the proposed regulations be 

adopted, the Commission estimates that 

the total number of traders with 

significant positions that could be 

affected by the proposed regulations 

would be approximately ten. 

Particular data concerning the 

distribution of speculative traders in a 

market and an analysis of market 

conditions and variables, including 

open interest, can support a range of 

acceptable speculative position limit 

requirements. The Commission, in 

structuring the speculative position 

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4The Commission sets Federal speculative 

position limits for certain agricultural commodities 

enumerated in section 1a(4) of the Act. See 17 CFR 

150.2. 

5Futures Trading Act of 1982, Pub. L. No. 97– 

444, 96 Stat. 2299–30 (1983). 

6Section 4a(5) has since been redesignated as 

section 4a(e) of the Act. 7 U.S.C. 4a(e). 

7Commodity Futures Modernization Act of 2000, 

Appendix E of Public Law No. 106–554, 114 Stat. 

2763 (2000). 

8Food, Conservation and Energy Act of 2008, 

Public Law No. 110–246, 122 Stat. 1624 (June 18, 

2008). 

9 7 U.S.C. 2(h)(3)–(7). 

10 7 U.S.C. 2(h)(7)(C)(ii)(IV). 

11The Congressional finding that excessive 

speculation can have detrimental consequences 

even without manipulative intent is consistent with 

the series of studies and reports made to Congress 

Continued 

limit framework as proposed, has 

considered its recent and historical 

actions in setting position limits, its 

continuous oversight of exchange-set 

speculative position limit and 

accountability rules, its experience in 

administering Commission-set 

speculative position limits 4 and its 

observations of energy commodity 

market conditions and developments, 

particularly during the past four years. 

The Commission notes that the 

proposed Federal speculative position 

limits on energy contracts would be in 

addition to, and not a substitute for, a 

reporting market’s existing speculative 

position limit and accountability 

requirements. Reporting markets, 

defined in Commission regulation 15.00 

to include DCMs and ECM–SPDCs, are 

self-regulatory organizations with an 

independent responsibility for adopting 

and implementing appropriate position 

limit and accountability rules. 

This notice of proposed rulemaking 

does not propose regulations that would 

classify and treat differently passive 

long-only positions. The Commission 

does, however, in section VIII of this 

notice, solicit comment on specific 

issues related to large, passive long-only 

positions. In particular, the Commission 

solicits comments on how to identify 

and define such positions and whether 

such positions should, including 

collectively, be limited in any way. 

II. Statutory Background 

Speculative position limits have been 

identified as an effective regulatory tool 

for mitigating the potential for market 

disruptions that could result from 

uncontrolled speculative trading. 

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

which in significant part retains 

language that was initially adopted in 

1936, provides that: 

Excessive speculation in any commodity 

under contracts of sale of such commodity 

for future delivery made on or subject to the 

rules of contract markets or derivatives 

transaction execution facilities, or on 

electronic trading facilities with respect to a 

significant price discovery contract causing 

sudden or unreasonable fluctuations or 

unwarranted changes in the price of such 

commodity, is an undue and unnecessary 

burden on interstate commerce in such 

commodity. 

Accordingly, section 4a(a) of the Act 

provides the Commission with the 

following authority: 

For the purpose of diminishing, 

eliminating, or preventing such burden, the 

Commission shall, from time to time * * * 

proclaim and fix such limits on the amounts 

of trading which may be done or positions 

which may be held by any person under 

contracts of sale of such commodity for 

future delivery on or subject to the rules of 

any contract market or derivatives 

transaction execution facility, or on an 

electronic trading facility with respect to a 

significant price discovery contract, as the 

Commission finds are necessary to diminish, 

eliminate, or prevent such burden. 

Amendments introduced to the Act by 

the Futures Trading Act of 1982 

supplemented this longstanding 

statutory framework for Commission-set 

Federal speculative position limits by 

explicitly acknowledging the role of the 

exchanges in setting their own 

speculative position limits.5 The 1982 

legislation also gave the Commission, 

under section 4a(5) of the Act, the 

authority to directly enforce violations 

of exchange-set, Commission-approved 

speculative position limits in addition 

to position limits established directly by 

the Commission through orders or 

regulations.6 Thus, since 1982, the Act’s 

framework explicitly anticipates the 

concurrent application of Commission 

and exchange-set speculative position 

limits. The concurrent application of 

limits is particularly consistent with an 

exchange’s close knowledge of trading 

activity on that facility and the 

Commission’s greater capacity for 

monitoring trading and implementing 

remedial measures across 

interconnected commodity futures and 

option markets. 

The Commodity Futures 

Modernization Act of 2000 (‘‘CFMA’’) 7

introduced substantial changes to the 

CEA. Broadly described, the CFMA 

established a principles-based approach 

to regulating the futures markets, 

allowed for the implementation of 

exchange rules through a certification 

process without requiring the exchanges 

to obtain prior Commission approval, 

and delineated specific designation 

criteria and core principles with which 

a DCM must comply to receive and 

maintain designation. Among these, 

Core Principle 5 in section 5(d) of the 

Act provides: 

Position Limitations or Accountability—To 

reduce the potential threat of market 

manipulation or congestion, especially 

during trading in the delivery month, the 

board of trade shall adopt position 

limitations or position accountability for 

speculators, where necessary and 

appropriate. 

Most recently the CEA was amended 

by the CFTC Reauthorization Act of 

2008.8 The 2008 legislation amended 

the CEA by, among other things, adding 

core principles in new section 2(h)(7) 

governing SPDCs traded on electronic 

trading facilities operating in reliance 

on the exemption in section 2(h)(3) of 

the Act.9 The 2008 legislation amended 

the Act to impose certain self-regulatory 

responsibilities on ECM–SPDCs through 

core principles, as did the CFMA with 

respect to DCMs, including a core 

principle that requires such facilities to 

‘‘adopt, where necessary and 

appropriate, position limitations or 

position accountability for speculators 

in significant price discovery contracts 

***’’ 10 The 2008 legislation also 

amended section 4a(e) of the Act to 

incorporate references to ECM–SPDCs, 

thereby assuring that violation of an 

ECM–SPDC’s position limits, regardless 

of whether such position limits have 

been approved by or certified to the 

Commission, would constitute a 

violation of the Act that the Commission 

could independently enforce. 

As mentioned above, the CFMA 

generally replaced the Act’s exchange 

rule approval process with a 

certification process. On a practical 

level, this shift has tended to reduce the 

Commission’s ability to more directly 

shape the specific requirements of 

exchange-set speculative position limit 

and accountability rules through 

approving such rules prior to 

implementation. In light of this, the 

Commission’s broad authority to 

independently set position limits under 

CEA section 4a(a) could be viewed as an 

increasingly important enabling 

provision that allows the Commission to 

take the initiative in acting, when 

appropriate, to bolster market 

confidence and curb or prevent 

excessive speculation that may cause 

sudden, unwarranted, or unreasonable 

fluctuations in commodity prices. 

III. Federal Speculative Position Limits 

A. Historical Background 

From 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.11 To protect 

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urging the adoption of measures to restrict 

speculative trading notwithstanding the absence of 

‘‘the deliberate purpose of manipulating the 

market.’’ See e.g., Fluctuations in Wheat Futures, 

69th Cong., 1st Sess., Senate Document No. 135 

(June 28, 1926). 

12The CEC is the predecessor of the Commodity 

Exchange Authority, which is, in turn, the 

predecessor of the Commission. 

13Requiring a specific demonstration of the need 

for position limits is contrary to section 4a(a) of the 

Act, which provides that the Commission shall set 

position limits from time to time, among other 

things, to prevent excessive speculation. 7 U.S.C. 

4a(a). 

14 3 FR 3145 (December 24, 1938). 

15 ‘‘The fundamental purpose of the measure is to 

insure fair practice and honest dealing on the 

commodity exchanges and to provide a measure of 

control over those forms of speculative activity 

which too often demoralize the markets to the 

injury of producers and consumers and the 

exchanges themselves.’’ S. Rep. No. 93–1131, 93rd 

Cong., 2d. Sess. (1974). 

16 45 FR 79831 (December 2, 1980). 

17 Id. at 79832. ‘‘Commodity Exchange Authority 

regulations included limits for wheat, corn, oats, 

soybeans, cotton, eggs and potatoes. Exchange rules 

included limits for live cattle, feeder cattle, live 

hogs, frozen pork bellies, soybean oil, soybean 

meal, and grain sorghums.’’ (Id. n.1) 

18Pursuant to section 4l of the Commodity 

Futures Trading Commission Act of 1974, all 

regulations previously adopted by the Commodity 

Exchange Authority continued in full force and 

effect, to the extent they were not inconsistent with 

the Act, as amended, unless or until terminated, 

modified or suspended by the Commission. Sec. 

205, 88 Stat. 1397 (effective July 18, 1975). 

19See, In re Nelson Bunker Hunt et al., CFTC 

Docket No. 85–12. 

20 45 FR 79831, at 79833 (December 2, 1980). 

21 46 FR 50938 (October 16, 1981). 

22H.R. Rep. No. 624, 99th Cong., 2d Sess., at 4 

(1986). 

23 52 FR 38914 (October 20, 1987). 

24 Id. at 38917, 38919. 

25Petition for rulemaking of the CBOT, dated July 

24, 1986, cited in 52 FR 6814 (March 5, 1987). 

26 57 FR 12766 (April 13, 1992). 

markets from the adverse consequences 

associated with large speculative 

positions, Congress expressly 

authorized the Commodity Exchange 

Commission (‘‘CEC’’) 12 to impose 

speculative position limits 

prophylactically.13 The Congressional 

endorsement of the Commission’s 

prophylactic use of position limits 

rendered unnecessary a specific finding 

that an undue burden on interstate 

commerce had actually occurred. 

Additionally, Congress closely restricted 

exemptions from position limits to bona 

fide hedging transactions, initially 

defined as sales or purchases of futures 

contracts offset by sales or purchases of 

the same cash commodity. 

In December of 1938, the CEC 

promulgated the first Federal 

speculative position limits for futures 

contracts in grains (then defined as 

wheat, corn, oats, barley, flaxseed, grain 

sorghums and rye) after finding that 

large speculative positions tended to 

cause sudden and unreasonable 

fluctuations and changes in the price of 

grain.14 At that time, the CEC did not 

impose limits in the other commodities 

enumerated in the 1936 Act. 

Over the following years, Federal 

position limits were extended to various 

other commodities enumerated in the 

Act. However, no uniform approach 

regarding speculative position limits 

was applied to those enumerated 

commodities. In some cases (e.g., 

soybeans), a commodity added to the 

Act’s list of enumerated commodities 

was also added to the roster of 

commodities subject to Federal 

speculative position limits. In other 

cases (e.g., livestock products, butter, 

and wool), commodities added to the 

list of enumerated commodities in the 

Act never became subject to Federal 

position limits. 

In 1974, Congress overhauled the CEA 

to create the CFTC and simultaneously 

expanded the new agency’s 

jurisdictional scope beyond the 

enumerated agricultural commodities to 

include futures contracts in any 

commodity. In expanding the CFTC’s 

jurisdiction, Congress reiterated a 

fundamental precept underlying the 

Act, namely, to minimize or prevent the 

harmful effect of uncontrolled 

speculation.15 When the Commission 

came into existence in April 1975, 

‘‘various contract markets [had] 

voluntarily placed speculative position 

limits on 23 contracts involving 17 

commodities.’’ 16 At that time, ‘‘position 

limits were in effect for almost all 

actively traded commodities then under 

regulation and the limits for positions in 

about one half of these actively traded 

commodities had been specified by the 

contract markets.’’ 17 Initially, the 

Commission retained the position limits 

enacted by the CEC, as then in effect, 

but did not establish position limits for 

any additional commodities.18 In the 

years immediately following, the 

Commission implemented a few 

relatively minor changes to position 

limit regulations, but undertook no 

significant expansion of Federal 

speculative position limits. 

After the silver futures market crisis 

during late 1979 to early 1980, 

commonly referred to as ‘‘the Hunt 

Brothers silver manipulation,’’ 19 the 

Commission concluded that ‘‘[t]he 

recent events in silver * * * suggest 

that the capacity of any futures market 

to absorb large positions in an orderly 

manner is not unlimited.’’ 20

Accordingly, in 1981 the Commission 

adopted regulation 1.61, which required 

all exchanges to adopt and submit for 

Commission approval speculative 

position limits in active futures markets 

for which no exchange or Commission 

limits were then in effect.21 Although 

regulation 1.61 directed the exchanges 

to implement position limit rules, the 

pre-CFMA exchange rule approval 

process, on a practical level, gave the 

Commission the ability to shape the 

requirements of exchange-set position 

limit rules as measures that guarded 

against excessive speculation in 

accordance with the purposes and 

findings of section 4a(a) of the Act. 

The next significant development 

occurred in 1986, when the Commission 

undertook a comprehensive review of 

speculative position limit policies, 

including position limit levels. During 

the Commission’s 1986 reauthorization, 

the CFTC’s Congressional authorizing 

committees suggested that this subject 

should be addressed. The Report of the 

House Agriculture Committee stated: 

[T]he Committee believes that, given the 

changes in the nature of these markets and 

the influx of new market participants over 

the last decade, the Commission should 

reexamine the current levels of speculative 

position limits with a view toward 

elimination of unnecessary impediments to 

expanded market use.22

Subsequently, the Commission 

reviewed its Federal speculative 

position limit framework and, in 

October 1987, adopted final 

amendments that raised some of the 

Federal speculative position limits and 

revised the general structure of the 

Federal speculative position limit 

regulations.23 The amendments 

introduced in 1987 retained the then 

current spot-month and individual 

month position limits but increased the 

all-months-combined position limits. 

The revised limits, which had 

historically been set on a generic 

commodity basis, established position 

limits for each contract ‘‘according to the 

individual characteristics of that 

contract market,’’ particularly ‘‘the 

distribution of speculative position sizes 

in recent years and recent levels of open 

interest.’’ 24 In response to a petition by 

the CBOT, the Commission also 

established position limits for CBOT 

soybean oil and soybean meal contracts, 

which had been subject solely to 

exchange-set position limits, to provide 

‘‘consistency with all other agricultural 

commodities traded at the CBOT.’’ 25

In 1992, the Commission issued 

proposed regulations adhering to the 

principle that speculative position 

limits should be formulaically adjusted 

based upon increases in the size of a 

contract’s open interest (in addition to 

the traditional standard of distribution 

of speculative traders in a market).26

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27 63 FR 38525 (July 17, 1998). 

28See, e.g., 56 FR 51687 (October 15, 1991) and 

57 FR 29064 (June 30, 1992). 

29 64 FR 24038, at 24048 (May 5, 1999). 

30Regulation 150.5(e) provides that, for futures 

and option contracts that have been listed for 

trading for at least 12 months, an exchange may 

submit a position accountability rule, in lieu of a 

numerical limit, as follows: 

‘‘(1) For futures and option contracts on a 

financial instrument or product having an average 

open interest of 50,000 contracts and an average 

daily trading volume of 100,000 contracts and a 

very highly liquid cash market, an exchange bylaw, 

regulation or resolution requiring traders to provide 

information about their position upon request by 

the exchange; 

(2) For futures and option contracts on a financial 

instrument or product or on an intangible 

commodity having an average month-end open 

interest of 50,000 and an average daily volume of 

25,000 contracts and a highly liquid cash market, 

an exchange bylaw, regulation or resolution 

requiring traders to provide information about their 

position upon request by the exchange and to 

consent to halt increasing further a trader’s 

positions if so ordered by the exchange; 

(3) For futures and option contracts on a tangible 

commodity, including but not limited to metals, 

energy products, or international soft agricultural 

products having an average month-end open 

interest of 50,000 contracts and an average daily 

volume of 5,000 contracts and a liquid cash market, 

an exchange bylaw, regulation or resolution 

requiring traders to provide information about their 

position upon request by the exchange and to 

consent to halt increasing further a trader’s 

positions if so ordered by the exchange, provided, 

however, such contract markets are not exempt from 

the requirement of paragraphs (b) or (c) that they 

adopt an exchange bylaw, regulation or resolution 

setting a spot month speculative position limit with 

a level no greater than one quarter of the estimated 

spot-month deliverable supply * * *’’ 17 CFR 

150.5(e). 

Notably, the Commission’s concerns regarding 

spot-month limits were eventually mirrored by the 

CFMA, which provides in DCM Core Principle 5 

(section 5(d)(5) of the Act), that ‘‘[t]o reduce the 

potential threat of market manipulation or 

congestion, especially during trading in the delivery 

month, the board of trade shall adopt position 

limitations or position accountability for 

speculators, where necessary and appropriate.’’ 

31The formulaic approach, initially developed by 

Blake Imel, former Acting Director of the Division 

of Economic Analysis (the Division has since been 

merged into the Division of Market Oversight), was 

premised on limiting the concentration of positions 

in the hands of one or a few traders by requiring 

a minimum number of distinct market participants. 

32 64 FR 24038, at 24039 (May 5, 1999). 

33 57 FR 12766, at 12771 (April 13, 1992). 

34 Id. at 12770. 

35 Id. 

36 17 CFR part 38, Appendix B, Core Principle 

5(d)(5). 

37 66 FR 42256 (August 10, 2001). 

38 70 FR 24705 (May 11, 2005). 

The formula was thereafter ‘‘routinely 

applied ... as a matter of administrative 

practice when reviewing proposed 

exchange speculative position limits 

under Commission [regulation] 1.61.’’ 27

During this same time frame, the 

Commission began a process that led to 

the adoption of position accountability 

rules for contracts that were subject to 

exchange-set speculative position limits. 

Beginning in 1991, the Commission 

approved several exchange rules 

establishing position accountability 

provisions in lieu of position limits for 

certain contracts exhibiting significant 

trading volume and open interest, a 

highly liquid underlying cash market 

and ready opportunities for arbitrage 

between the cash and futures markets.28

An exchange’s position accountability 

rules, as opposed to position limits that 

bar traders from acquiring contracts that 

quantitatively exceed a specific number 

of outstanding contracts, require 

persons holding a certain number of 

open contracts to report the nature of 

their positions, trading strategy, and 

hedging needs to the exchange, upon 

the exchange’s request. 

In 1999, the Commission simplified 

and reorganized its speculative position 

limit regulations to consolidate 

requirements for both Commission-set 

limits and exchange-set limits under 

regulation 1.61 in part 150 of the 

Commission’s regulations. Regulation 

150.5(e), currently, and as initially 

adopted in 1999, establishes a ‘‘trader 

accountability exemption’’ 29 and 

generally codifies the position 

accountability conditions that initially 

were imposed as a matter of 

administrative practice beginning in 

1991.30

The reorganized rules also included 

new regulation 150.5(c), which codified 

the Commission’s 1992 formula for 

calculating Federal speculative position 

limits based upon open interest, and 

applied it to exchanges for their use in 

calculating the levels of exchangeimposed numerical speculative position 

limits.31 The formula provided for 

‘‘combined futures and option 

speculative position limits for both a 

single month and for all-monthscombined at the level of 10 percent of 

open interest up to an open interest of 

25,000 contracts, with a marginal 

increase of 2.5% thereafter.’’ 32 In 

initially proposing to use this formula, 

the Commission noted that: 

[I]ts large trader data indicates that limits 

based on open interest as described above 

should accommodate the normal course of 

speculative positions in agricultural markets. 

The levels derived using this method of 

analysis generally are consistent with the 

largest exchange-set speculative limits 

approved by the Commission under Rule 

1.61 for contract markets in agricultural 

commodities at corresponding levels of open 

interest. However, the Commission, based on 

its surveillance experience and monitoring of 

exchange and Federal speculative position 

limits, is satisfied that the levels indicated by 

this methodology, although near the outer 

bounds of the levels which have been 

approved previously, nevertheless will 

achieve the prophylactic intent of Section 

[4a] of the Act and Commission Rule 1.61, 

thereunder [emphasis supplied].33

The Commission also emphasized 

that particular data can result in a range 

of acceptable speculative position 

limits, and that based on its experience 

overseeing exchange-set speculative 

limits and its direct administration of 

the Federal limits establishing ‘‘a singlemonth and all-month limits on futures 

positions combined with option 

positions on a delta-equivalent basis of 

no more than ten percent of the 

combined markets’ open interest for 

contracts with combined open interest 

below 25,000’’ was within the range of 

acceptable speculative position limits.34

For those markets with combined 

average open interest greater than 

25,000 contracts, the Commission 

proposed a marginal increase of 2.5% 

after noting that ‘‘the size of the largest 

individual positions in a market do not 

continue to grow in proportion with 

increases in the overall open interest of 

the market.’’35

As noted above, Core Principle 5, 

introduced to the Act in 2000 by the 

CFMA, requires DCMs to implement 

position limits or position 

accountability rules for speculators 

‘‘where necessary and appropriate.’’ In 

2001, the Commission established 

Acceptable Practices for complying with 

Core Principle 5, set out in Appendix B 

to part 38 of the Commission’s 

regulations.36 The Acceptable Practices 

specifically reference part 150 of the 

Commission’s regulations as providing 

guidance on how to comply with the 

requirements of the Core Principle.37

The CFMA, however, did not change the 

treatment of the enumerated agricultural 

commodities, which remained subject to 

Federal speculative position limits. 

In 2005, the Commission increased 

the all-months-combined Federal 

speculative position limits and reset the 

single-month levels to roughly 

approximate the existing numerical 

relationship between all-monthscombined and single-month levels (i.e., 

arriving at the single-month limits by 

setting them at about two-thirds of the 

relevant all-months-combined limits), 

based generally on the 1992 open 

interest formula (as incorporated into 

regulation 150.5(e)).38

In 2008, Congress, in response to high 

prices and volatility in the energy 

markets and concerns regarding 

excessive speculation on unregulated 

energy exchanges, including ECMs, 

adopted the CFTC Reauthorization Act 

of 2008 and amended two CEA 

provisions aimed at curbing possible 

manipulation and excessive speculation 

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39See 7 U.S.C. 2(h)(7)(C)(IV). 

40The contract was designated in October 1974, 

but significant volume first developed in 1980. 

41At the hearings, numerous witnesses expressed 

concern regarding the impact on energy prices of 

speculation on commodity futures markets, 

including particularly the price impact of trading by 

swap dealers and index funds. Alternatively, many 

other witnesses expressed the view that 

fundamental market conditions were the primary 

driver of prices. 

42The Task Force included staff representatives 

from the Departments of Agriculture, Energy and 

the Treasury, the Board of Governors of the Federal 

Reserve, the Federal Trade Commission, and the 

Securities and Exchange Commission. The Task 

Force looked at the crude oil market between 

January 2003 and June 2008. The staff members of 

the various agencies did not find direct causal 

evidence for the general increase in oil prices 

between January 2003 and June 2008. Interagency 

Task Force on Commodity Markets, Interim Report 

on Crude Oil (July 22, 2008). 

43Commodity Futures Trading Commission, 

‘‘CFTC to Hold Three Open Hearings to Discuss 

Energy Position Limits and Hedge Exemptions,’’ 

CFTC Release 5681–09 (July 21, 2009). 

44See the following Commission Releases for a 

listing of agendas and witnesses and related links: 

5681–09 (July 21, 2009) http://www.cftc.gov/

newsroom/generalpressreleases/2009/pr5681- 

09.html; 

5682–09 (July 27, 2009) http://www.cftc.gov/

newsroom/generalpressreleases/2009/pr5682- 

09.html; 

and 5685–09 (July 31, 2009) http://www.cftc.gov/ 

newsroom/generalpressreleases/2009/pr5685- 

09.html. 

45Persons wishing to review these comments may 

contact the Commission’s Secretariat at 

secretary@cftc.gov. 

46 ‘‘This increase in volatility has been associated 

with a massive increase in speculative investment 

in oil futures.’’ Ben Hirst, Senior Vice President and 

General Counsel for Delta Airlines; 

‘‘* * *[S]peculative trading strategies may not 

always have a benign effect on the markets.’’ Laura 

Campbell, Assistant Manager of Energy Resources, 

Memphis Light, Gas & Water, on behalf of The 

American Public Gas Association; ‘‘That ability [to 

hedge heating fuel costs], however, is now being 

undermined by an erratic market, questionable 

investment tactics and purely speculative market 

forces.’’ Sean Cota, President, Cota & Cota, Inc. 

Hearings on Energy Position Limits and Hedge 

Exemptions, July 28, July 29 and August 5, 2009, 

at the Commodity Futures Trading Commission. 

47 ‘‘If [limits] are set too tight, traders who possess 

important market information and provide crucial 

liquidity are kept away.’’ Todd E. Petzel. Chief 

Investment Officer, Offit Capital Advisors; ‘‘Simply 

eliminating or limiting swap dealer hedge 

exemptions will impair liquidity, have other 

unintended consequences and would very likely 

not achieve the stated objective.’’ Donald Casturo, 

Managing Director, Goldman Sachs & Co.; ‘‘Position 

limits no matter how well meaning create real 

market migration risk and pushing price discovery 

of agricultural, energy or metals markets to overseas 

or other trading venues would be contrary to the 

purposes of the Act.’’ Mark D. Young, Kirkland & 

Ellis LLP. Hearings on Energy Position Limits and 

Hedge Exemptions, July 28, July 29 and August 5, 

2009, at the Commodity Futures Trading 

Commission. 

48Moreover, the exchanges’ independent 

responsibility to monitor trading and implement 

position limits and position accountability rules 

does not detract from or otherwise impair the 

Commission’s broad authority to impose 

speculative limits. 

in the energy markets. Specifically, the 

2008 legislation amended CEA section 

4a(e) to give the CFTC enforcement 

authority over position limits certified 

by the exchanges and adopted new 

section 2(h)(7) to apply a position limit 

and position accountability core 

principle to ECM–SPDCs.39 Notably, the 

legislation also extended the 

Commission’s authority to set Federal 

speculative position limits, under CEA 

section 4a(a), to ECM–SPDCs. 

B. Statutory Basis and Need for Energy 

Speculative Position Limits 

Energy futures and option contracts 

have never been subject to CFTC-set 

speculative position limits. These 

contracts began to attract significant 

trading volumes in the early 1980s 

beginning with NYMEX’s New York 

Harbor No. 2 heating oil futures 

contract,40 followed by NYMEX’s 

gasoline futures contract in 1981 and 

crude oil futures contract in 1983. 

NYMEX did not initially adopt position 

limits for heating oil futures contracts. 

However, with the adoption of 

Commission regulation 1.61, effective 

November 16, 1981, each exchange was 

required to submit for Commission 

approval speculative position limits for 

each actively traded futures contract. 

Thereafter, newly designated contracts 

(e.g., NYMEX’s crude oil futures 

contract in 1983) were required to be 

accompanied by exchange speculative 

position limit rules as a condition of 

designation. 

As noted above, in 1999 the 

Commission reorganized its speculative 

position limit regulations to codify its 

earlier administrative practice of 

allowing exchanges to adopt position 

accountability rules in lieu of numerical 

position limits for positions outside of 

the spot month. Currently, virtually all 

of NYMEX’s energy futures and option 

contracts and ICE’s single SPDC contract 

are subject to exchange-set position 

accountability rules during non-spot 

months and to hard speculative position 

limits during spot months. 

From 2007 to mid 2008, commodity 

prices generally, and energy prices in 

particular, increased significantly and 

experienced unusual volatility. As a 

result of this, Commission-regulated 

energy markets, as well as the over-thecounter (‘‘OTC’’) energy swap markets 

over which the Commission has no 

direct regulatory authority, were the 

subject of numerous Congressional 

hearings 41 and formal and informal 

studies, including a preliminary review 

by an Interagency Task Force chaired by 

CFTC staff. 42 In the summer of 2009, 

the Commission held three days of 

hearings ‘‘to discuss energy position 

limits and hedge exemptions’’ (‘‘Energy 

Hearings’’).43 The Commission heard 

from 26 witnesses, including members 

of the U.S. House and Senate, swap 

dealers, money managers, futures 

market participants (including 

commercial hedgers), trade associations, 

exchanges, and consumer advocates.44

In addition, a total of 5,281 email 

comments were received (including 

some 1,200 identical emails from a 

single commenter).45

As with the Congressional hearings 

and market studies, there were mixed 

opinions among the Energy Hearing 

participants as to the causes of the price 

rises and market volatility. With respect 

to position limits for energy 

commodities, a number of witnesses 

expressed concern over the impact on 

energy prices of excessive speculation 

and supported position limits.46 Others 

cautioned that such limits could be 

ineffective, hurt market liquidity or 

distort the price discovery process if not 

properly constructed.47

As discussed above, section 4a(a) 

represents an explicit Congressional 

finding that extreme or abrupt price 

fluctuations attributable to unchecked 

speculative positions are harmful to the 

futures markets and that position limits 

can be an effective prophylactic 

regulatory tool to diminish, eliminate or 

prevent such activity. Accordingly, 

Congress charged the Commission with 

responsibility for setting contract 

position limits in any commodity to 

prevent or minimize extreme or abrupt 

price movements resulting from large or 

concentrated positions. Under the 

authority granted to it, the Commission 

may impose speculative position limits 

without finding an extant undue burden 

on interstate commerce resulting from 

excessive speculation.48 Section 8a(5) of 

the Act also provides that the 

Commission may make and promulgate 

such rules and regulations that in its 

judgment are reasonably necessary to 

accomplish any of the purposes of the 

Act. 

Large concentrated positions in the 

energy futures and option markets can 

potentially facilitate abrupt price 

movements and price distortions. The 

prevention of unreasonable and abrupt 

price movements that are attributable to 

large or concentrated speculative 

positions is a congressionally endorsed 

regulatory objective. This objective is 

furthered by position limits, particularly 

given that the capacity of any reporting 

market to absorb the establishment and 

liquidation of large speculative 

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49Commission regulation 1.3(z) provides: 

‘‘Bona fide hedging transactions and positions— 

(1) General definition. Bona fide hedging 

transactions and positions shall mean transactions 

or positions in a contract for future delivery on any 

contract market, or in a commodity option, where 

such transactions or positions normally represent a 

substitute for transactions to be made or positions 

to be taken at a later time in a physical marketing 

channel, and where they are economically 

appropriate to the reduction of risks in the conduct 

and management of a commercial enterprise, and 

where they arise from: 

(i) The potential change in the value of assets 

which a person owns, produces, manufactures, 

processes, or merchandises or anticipates owning, 

producing, manufacturing, processing, or 

merchandising, 

(ii) The potential change in the value of liabilities 

which a person owns or anticipates incurring, or 

(iii) The potential change in the value of services 

which a person provides, purchases, or anticipates 

providing or purchasing. 

Notwithstanding the foregoing, no transactions or 

positions shall be classified as bona fide hedging 

unless their purpose is to offset price risks 

incidental to commercial cash or spot operations 

and such positions are established and liquidated 

in an orderly manner in accordance with sound 

commercial practices and, for transactions or 

positions on contract markets subject to trading and 

position limits in effect pursuant to section 4a of 

the Act, unless the provisions of paragraphs (z)(2) 

and (3) of this section and §§ 1.47 and 1.48 of the 

regulations have been satisfied. 

(2) Enumerated hedging transactions. The 

definitions of bona fide hedging transactions and 

positions in paragraph (z)(1) of this section 

includes, but is not limited to, the following 

specific transactions and positions: 

(i) Sales of any commodity for future delivery on 

a contract market which do not exceed in quantity: 

(A) Ownership or fixed-price purchase of the 

same cash commodity by the same person; and 

(B) Twelve months’ unsold anticipated 

production of the same commodity by the same 

person provided that no such position is 

maintained in any future during the five last trading 

days of that future. 

(ii) Purchases of any commodity for future 

delivery on a contract market which do not exceed 

in quantity: 

(A) The fixed-price sale of the same cash 

commodity by the same person; 

(B) The quantity equivalent of fixed-price sales of 

the cash products and by-products of such 

commodity by the same person; and 

(C) Twelve months’ unfilled anticipated 

requirements of the same cash commodity for 

processing, manufacturing, or feeding by the same 

person, provided that such transactions and 

positions in the five last trading days of any one 

future do not exceed the person’s unfilled 

anticipated requirements of the same cash 

commodity for that month and for the next 

succeeding month. 

(iii) Offsetting sales and purchases for future 

delivery on a contract market which do not exceed 

in quantity that amount of the same cash 

commodity which has been bought and sold by the 

same person at unfixed prices basis different 

delivery months of the contract market, provided 

that no such position is maintained in any future 

during the five last trading days of that future. 

(iv) Sales and purchases for future delivery 

described in paragraphs (z)(2)(i), (ii), and (iii) of this 

section may also be offset other than by the same 

quantity of the same cash commodity, provided that 

the fluctuations in value of the position for future 

delivery are substantially related to the fluctuations 

in value of the actual or anticipated cash position, 

and provided that the positions in any one future 

shall not be maintained during the five last trading 

days of that future. 

(3) Non-enumerated cases. Upon specific request 

made in accordance with § 1.47 of the regulations, 

the Commission may recognize transactions and 

positions other than those enumerated in paragraph 

(z)(2) of this section as bona fide hedging in such 

amount and under such terms and conditions as it 

may specify in accordance with the provisions of 

§ 1.47. Such transactions and positions may 

include, but are not limited to, purchases or sales 

for future delivery on any contract market by an 

agent who does not own or who has not contracted 

to sell or purchase the offsetting cash commodity 

at a fixed price, provided that the person is 

responsible for the merchandising of the cash 

position which is being offset.’’ 17 CFR 1.3(z). 

50 17 CFR 1.47(b)(2). 

positions in an orderly manner is 

related to the relative size of such 

positions and is not unlimited. 

Specifically, when large speculative 

positions are amassed in a contract, or 

contract month, the potential exists for 

unreasonable and abrupt price 

movements should the positions be 

traded out of or liquidated in a 

disorderly manner. Concentration of 

large positions in one or a few traders’ 

accounts can also create the 

unwarranted appearance of appreciable 

liquidity and market depth. Trading 

under such conditions can result in 

greater volatility than would otherwise 

prevail if traders’ positions were more 

evenly distributed among market 

participants. 

Furthermore, concurrent trading in 

economically similar and equivalent 

energy futures and option contracts on 

multiple exchanges effectively creates a 

single but fragmented market for such 

contracts. Because individual exchanges 

have knowledge of positions only on 

their own trading facilities, it is difficult 

for them to assess the full impact of a 

trader’s positions on the greater market. 

As such, monitoring and limiting 

positions through exchange-specific 

position limits and through the 

enforcement of exchange position 

accountability rules, though necessary 

and beneficial, may not sufficiently 

guard against potential market 

disruptions. 

For these reasons, the Commission is 

proposing to establish reporting marketspecific Federal speculative position 

limits for futures and option contracts in 

certain energy commodities and 

aggregate position limits that would 

apply across economically similar 

contracts, regardless of whether such 

contracts are listed on a single or on 

multiple reporting markets, to curb the 

impact of disruptive excessive 

speculation. 

IV. Exemptions and Account 

Aggregation 

The Commission’s current regulatory 

framework for Federal speculative 

position limits consists of three 

elements, (i) the levels of the 

Commission-set speculative position 

limits (discussed above), (ii) certain 

exemptions from the limits (e.g., for 

hedging, spreading or arbitraged 

positions), and (iii) the policy on 

aggregating related accounts for 

purposes of applying the limits. 

Commission regulation 150.3, headed 

‘‘Exemptions,’’ lists certain types of 

positions that may be exempted from 

(and thus may exceed) the Federal 

speculative position limits delineated in 

regulation 150.2. In particular, under 

regulation 150.3(a)(1), bona fide hedging 

transactions, as defined in Commission 

regulation 1.3(z), may exceed 

Commission-set position limits.49 The 

first two parts of the bona fide hedging 

definition include a general definition 

of bona fide hedging (see paragraph 

(z)(1)) and a listing of certain 

enumerated hedging transactions in the 

agricultural commodities that are 

currently subject to Federal position 

limits (see paragraph (z)(2)). Paragraph 

(z)(3) of the definition provides 

flexibility to the Commission in granting 

exemptions by permitting additional 

transactions to be recognized as bona 

fide hedging upon a trader’s request, 

made in accordance with the 

application provisions of Commission 

regulation 1.47. Regulation 1.47 requires 

a person seeking a bona fide hedge 

exemption under regulation 1.3(z)(3) to 

provide the Commission with various 

information that will, among other 

things, ‘‘demonstrate that the purchases 

and sales are economically appropriate 

to the reduction of risk exposure 

attendant to the conduct and 

management of a commercial 

enterprise.’’ 50

In addition to regulation 150.3(a)(1)’s 

bona fide hedging exemption, regulation 

150.3(a) includes two other exemptions 

from the Federal speculative position 

limits. Regulation 150.3(a)(3) exempts 

‘‘spread or arbitrage positions between 

single months of a futures contract 

* * * outside of the spot-month, in the 

same crop year * * * .’’ Subject to 

various conditions, regulation 

150.3(a)(4) exempts positions ‘‘[c]arried 

for an eligible entity as defined in 

regulation 150.1(d), in the separate 

account or accounts of an independent 

account controller, as defined in 

regulation 150.1(e) * * * .’’ Eligible 

entities include mutual funds, 

commodity pool operators and 

commodity trading advisors. Entities 

claiming this exemption are required, 

upon call by the Commission, to 

provide information supporting their 

claim that the account controllers for 

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51 42 FR 42748 (August 24, 1977). 

52 17 CFR 1.3(z)(1). 

53House Committee on Agriculture, Futures 

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

2d Sess. 44–46 (1986). 

54 Id. at 46. 

55 Id. 56Senate Committee on Agriculture, Nutrition 

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

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

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.’’ Id., at 22. 

57See, Clarification of Certain Aspect of the 

Hedging Definition, 52 FR 27195 (July 20, 1987); 

Risk Management Exemptions from Speculative 

Position Limits Approved under Commission 

Regulation 1.61, 52 FR 34633 (September 14, 1987). 

58The argument has also been made that 

commodities act as a general hedge of liability 

obligations that are linked to inflation. 

59A swap agreement is typically a privately 

negotiated exchange of one asset or cash flow for 

another asset or cash flow. In a commodity swap, 

at least one of the assets or cash flows is related to 

the price of one or more commodities. 

these positions are acting 

independently. 

Also, in order to achieve the intended 

effect of the Federal speculative position 

limits, Commission regulation 150.4, 

headed ‘‘Aggregation of positions,’’ 

requires the Commission and the 

exchanges to treat multiple accounts 

subject to common ownership or control 

as if they are held by a single trader. 

Such accounts are typically considered 

to be under a common ownership if one 

or more traders have a 10% or greater 

financial interest in the accounts and do 

not otherwise qualify for an exemption 

from aggregation, such as the 

independent account controller 

exemption discussed above. The 

aggregation standards are applied in a 

manner calculated to aggregate related 

positions. For example, each participant 

with a 10% or greater financial interest 

in an account must aggregate the entire 

position of that account—not just the 

participant’s fractional share—together 

with other positions that the participant 

may independently hold. Likewise, a 

commodity futures or option contract 

pool comprised of many traders is 

allowed only to hold positions as if it 

were a single trader. The Commission 

also treats positions that are not 

commonly owned, but are traded 

pursuant to an express or implied 

agreement, as a single aggregated 

position for purposes of applying the 

Federal speculative position limits. 

Exceptions to the aggregation standards 

exist for certain pool participants, such 

as limited partners and shareholders 

that cannot exercise control over the 

positions of the pool. 

V. Bona Fide Hedge Exemptions 

Prior to 1974, the CEA included a 

limited statutory hedging definition that 

applied only 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. 

The Commission exercised this 

authority in 1977 by adopting 

regulations 1.3(z) and 1.47.51 Those 

regulations have remained unchanged 

since 1977. By the mid 1980s, new 

concerns had emerged. Under the 

Commission’s definition, bona fide 

hedge transactions ‘‘normally represent 

a substitute for transactions to be made 

or positions to be taken at a later time 

in a physical marketing channel,’’ and 

are ‘‘economically appropriate to the 

reduction of risks in the conduct of a 

commercial enterprise.’’ 52 This aspect of 

the hedging definition proved to be ill 

fitted to the economic realities of 

financial futures. Portfolio managers 

utilize the financial futures markets to 

add incremental income to managed 

assets, to manage overall risk, or to 

rebalance a portfolio. Indeed, futures 

market positions are often acquired 

entirely as an alternative to cash market 

transactions (in view of the lower 

transaction costs, speed, and minimal 

price impact), rather than as a 

temporary substitute for positions that 

will later be taken in the underlying 

cash market. 

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.53

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 

***’’ 54 The Committee Report singled 

out four categories of trading and 

positions that the Commission should 

recognize 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 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.55

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.56

The Commission heeded Congress’s 

recommendation, and its staff issued 

interpretive statements directing that 

risk management exemptions be 

included as speculative position limit 

exemptions in addition to the existing 

exemptions for hedging, arbitrage and 

spreading.57 The interpretive statements 

recognized new types of ‘‘risk reducing’’ 

and ‘‘risk shifting’’ strategies in financial 

futures (including ‘‘dynamic asset 

allocation strategies’’) as falling within 

the bona fide hedging category. 

The next significant change in trading 

patterns and practices in derivatives 

markets involved an influx of new 

traders into the market seeking exposure 

to commodities as an asset class through 

passive, long-term investment in 

commodity indexes as a way of 

diversifying portfolios that might 

otherwise be limited to equities and 

debt instruments.58 New market 

participants included commodity index 

traders (including pension and 

endowment funds, as well as individual 

investors participating in commodity 

index-based funds or trading programs) 

and swap dealers seeking to hedge price 

risk from OTC trading activity 

(frequently opposite those same 

commodity index traders). 

The development of the OTC swaps 

industry, over which the Commission 

generally has no regulatory authority, is 

related to the exchange-traded futures 

and options industry in that a swap 

agreement 59 can either compete with or 

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60The bilateral contracts that swap dealers create 

can vary widely, from terms tailored to meet the 

needs of a specific customer, to relatively 

standardized contracts. 

61Because swap agreements can be highly 

customized, and the liquidity for a particular swap 

contract can be low, swap dealers may also use 

other swap agreements and physical market 

positions, in addition to futures, to offset the 

residual risks of their swap book. 

62The commodities comprising such indexes may 

include the agricultural commodities subject to 

Federal speculative position limits, as well as 

energy commodities, metals and world agricultural 

commodities (e.g., coffee, sugar, and cocoa). 

63 72 FR 66097, at 66099 (November 27, 2007). 

64CFTC Letter 06–09 (April 19, 2006); CFTC 

Letter 06–19 (September 6, 2006). 

65The Report also made a number of other 

recommendations for Commission action, 

including: (1) Removing swap dealers from the 

commercial category in the Commitments of 

Traders Reports (‘‘COT Reports’’) and creating a new 

swap dealer classification for reporting purposes; 

(2) Developing and publishing a new periodic 

supplemental report based on OTC swap dealer 

activity; (3) Creating a new CFTC Office of Data 

Collection dedicated to the collection and 

publication of COT Report data; (4) Establishing 

more detailed reporting standards for large traders; 

and (5) Conducting a review of swap dealers’ 

futures trading activity to ensure that it is 

sufficiently independent of any affiliated 

commodity research. The Commission has largely 

addressed the Report’s recommendations regarding 

COT Reports. The Commission has been publishing 

a new Disaggregated COT Report (‘‘DCOT Report’’) 

for twenty-two different physical commodity 

markets since September 4, 2009 and expanded the 

DCOT Report to the remaining physical markets on 

December 4, 2009. The Commission also began 

publishing on September 4, 2009 a new quarterly 

report of Index Investment Data which shows for 

swap dealers and index funds their index 

Continued 

complement regulated commodity 

futures and options trading.60 Market 

participants often enter into OTC swap 

agreements because, unlike more 

standardized futures contracts, they can 

be customized to match particular 

hedging or price exposure needs. Swap 

dealers, often affiliated with a bank or 

other large financial institution, act as 

swap counterparties to both commercial 

firms seeking to hedge price risks and 

speculators seeking to gain price 

exposure. Swap dealers, in turn, utilize 

the more standardized futures markets 

to manage the residual risk of their 

swaps book.61 In addition, some swap 

dealers also deal directly in the 

merchandising of physical commodities. 

In accordance with the abovediscussed Congressional 

recommendations, market 

developments, and the Commission’s 

recognition of a risk management 

exemption for financial futures, 

beginning in 1991, the Commission staff 

extended the concept of risk 

management exemptions from 

speculative position limits by granting 

bona fide hedge exemptions, in various 

agricultural futures markets subject to 

Federal speculative position limits, to a 

number of swap dealers who were 

seeking to manage price risks on their 

books arising from swap dealing 

activities. The first such hedge 

exemption involved J. Aron, a large 

commodity merchandising firm that 

engaged in commodity related swaps as 

a part of a commercial line of business. 

The firm, through an affiliate, wished to 

enter into an OTC swap transaction with 

a qualified counterparty (a large pension 

fund) involving an index based on the 

returns afforded by investments in 

exchange-traded futures contracts on 

certain non-financial commodities 

meeting specified criteria.62 The 

commodities making up the index 

included contracts in certain 

agricultural commodities subject to 

Federal speculative position limits. As a 

result of the swap, J. Aron would have, 

in effect, been going short the index. In 

order to protect itself against this risk, 

the firm planned to establish a portfolio 

of long futures positions in the 

commodities making up the index, in 

such amounts as would replicate its 

exposure under the swap transaction. 

By design, the index did not include 

contract months that had entered the 

delivery period and J. Aron, in 

replicating the index, stated that it 

would not maintain futures positions 

based on index-related swap activity 

into the spot month (when physical 

commodity markets are most vulnerable 

to manipulation and attendant price 

fluctuations). With this risk mitigation 

strategy, the firm’s composite return on 

its futures portfolio would have offset 

the net payments that the dealer would 

have been required to make to the 

pension fund counterparty. 

The futures positions J. Aron required 

to cover its exposure on the swap 

agreement’s agricultural component 

would have been in excess of certain 

Federal speculative position limits. 

Accordingly, the firm requested, and the 

staff granted, a hedge exemption for 

those futures positions, that offset risks 

directly related to the OTC swap 

transaction. 

Subsequently, the Commission staff 

granted a number of similar hedge 

exemptions, pursuant to delegated 

authority, in other cases where the 

futures positions clearly offset risks 

related to swap agreements or similar 

OTC positions involving both 

individual commodities and commodity 

indexes. These non-traditional ‘‘hedges’’ 

were all subject to specific limitations to 

protect the marketplace from potential 

ill effects. The limitations required: (i) 

The futures positions to offset specific 

price risk; (ii) the dollar value of the 

futures positions to be no greater than 

the dollar value of the underlying risk; 

and (iii) the futures positions to not be 

carried into the spot-month.63

In 2006, Commission staff issued two 

no-action letters involving another type 

of index-based trading.64 Both cases 

involved trading that offered investors 

the opportunity to participate in a 

broadly-diversified commodity indexbased fund or program (‘‘index fund’’). 

The futures positions of these index 

funds differed from the futures positions 

taken by the swap dealers who had 

earlier received exemptions. The swap 

dealer positions were taken to offset 

OTC swaps exposure that was directly 

linked to the price of an index. For that 

reason, Commission staff granted hedge 

exemptions to those swap dealer 

positions. On the other hand, in the 

index fund positions described in the 

no-action letters, the price exposure 

resulted from a promise or obligation to 

track an index, rather than from holding 

an OTC swap position whose value was 

directly linked to the price of an index. 

Commission staff believed that this 

difference was significant enough that 

the index fund positions would not 

qualify for a hedge exemption. 

Nevertheless, because the index fund 

positions represented a legitimate and 

potentially useful investment strategy, 

Commission staff granted the index 

funds no-action relief, subject to certain 

conditions intended to protect the 

futures markets from potential ill 

effects. These conditions required: (i) 

The positions to be passively managed; 

(ii) the positions to be unleveraged (so 

that financial conditions should not 

trigger rapid liquidations); and (iii) the 

positions to not be carried into the 

delivery month. 

Prompted by concerns regarding the 

growing market presence of swap 

dealers and commodity index traders 

who use futures markets to manage risks 

related to OTC trading activity, in June 

and July of 2008, CFTC staff issued a 

special call for information from swap 

dealers and index traders. Based upon 

information collected from its special 

call, the Commission published on 

September 11, 2008, a ‘‘Staff Report on 

Commodity Swap Dealers and Index 

Traders with Commission 

Recommendations’’ (the ‘‘September 

2008 Report’’). Most relevant to the 

Commission’s proposed rulemaking is 

the Report’s recommendation that the 

Commission consider the elimination of 

bona fide hedge exemptions for swap 

dealers and the creation of a new, 

limited risk management exemption for 

the activities of swap dealers and 

commodity index traders.65

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investments in commodity markets in terms of 

notional values and equivalent futures positions. 

The Commission continues to study the viability of 

the September 2008 Report’s other 

recommendations regarding the creation of an 

Office of Data Collection, the establishment of more 

detailed reporting standards for large traders and a 

review of the relation of swap dealers’ futures 

trading and commodity research activities. 

September 2008 Report, at 6. 

66 74 FR 12282 (March 24, 2009). 

67The comments are available for review on the 

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

lawandregulation/federalregister/federal

registercomments/2009/09–004.html. 

68Also in August 2009, Commission staff 

withdrew CFTC Letters 06–09 and 06–19, which 

had granted staff no-action relief to two index funds 

(with passively managed positions) from complying 

with the Federal speculative position limits 

otherwise applicable to futures and option contracts 

in wheat, corn and soybeans. 

69The concept of independence is important 

because the positions of a group of traders acting 

pursuant to a common plan would be aggregated as 

if the positions were traded by a single person. 

In March of 2009, the Commission 

published 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.’’66 The 

concept release reviewed the underlying 

statutory and regulatory background, as 

well as relevant regulatory history and 

marketplace developments, and posed a 

number of questions designed to help 

inform the Commission’s decision as to: 

(i) Whether to proceed with the 

recommendation to eliminate the bona 

fide hedge exemption for swap dealers 

and replace it with a conditional limited 

risk management exemption; and (ii) if 

so, what form the new limited risk 

management exemptive regulations 

should take and how they might be 

implemented most effectively. 

In response, the Commission received 

letters from 30 commenters, including 

futures exchanges, agricultural trade 

associations, financial industry trade 

associations, money management firms 

(including swap dealers), other market 

participants and various other interested 

parties. The comments 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.67 Similar views on hedge 

exemptions were also expressed at the 

Commission’s Energy Hearings in July 

and August 2009.68 As discussed below, 

the proposed regulations would not 

recognize futures and option 

transactions offsetting exposure 

acquired pursuant to swap dealing 

activity as bona fide hedges. 

Accordingly, swap dealers would not be 

allowed to seek bona fide hedge 

exemptions for such positions. Instead, 

however, upon compliance with several 

conditions including reporting and 

disclosure obligations, the proposed 

regulations would allow swap dealers to 

seek a limited exemption from the 

proposed speculative position limits for 

the major energy contracts. 

VI. The Proposed Regulations 

A. Overview 

The proposed regulations seek to 

implement an integrated speculative 

position limit framework for exchange 

listed natural gas, crude oil, heating oil, 

and gasoline futures and option 

contracts. In addition to identifying the 

affected energy contracts with 

particularity, the proposed regulations 

would establish aggregate and exchangespecific speculative position limits, 

including provisions relating to 

exemptions from the proposed limits 

and related application and reporting 

requirements. The proposed regulations 

provide position limit exemptions for 

bona fide hedging transactions, certain 

swap dealer risk management 

transactions, and positions that remain, 

in their totality, in compliance with the 

applicable limits once option contracts 

that comprise a portion of a trader’s 

overall position are delta-adjusted by a 

demonstrably appropriate risk factor. 

The proposed regulations key the setting 

of position limits to deliverable supplies 

and open interest. In addition, they seek 

to apply position limits to a set of 

readily identifiable contracts. By doing 

so, the proposed regulations intend to 

establish an objective and administerial 

process for fixing specific position 

limits and identifying the contracts to 

which they apply without relying on the 

Commission’s exercise of discretion. 

As discussed in detail below, the 

proposed spot-month limits generally 

are a function of the estimated 

deliverable supply for physically-settled 

contracts. The logic behind limiting 

positions based on deliverable supply is 

readily apparent since, for example, 

traders with sufficiently large positions 

can squeeze shorts and thereby distort 

the price of the deliverable commodity. 

In contrast, the proposed (non-spot) 

single-month and all-months-combined 

position limits would limit positions to 

a specific percentage of overall trading 

activity as represented by open interest. 

As such, the link between open interest 

and the proposed non-spot-month 

position limits may not be as readily 

apparent as the link between spotmonth limits and estimated deliverable 

supply. 

To illustrate how a formula based on 

open interest would restrict the ability 

of any single trader to disrupt market 

operations through the acquisition and 

liquidation of large speculative 

positions, it may be helpful to consider 

a framework in which there are no 

exemptions from position limits and 

there exists a single contract with an 

open interest level of 1,000 contracts. 

With these simplifications in place, a 

position limit that is set at 10% of open 

interest, given an assumed open interest 

level of 1,000 contracts, would be 100 

contracts (i.e., 10% of 1,000 contracts). 

Thus, the position limit, at the assumed 

open interest level of 1,000 contracts, 

would mean that there must, at a 

minimum, be 10 independent long and 

10 independent short traders.69 If there 

were 9 traders on either side of the 

market, then at least one trader would 

necessarily hold more than 100 

contracts. That trader would hold such 

positions in violation of the contract’s 

position limit. 

Alternatively, if the position limit is 

set at a lower percentage of the 

contract’s assumed open interest level of 

1,000 contracts, then the minimum 

number of independent traders needed 

as market participants would be higher. 

For example, a position limit that is set 

at 2.5% of the assumed open interest 

level of 1,000 contracts would be 25 

contracts (i.e., 2.5% of 1,000 contracts). 

Accordingly, the minimum ‘‘size of the 

trading crowd’’ under this scenario 

would be 40 long and 40 short traders 

(40 traders each with 25 contract 

positions would equal the given open 

interest level of 1,000 contracts). 

Therefore, position limits that are 

formulaically set as a percentage of open 

interest can prevent any single trader 

from acquiring excessive market power 

if structured properly as one part of a 

comprehensive speculative position 

limit framework. 

B. Identifying Referenced Energy 

Contracts 

As proposed, the speculative position 

limits would apply only to referenced 

energy contracts. Proposed regulation 

151.1 defines referenced energy 

contracts to mean one of four 

enumerated contracts—the NYMEX 

Henry Hub natural gas contract, the 

NYMEX Light Sweet crude oil contract, 

the NYMEX New York Harbor No. 2 

heating oil contract, and the NYMEX 

New York Harbor gasoline blendstock 

(RBOB) contract—and in addition, any 

other contract that is exclusively or 

partially based on the referenced 

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70A commodity may be considered ‘‘substantially 

the same,’’ for instance, if it is of the same grade 

and quality. If a commodity meets an underlying 

referenced energy contract’s deliverable grade and 

quality specifications, then such commodity 

presumptively is substantially similar. 

71 It should also be noted that, although a grade 

may be substantially similar to a referenced energy 

contract’s commodity, this is not sufficient to 

render a futures or option contract a referenced 

energy contract. In order to be included as a 

referenced energy contract, a substantially similar 

commodity must also be deliverable at a referenced 

energy contract’s delivery point(s). 

72Examples of diversified commodity indexes 

include the S&P/Goldman Sachs Commodity Index, 

the Thomson Reuters/Jefferies CRB Index and the 

Dow Jones-UBS Commodity Index. 

73 70 FR 24705 (May 11, 2005). 

74See, 70 FR 12621 (March 15, 2005); 72 FR 

65483 (November 21, 2007). 

75More specifically, proposed regulation 151.1 

defines ‘‘calendar spread contracts’’ as contracts that 

are settled based on the difference between the 

settlement prices in one expiring month of a 

referenced energy contract and another month’s 

settlement price for the same referenced energy 

contract. The proposed regulations would define 

‘‘inter-commodity spread’’ contracts as contracts 

that are based on the price difference between the 

settlement price of a referenced energy contract and 

another commodity contract. An example of a 

calendar spread contract is the NYMEX Crude Oil 

Calendar Spread Financially Settled Option 

Contract (WA). This contract represents an option 

to assume positions in two different NYMEX Light 

Sweet crude oil futures contracts distinguished by 

opposite positions in different delivery months. An 

Continued 

contracts’ commodities and deliverable 

at locations specified in the proposed 

regulations. Basis contracts and 

diversified commodity index futures 

that are based on such contracts’ 

commodities, however, would not be 

considered to be referenced energy 

contracts and, therefore, would not be 

subject to the proposed speculative 

position limits. 

Basis contracts, as defined in 

proposed regulation 151.1, are futures or 

option contracts that are cash settled 

based on the difference in price of the 

same commodity (or substantially the 

same commodity)70 at different delivery 

points. These basis contracts have been 

excluded by the Commission from the 

speculative position limits because they 

price the difference between the same 

commodity in two different locations 

and not the underlying commodity 

itself.71 Similarly, contracts based on 

diversified commodity indexes, defined 

in proposed regulation 151.1 as 

commodity indexes that are comprised 

of contracts in energy as well as nonenergy commodities, are excluded 

because they may not involve a separate 

and distinct exposure to the price of a 

referenced energy contract’s 

commodity.72

C. Determining Aggregate All-MonthsCombined and Single-Month Position 

Limits 

The current Federal speculative 

position limits of regulation 150.2 apply 

only to specific futures contracts (and 

on a futures-equivalent basis) specific 

option contracts. Historically, all trading 

volume in a specific contract tended to 

migrate to a single contract on a single 

exchange. Consequently, speculative 

position limits that applied to a single 

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. 

In 2005, when the Commission last 

amended the agricultural speculative 

position limits of regulation 150.2, it 

codified the Commission’s practice of 

grouping positions in a limited set of 

contracts on the same exchange with 

substantially identical terms for the 

purpose of applying the Federal 

agricultural speculative position 

limits.73 This limited grouping of 

positions extended only to regular and 

mini-sized contracts on the same 

exchange, such as the CBOT Corn and 

Mini-Corn futures contracts, and did not 

extend to contracts that were cash 

settled to physically delivered contracts. 

At that time and subsequently in 2007 

(in a notice of proposed rulemaking that 

was subsequently withdrawn), the 

Commission considered but refrained 

from adopting additional position 

grouping requirements for the 

agricultural contracts enumerated in 

regulation 150.2.74

With the advent of look-alike energy 

contracts that are listed on different 

registered entities and contracts that are 

based on other contracts in an attempt 

to isolate different energy price risks, 

most prominently contracts traded at 

NYMEX and ICE, applying a speculative 

position to a specific energy contract, 

and its smaller sized counterpart, if any, 

without consideration of other directly 

or highly related contracts could result 

in applying a position limit only to a 

very limited segment of a broader 

regulated market. Accordingly, the 

proposed regulations would, for 

positions outside the spot month, apply 

the proposed Federal speculative 

position limits aggregately on and across 

reporting markets to capture a broader 

segment of the open interest that 

comprises the market for the referenced 

energy contracts. 

Proposed regulation 151.2(b)(1) would 

establish aggregate all-months-combined 

and single-month speculative limits for 

positions held outside the spot month. 

The proposed framework premises its 

limits on open interest levels, and 

would establish speculative position 

limits aggregately, that is, across 

contracts of different classes on a single 

exchange and across all reporting 

markets listing the same referenced 

energy contracts. As defined in 

proposed regulation 151.1, contracts of 

the same class outside of the spot month 

include all referenced energy contracts 

(including option contracts on a futuresequivalent basis) on a single reporting 

market that are based on the same 

commodity and settled in the same 

manner. As proposed, NYMEX’s crude 

oil financial calendar spread option, last 

day financial futures and options 

thereon, and light sweet crude oil emini contracts, as cash-settled NYMEX 

contracts, would all be grouped together 

as contracts of the same class. NYMEX’s 

physically-settled light sweet crude oil 

contract, however, would be in a 

different class because the contract is 

physically-settled as opposed to being a 

financial futures contract like the 

contracts listed above. Similarly, ICE’s 

natural gas SPDC, although financiallysettled and related to NYMEX’s natural 

gas contracts, would be in a different 

class because it is on a different 

exchange. As discussed more fully 

below, categorizing the referenced 

energy contracts in this manner allows 

for the application of aggregate and 

class-specific speculative position limits 

and permits for the netting of positions 

as appropriate. 

In fixing aggregate all-monthscombined and single-month position 

limits across contract classes, that is, for 

related contracts of different classes on 

and across the exchanges, the 

Commission would initially identify the 

referenced energy contracts that are 

based on the same commodity but that 

constitute a distinct class of contracts 

because, for example, they are cashsettled as opposed to physically-settled, 

or because they are listed on different 

reporting markets. The Commission 

next would calculate each class’s 

average combined futures and deltaadjusted option month-end open 

interest for all months listed on a 

reporting market during the most recent 

calendar year as the first reference point 

(‘‘class single-exchange gross open 

interest value’’). 

The proposed regulations would 

subtract the open interest generated 

from spread contracts, as defined in 

regulation 151.1, from the class singleexchange gross open interest value to 

arrive at a ‘‘class single-exchange final 

open interest value.’’ Proposed 

regulation 151.1 would define spread 

contracts as either a calendar spread 

contract or an inter-commodity spread 

contract.75 Open interest generated from 

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4154 Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules 

example of an inter-commodity spread representing 

the price difference between two referenced 

commodities would be the NYMEX heating oil 

crack spread swap futures (HK) contract, which 

represents the price difference between two 

referenced energy contracts, the NYMEX New York 

Harbor No. 2 heating oil futures settlement price 

minus the NYMEX Light Sweet crude oil futures 

settlement price. A different example of an intercommodity spread would be the NYMEX Mars 

(Argus) vs. WTI spread calendar swap (YX) which 

represents the Mars midpoint price from Argus 

Media minus the NYMEX Light Sweet crude oil 

futures first nearby contract month settlement price. 

spread contracts, as defined in proposed 

regulation 151.1, is not included in the 

class single-exchange final open interest 

value because spread contracts may be 

indicative of nominal commodity price 

exposures. Traders on both sides of 

spread contracts, as defined by the 

proposed regulations, hold a single 

position composed of two highly 

correlated legs. Therefore, open interest 

from such contracts may be excluded 

from the base open interest value that is 

used to calculate speculative position 

limits. Although excluded from the 

class single-exchange final open interest 

value that, as discussed below, is used 

to set the aggregate all-monthscombined and single-month position 

limits, such contracts, unlike basis 

contracts and contracts based on 

diversified commodity indexes, are 

nonetheless referenced energy contracts 

and therefore are attributable to traders 

for the purposes of determining a 

trader’s compliance with, for example, 

the proposed single-month speculative 

position limits. 

The following table lists the contracts, 

grouped by class, which would be used 

to determine a class’s single-exchange 

final open interest value as described 

above: 

CONTRACT LIST WITHOUT SPREAD CONTRACTS

Class of contract Contract name Contract 

code 

Spot-month 

conversion 

factor relative 

to referenced 

energy 

contract 

Individual 

month 

conversion 

factor relative 

to referenced 

energy contract 

All months 

combined conversion factor 

relative to referenced energy contract 

Crude Oil/Physical Delivery/NYMEX .... Light Sweet Crude Oil Futures ............. CL .......... 1 1 1 

Light Sweet Crude Oil Option .............. LO ......... 0 1 1 

Crude Oil/Cash-Settled/NYMEX ........... Crude Oil Financial Futures ................. WS ........ 1 1 1 

Crude Oil Last Day Financial Futures .. 26 .......... 1 1 1 

Crude Oil Option on Calendar Strip ..... 6F .......... 0 1 12 

Crude Oil Option on Quarterly Futures 

Strip.

6E .......... 0 1 3 

Daily Crude Oil Option ......................... CD ......... 0 1 1 

E-mini Crude Oil Futures ..................... QM ........ 1⁄2 1⁄2 1⁄2

NYMEX Crude Oil Backwardation/ 

Contango (B/C) Index.

XK ......... 0 1⁄5 1⁄5

NYMEX Crude Oil MACI Index ............ XC ......... 0 1⁄5 1⁄5

NYMEX Crude Oil Minute-Marker Calendar Month Swap Futures.4T .......... 1 1 1 

NYMEX Crude Oil Minute-Marker Futures.6C .......... 1 1 1 

WTI Average Price Option ................... AO ......... 0 1 1 

WTI Calendar Swap Futures ................ CS ......... 1 1 1 

WTI Look-Alike Option ......................... LC .......... 0 1 1 

Gasoline/Physical Delivery/NYMEX ...... RBOB Gasoline Futures ....................... RB ......... 1 1 1 

RBOB Gasoline Option ........................ OB ......... 0 1 1 

Gasoline/Cash-Settled/NYMEX ............ E-mini RBOB Gasoline Futures ........... QU ......... 1⁄2 1⁄2 1⁄2

NYMEX RBOB Gasoline Minute-Marker Calendar Month Swap Futures.5T .......... 1 1 1 

NYMEX RBOB Gasoline Minute-Marker Futures.6R .......... 1 1 1 

RBOB Gasoline Average Price Option RA ......... 1 1 1 

RBOB Gasoline BALMO Swap Futures 1D .......... 1 1 1 

RBOB Gasoline Calendar Swap Futures.RL .......... 1 1 1 

RBOB Gasoline Financial Futures ....... RT ......... 1 1 1 

RBOB Gasoline Last Day Financial Futures.27 .......... 1 1 1 

RBOB Gasoline Look-Alike European 

Option.

RF ......... 0 1 1 

Heating Oil/Physical Delivery/NYMEX .. Heating Oil Option ................................ OH ......... 0 1 1 

New York Harbor No. 2 Heating Oil 

Futures.

HO ......... 1 1 1 

Heating Oil/Cash-Settled/NYMEX ......... E-mini Heating Oil Futures ................... QH ......... 1⁄2 1⁄2 1⁄2

Heating Oil Average Price Option ........ AT .......... 1 1 1 

Heating Oil BALMO Swap Futures ...... 1G ......... 1 1 1 

Heating Oil Calendar Swap Futures .... MP ......... 1 1 1 

Heating Oil Financial Futures ............... BH ......... 1 1 1 

Heating Oil Last Day Financial Futures 23 .......... 1 1 1 

Heating Oil Look-Alike Option .............. LB .......... 0 1 1 

NYMEX Heating Oil Minute-Marker 

Calendar Month Swap Futures.

7T .......... 1 1 1 

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76Proposed regulation 151.2(e)(3) provides that 

the result of the formula is rounded up to the 

nearest one hundred to calculate the level of the 

limit. 

CONTRACT LIST WITHOUT SPREAD CONTRACTS—Continued 

Class of contract Contract name Contract 

code 

Spot-month 

conversion 

factor relative 

to referenced 

energy 

contract 

Individual 

month 

conversion 

factor relative 

to referenced 

energy contract 

All months 

combined conversion factor 

relative to referenced energy contract 

NYMEX Heating Oil Minute-Marker Futures.6H .......... 1 1 1 

Natural Gas/Physical Delivery/NYMEX Henry Hub Natural Gas Futures .......... NG ......... 1 1 1 

Henry Hub Natural Gas Option ............ ON ......... 1 1 1 

Natural Gas/Cash-Settled/NYMEX ....... Daily Natural Gas Option ..................... KD ......... 0 1 1 

E-mini Henry Hub Natural Gas Penultimate Financial Futures.NP ......... 1⁄4 1⁄4 1⁄4

E-mini Natural Gas Futures ................. QG ......... 1⁄4 1⁄4 1⁄4

Henry Hub Natural Gas Last Day Financial Futures.HH ......... 1 1 1 

Henry Hub Natural Gas Last Day Financial Option.E7 .......... 1 1 1 

Henry Hub Natural Gas Look-Alike Option.LN .......... 1 1 1 

Henry Hub Natural Gas Penultimate 

Financial Futures.

HP ......... 1 1 1 

Henry Hub Natural Gas Swap Futures NN ......... 1⁄4 1⁄4 1⁄4

Natural Gas Option on Calendar Futures Strip.6J .......... 0 1⁄4 3 

Natural Gas Option on Summer Futures Strip.4D .......... 0 1⁄4 13⁄4

Natural Gas Option on Winter Futures 

Strip.

6I ........... 0 1⁄4 11⁄4

Natural Gas/Cash-Settled/ICE .............. Henry Hub Natural Gas Swap ............. H ............ 1⁄4 1⁄4 1⁄4

Once a class single-exchange final 

open interest value is determined, under 

the proposed regulations, the 

Commission would sum this value for 

all related classes on and across all 

reporting markets to arrive at an 

‘‘aggregated market open interest value’’ 

as a third reference point for each of the 

four referenced energy contracts. The 

proposed regulations would establish an 

all-months-combined aggregate position 

limit that is fixed by the Commission at 

10% of the aggregated open interest 

value discussed above, up to 25,000 

contracts, with a marginal increase of 

2.5% thereafter.76 This proposed 

formula is similar to the formula 

provided in current regulation 150.5(c). 

The proposed regulations would set 

the single-month aggregate position 

limit at two-thirds of the position limit 

fixed for the all-months-combined 

aggregate position limit. This means that 

the aggregate all-months-combined 

position limit level would be 150% of 

the aggregate single-month position 

limit level. As previously discussed, in 

2005 the Commission increased the allmonths-combined Federal speculative 

position limits and reset the singlemonth levels to approximate the then 

existing ratio between all-monthscombined and single-month levels (i.e., 

arriving at the single-month limits by 

setting them at about two-thirds of the 

relevant all-months-combined limits). 

The proposed regulation’s reliance on 

this approach for determining single 

non-spot-month limits is therefore 

consistent with prior Commission 

determinations. 

As proposed, the intent of the 

aggregate position limits is to permit for 

the netting of positions in a referenced 

energy contract’s different classes on a 

single exchange and across the 

exchanges for the purpose of 

determining compliance with the 

aggregate all-months-combined and 

aggregate single-month speculative 

position limits. Accordingly, no trader 

would be permitted to hold net long or 

net short referenced energy contract 

positions that, when combined with net 

long or net short positions in the same 

referenced energy contract on another 

exchange, would exceed the aggregate 

all-months-combined and aggregate 

single-month speculative position 

limits. 

D. Single-Exchange Limits 

In order to prevent the excessive 

concentration of positions in a 

particular class of contracts, for each 

reporting market separately, the 

proposed regulations would also 

establish an all-months-combined 

position limit that would apply 

specifically to contracts of the same 

class at the lower of the aggregate 

position limit for a referenced energy 

contract or 30% of a class’s single 

exchange final open interest value. 

Accordingly, for the purpose of 

applying these exchange and classspecific speculative position limits, 

netting would only be permitted 

between contracts of the same class. 

For each reporting market separately, 

the proposed regulations also would 

establish a single-month position limit 

for contracts of the same class that 

would be two-thirds of the all-monthscombined position limit fixed for that 

class of contracts. Thus, the singlemonth limit on each reporting market 

for a class of contracts would be no 

greater than 20% of a class’s single 

exchange final open interest value (i.e., 

two-thirds of 30% of a class’s single 

exchange final open interest value). 

Proposed regulation 151.2 also 

establishes a minimum position limit 

for a reporting market of 5,000 contracts 

or 1% of the aggregated open interest 

value, whichever is greater. The 

Commission notes that the 5,000 

contract level is consistent with its 

guidance on acceptable practices for 

exchanges setting all-months-combined 

position limits for newly listed energy 

contracts in current regulation 

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4156 Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules 

77A market maker is a trader that quotes both a 

buy and a sell price in an attempt to profit from the 

spread. 

150.5(b)(3). Levels set by reference to 

the 1% of aggregated open interest value 

and the 5,000 contract limit are 

intended to give newly listed contracts 

or contracts with low open interest the 

opportunity to attract liquidity. The 

concentration of positions held by a 

single trader on a particular reporting 

market, such as a market marker,77

given the minimal impact that such 

trading may have on commodity prices, 

is acceptable because such levels 

promote innovation and competition. 

In addition to the above mentioned 

position limits, as proposed, a trader’s 

positions in contracts of the same class 

in a single month on a reporting market, 

measured on a gross basis, would be 

limited to no greater than two times the 

all-months-combined class position 

limit fixed for that reporting market. A 

limit on a trader’s gross positions in a 

single month would serve to prevent 

sudden or unreasonable fluctuations or 

unwarranted changes in commodity 

prices that could arise from traders 

holding large positions that would 

otherwise net out (e.g., offsetting 

positions in last trading day and 

penultimate contracts of the same class 

for the same month) for the purpose of 

applying the class single-month position 

limits. 

The following table groups contracts 

by the classes in which they would be 

included under the proposed 

regulations: 

CONTRACT LIST WITH SPREAD CONTRACTS

Class of contract Contract name Contract 

code 

Spot-month 

conversion 

factor relative 

to referenced 

energy contract 

Individual 

month conversion factor relative to referenced energy contract 

All months 

combined conversion factor 

relative to referenced energy contract 

Crude Oil/Physical Delivery/NYMEX.Light Sweet Crude Oil Futures .............................. CL 1 1 1 

Light Sweet Crude Oil Option ................................ LO 0 1 1 

Heating Oil Crack Spread Option .......................... HC ¥1 ¥1 ¥1 

RBOB Gasoline Crack Spread Option ................... RX ¥1 ¥1 ¥1 

WTI Calendar Spread Option ................................ WA 1 1 0 

Crude Oil/Cash-Settled/ 

NYMEX.

Crude Oil Financial Calendar Spread Option ........ 7A 1 1 1 

Crude Oil Financial Futures ................................... WS 1 1 1 

Crude Oil Last Day Financial Futures ................... 26 1 1 1 

Crude Oil Option on Calendar Strip ....................... 6F 0 1 12 

Crude Oil Option on Quarterly Futures Strip ......... 6E 0 1 3 

Daily Crude Oil Option ........................................... CD 0 1 1 

E-mini Crude Oil Futures ....................................... QM 1⁄2 1⁄2 1⁄2

Gulf Coast No. 2 (Platts) Crack Spread Swap Futures.RD ¥1 ¥1 ¥1 

Gulf Coast No. 6 Fuel Oil (Platts) Crack Spread 

Swap Futures.

MG ¥1 ¥1 ¥1 

Gulf Coast ULSD (Argus) Crack Spread Swap Futures.CF ¥1 ¥1 ¥1 

Gulf Coast ULSD (Platts) Crack Spread Swap Futures.GY ¥1 ¥1 ¥1 

Gulf Coast Unl 87 (Argus) Crack Spread Swap 

Futures.

CK ¥1 ¥1 ¥1 

Gulf Coast Unl 87 (Platts) Crack Spread BALMO 

Swap Futures.

1J ¥1 ¥1 ¥1 

Gulf Coast Unl 87 (Platts) Crack Spread Swap 

Futures.

RU ¥1 ¥1 ¥1 

Heating Oil Crack Spread Average Price Option .. 3W ¥1 ¥1 ¥1 

Heating Oil Crack Spread BALMO Swap Futures 1H ¥1 ¥1 ¥1 

Heating Oil Crack Spread Swap Futures .............. HK ¥1 ¥1 ¥1 

Mars (Argus) vs. WTI Spread Calendar Swap Futures.YX ¥1 ¥1 ¥1 

Mars (Argus) vs. WTI Spread Trade Month Swap 

Futures.

YV ¥1 ¥1 ¥1 

New York Harbor Residual Fuel (Platts) Crack 

Spread Swap Futures.

ML ¥1 ¥1 ¥1 

New York Ultra Low Sulfur Diesel (ULSD) Crack 

Spread Swap.

YU ¥1 ¥1 ¥1 

NYMEX Crude Oil Backwardation/Contango (B/C) 

Index.

XK 0 1⁄5 1⁄5

NYMEX Crude Oil MACI Index .............................. XC 0 1⁄5 1⁄5

NYMEX Crude Oil Minute-Marker Calendar Month 

Swap Futures.

4T 1 1 1 

NYMEX Crude Oil Minute-Marker Futures ............ 6C 1 1 1 

RBOB Gasoline Crack Spread Average Price Option.3Y ¥1 ¥1 ¥1 

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CONTRACT LIST WITH SPREAD CONTRACTS—Continued 

Class of contract Contract name Contract 

code 

Spot-month 

conversion 

factor relative 

to referenced 

energy contract 

Individual 

month conversion factor relative to referenced energy contract 

All months 

combined conversion factor 

relative to referenced energy contract 

RBOB Gasoline Crack Spread BALMO Swap Futures.1E ¥1 ¥1 ¥1 

RBOB Gasoline Crack Spread Swap Futures ....... RM ¥1 ¥1 ¥1 

WTI Average Price Option ..................................... AO 0 1 1 

WTI Calendar Swap Futures ................................. CS 1 1 1 

WTI Look-Alike Option ........................................... LC 0 1 1 

WTS (Argus) vs. WTI Spread Calendar Swap Futures.FF ¥1 ¥1 ¥1 

WTS (Argus) vs. WTI Spread Trade Month Swap 

Futures.

FH ¥1 ¥1 ¥1 

Gasoline/Physical Delivery/NYMEX.RBOB Gasoline Futures ........................................ RB 1 1 1 

RBOB Gasoline Option .......................................... OB 0 1 1 

RBOB Gasoline Calendar Spread Option ............. ZA 1 1 0 

RBOB Gasoline Crack Spread Option ................... RX 0 1 1 

Gasoline/Cash-Settled/ 

NYMEX.

Chicago Unleaded Gasoline (Platts) vs. RBOB 

Gasoline Spread Swap Futures.

3C ¥1 ¥1 ¥1 

E-mini RBOB Gasoline Futures ............................. QU 1⁄2 1⁄2 1⁄2

Group Three Unleaded Gasoline (Platts) vs. 

RBOB Spread Swap.

A8 ¥1 ¥1 ¥1 

Gulf Coast Gasoline (OPIS) vs. RBOB Gasoline 

Spread Swap Futures.

4F ¥1 ¥1 ¥1 

Gulf Coast Unl 87 (Argus) Up-Down Swap Futures.UZ ¥1 ¥1 ¥1 

Gulf Coast Unl 87 (Platts) Up-Down BALMO 

Swap Futures.

1K ¥1 ¥1 ¥1 

Gulf Coast Unl 87 (Platts) vs. RBOB Gasoline 

Spread Swap Futures.

RV ¥1 ¥1 ¥1 

Los Angeles CARBOB Gasoline (OPIS) Spread 

Swap Futures.

JL ¥1 ¥1 ¥1 

New York Harbor Conv. Gasoline (Platts) vs. 

RBOB Gasoline Swap Futures.

RZ ¥1 ¥1 ¥1 

NY RBOB (Platts) vs. NYMEX RBOB Gasoline 

Spread Swap Futures.

RI ¥1 ¥1 ¥1 

NYMEX RBOB Gasoline Minute-Marker Calendar 

Month Swap Futures.

5T 1 1 1 

NYMEX RBOB Gasoline Minute-Marker Futures .. 6R 1 1 1 

RBOB Gasoline Average Price Option .................. RA 1 1 1 

RBOB Gasoline BALMO Swap Futures ................ 1D 1 1 1 

RBOB Gasoline Calendar Swap Futures .............. RL 1 1 1 

RBOB Gasoline Crack Spread Average Price Option.3Y 1 1 1 

RBOB Gasoline Crack Spread BALMO Swap ...... 1E 1 1 1 

RBOB Gasoline Crack Spread Swap Futures ....... RM 1 1 1 

RBOB Gasoline Financial Futures ......................... RT 1 1 1 

RBOB Gasoline Last Day Financial Futures ......... 27 1 1 1 

RBOB Gasoline Look-Alike European Option ....... RF 0 1 1 

RBOB Gasoline vs. Heating Oil Swap Futures ..... RH 1 1 1 

Heating Oil/Physical Delivery/NYMEX.New York Harbor No. 2 Heating Oil Futures ......... HO 1 1 1 

Heating Oil Option .................................................. OH 0 1 1 

Heating Oil Calendar Spread Options ................... FA 1 1 0 

Heating Oil Crack Spread Option .......................... HC 0 1 1 

Heating Oil/Cash-Settled/ 

NYMEX.

Chicago ULSD (Platts) vs. Heating Oil Spread 

Swap.

5C ¥1 ¥1 ¥1 

E-mini Heating Oil Futures ..................................... QH 1⁄2 1⁄2 1⁄2

Group Three ULSD (Platts) vs. Heating Oil 

Spread Swap Futures.

A6 ¥1 ¥1 ¥1 

Gulf Coast Jet (Argus) Up-Down Swap Futures .... JU ¥1 ¥1 ¥1 

Gulf Coast Jet (OPIS) vs. Heating Oil Spread 

Swap Futures.

W7 ¥1 ¥1 ¥1 

Gulf Coast Jet (Platts) Up-Down BALMO Swap 

Futures.

1M ¥1 ¥1 ¥1 

Gulf Coast Jet (Platts) vs. Heating Oil Spread 

Swap Futures.

ME ¥1 ¥1 ¥1 

Gulf Coast Low Sulfur Diesel (LSD) (Platts) UpDown Spread Swap Futures.YL ¥1 ¥1 ¥1 

Gulf Coast ULSD (Argus) Up-Down Swap Futures US ¥1 ¥1 ¥1 

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78For a contract that does not allow trading 

concurrently with the issuance of delivery notices, 

spot-month means ‘‘the futures contract next to 

expire during that period of time beginning at the 

close of trading on the third trading day preceding 

the last trading day.’’ For a contract that cash-settles 

based on the price of one or more physicallydelivered contracts, spot-month means ‘‘the period 

of time that is the spot-month for such physicallydelivered contracts.’’ The Commission intends the 

spot-month for options on futures contracts to be 

the same period of time as for the underlying 

futures contract. 

CONTRACT LIST WITH SPREAD CONTRACTS—Continued 

Class of contract Contract name Contract 

code 

Spot-month 

conversion 

factor relative 

to referenced 

energy contract 

Individual 

month conversion factor relative to referenced energy contract 

All months 

combined conversion factor 

relative to referenced energy contract 

Gulf Coast ULSD (OPIS) vs. Heating Oil Spread 

Swap Futures.

5Q ¥1 ¥1 ¥1 

Gulf Coast ULSD (Platts) Up-Down Spread Swap 

Futures.

LT ¥1 ¥1 ¥1 

Gulf Coast ULSD (Platts) Up-Down Swap Futures 1L ¥1 ¥1 ¥1 

Heating Oil Arb : NYMEX Heating Oil vs. ICE 

Gasoil.

HA 1 1 1 

Heating Oil Average Price Option .......................... AT 1 1 1 

Heating Oil BALMO Swap Futures ........................ 1G 1 1 1 

Heating Oil Calendar Swap Futures ...................... MP 1 1 1 

Heating Oil Crack Spread Average Price Option .. 3W 1 1 1 

Heating Oil Crack Spread BALMO Swap Futures 1H 1 1 1 

Heating Oil Crack Spread Swap Futures .............. HK 1 1 1 

Heating Oil Financial Futures ................................ BH 1 1 1 

Heating Oil Last Day Financial Futures ................. 23 1 1 1 

Heating Oil Look-Alike Option ................................ LB 0 1 1 

Los Angeles CARB Diesel (OPIS) Spread Swap 

Futures.

KL ¥1 ¥1 ¥1 

Los Angeles Jet (OPIS) Spread Swap Futures ..... JS ¥1 ¥1 ¥1 

Los Angeles Jet Fuel (Platts) vs. Heating Oil 

Spread Swap Futures.

MQ ¥1 ¥1 ¥1 

NY Jet Fuel (Argus) vs. Heating Oil Spread Swap 

Futures.

5U ¥1 ¥1 ¥1 

NY Jet Fuel (Platts) vs. Heating Oil Swap Futures 1U ¥1 ¥1 ¥1 

NY ULSD (Platts) vs. NYMEX Heating Oil Spread 

Swap Futures.

UY ¥1 ¥1 ¥1 

NYMEX Heating Oil Minute-Marker Calendar 

Month Swap Futures.

7T 1 1 1 

NYMEX Heating Oil Minute-Marker Futures .......... 6H 1 1 1 

RBOB Gasoline vs. Heating Oil Swap Futures ..... RH ¥1 ¥1 ¥1 

ULSD (Argus) vs. Heating Oil Spread Swap Futures.7Y ¥1 ¥1 ¥1 

Natural Gas/Physical Delivery/NYMEX.Henry Hub Natural Gas Futures ............................ NG 1 1 1 

Henry Hub Natural Gas Option .............................. ON 1 1 1 

Henry Hub Natural Gas Calendar Spread Options IA 1 1 0 

Natural Gas/Cash-Settled/NYMEX.Daily Natural Gas Option ....................................... KD 0 1 1 

E-mini Henry Hub Natural Gas Penultimate Financial Futures.NP 1⁄4 1⁄4 1⁄4

E-mini Natural Gas Futures ................................... QG 1⁄4 1⁄4 1⁄4

Henry Hub Natural Gas Last Day Financial Futures.HH 1 1 1 

Henry Hub Natural Gas Last Day Financial Option E7 1 1 1 

Henry Hub Natural Gas Look-Alike Option ............ LN 1 1 1 

Henry Hub Natural Gas Penultimate Financial Futures.HP 1 1 1 

Henry Hub Natural Gas Swap Futures .................. NN 1⁄4 1⁄4 1⁄4

Henry Natural Gas Financial Calendar Spread 

Option.

G4 1 1 0 

Natural Gas Option on Calendar Futures Strip ..... 6J 0 1⁄4 3 

Natural Gas Option on Summer Futures Strip ...... 4D 0 1⁄4 13⁄4

Natural Gas Option on Winter Futures Strip ......... 6I 0 1⁄4 11⁄4

Natural Gas/Cash-Settled/ICE.Henry Hub Natural Gas Swap ............................... H 1⁄4 1⁄4 1⁄4

E. Spot-Month Classes of Contracts 

An energy contract that is in its spot 

month, pursuant to industry practice 

and as defined in proposed regulation 

151.1, is a futures contract that is ‘‘next 

to expire during that period of time 

beginning at 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 registered 

entity.’’ 78 In practice, the spot-month for 

the major energy contracts generally is 

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Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules 4159 

three days in duration. In view of the 

heightened potential for manipulation, 

corners, squeezes as well as excessive 

speculation during this concentrated 

period of time, only those contracts that 

expire on the same day would be 

deemed to be contracts of the same class 

under the proposed regulations. This 

would mean that, for example, during 

the spot month, a cash-settled last 

trading day contract would not be in the 

same class as a cash-settled penultimate 

contract. The most significant impact of 

defining a class of contracts in a 

narrower manner during the spot-month 

is to prohibit the netting of spot-month 

contracts that expire on different days 

for the purpose of applying the 

proposed speculative position limits. By 

way of example, a trader that is 4,000 

contracts long in a cash-settled last 

trading day contract, and 4,000 

contracts short in a cash-settled 

penultimate contract on the same 

exchange in a referenced energy 

contract, would be subject to spotmonth position limits for each contract 

and would not be deemed to be holding 

a flat position. In contrast, outside the 

spot month, each leg of this spread 

would be considered to be in the same 

class and therefore subject to netting for 

the purpose of applying the proposed 

class all-months-combined and singlemonth position limits. 

F. Determining and Complying With the 

Proposed Spot-Month Limits 

For physically-delivered contracts, a 

spot-month position limit would be 

fixed by the Commission at one-quarter 

of the estimated deliverable supply for 

a spot-month class of contracts. This 

proposed formula is consistent with 

current regulation 150.5(b) and the 

Acceptable Practices for Core Principle 

5, in Appendix B to part 38, and the 

Commission’s Guideline No. 1, in 

Appendix A to part 40. Proposed 

regulation 151.2(d) would require a 

reporting market listing physicallydelivered contracts to submit to the 

Commission an estimate of deliverable 

supply for its contracts by December 

31st of each calendar year. The 

Commission, in setting the spot-month 

limits, would take into consideration 

the estimates of deliverable supply 

provided by the reporting markets and 

would base its own determination of 

deliverable supply on data submitted by 

the reporting markets unless the 

Commission has a basis for questioning 

the accuracy of the submitted data, in 

which case the Commission would 

derive its own estimates of deliverable 

supply. 

For cash-settled contracts based on 

the prices of physically-delivered 

futures contracts, the proposed 

regulations would establish a default 

spot-month position limit equal to that 

of the cash-settled contract’s physicallydelivered counterpart. The proposed 

regulations would allow a trader to 

acquire or hold positions in a spotmonth class of contracts, pursuant to 

reporting market rules specifically 

implemented to address such positions, 

that is five times greater than the default 

spot-month limit upon satisfying certain 

conditions. A trader would be permitted 

to hold positions under this conditionalspot-month limit only if that trader does 

not hold a position in any physicallydelivered referenced energy contract to 

which its cash-settled positions are 

linked in the spot month and satisfies 

the reporting requirements of proposed 

regulation 20.00. 

Proposed regulation 20.00 sets forth 

reporting requirements for persons that 

would acquire positions in a referenced 

energy contract pursuant to the 

conditional-spot-month position limit of 

proposed regulation 151.2(a)(2). 

Specifically, this regulation would 

require such persons to file a completed 

CFTC Form 40 and Part A of new CFTC 

Form 404. CFTC Form 40, among other 

things, facilitates the Commission’s 

identification of the persons controlling 

the trading of an account. Part A of new 

CFTC Form 404 would collect 

information on: A trader’s spot and 

forward positions priced in relation to 

the relevant referenced energy contract 

or the contract’s underlying commodity; 

the trader’s spot and forward positions 

in contracts priced to a cash market 

index that includes quotations or prices 

for spot or forward contracts in the 

referenced energy contract’s underlying 

commodity; the trader’s positions in 

swaps priced in relation to the 

referenced energy contract or the 

contract’s underlying commodity; and 

the trader’s positions in other physically 

or financially settled contracts related to 

the trader’s positions held pursuant to 

the conditional-spot-month position 

limit. The 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 energy contracts and 

their underlying commodities during 

the spot-month. 

G. Exemptions and Related 

Requirements 

1. Bona Fide Hedges 

Proposed regulation 151.3(a) would 

establish three exemptions for the 

following transactions and positions: (i) 

Bona fide hedging transactions generally 

consistent with paragraphs (1) and (2) of 

regulation 1.3(z); (ii) swap dealer risk 

management transactions outside of the 

spot-month that are held to offset risks 

associated with certain swap 

agreements; and (iii) positions that 

would be in compliance with the 

speculative position limits when 

adjusted by an appropriate 

contemporaneous risk factor. 

As proposed, a reporting market may 

establish an exemption process for 

traders holding positions in proprietary 

accounts that are shown to be bona fide 

hedging positions consistent with, but 

that may differ from (to the extent such 

differences are consistent with 

commercial activity in the physical 

energy markets), paragraphs (1) and (2) 

of regulation 1.3(z). As is currently the 

case for traders seeking exemptions 

from exchange-set spot-month position 

limits applicable to the referenced 

energy contracts, the Commission 

intends for traders seeking such bona 

fide hedging transactions to apply to a 

reporting market for exemptions from 

the applicable spot and non-spot-month 

limits. The Commission would audit 

this process to ensure that the reporting 

markets act appropriately in reviewing 

and acting on trader bona fide hedge 

exemption requests. In this manner, the 

Commission would also enable a 

reporting market to act expeditiously on 

exemption requests. 

Under the proposed regulations, 

traders holding positions pursuant to a 

bona fide hedge exemption would 

generally be prohibited from also 

trading speculatively. If bona fide 

hedging positions outside the spot 

month exceed twice an otherwise 

applicable all-months-combined or 

single-month position limit, then such 

traders would also be prohibited from 

holding positions as swap dealers. In 

contrast, however, traders holding 

positions in the spot-month pursuant to 

a bona fide hedge exemption would not 

be prohibited from holding positions 

speculatively outside the spot month. 

The intent of this proposed exception is 

to not affect liquidity generated by 

speculative trading outside the spot 

month that would otherwise be 

prohibited by virtue of a trader’s need 

to invoke a hedge exemption to exceed 

the lower spot-month position limits. 

These ‘‘crowding out’’ provisions 

would restrict a trader controlling large 

positions used for hedging from also 

entering into large speculative positions 

or large swap dealer risk management 

positions. The proposed regulations 

would not impede a trader’s ability to 

engage in bona fide hedging in any way, 

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4160 Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules 

79 17 CFR 35.1(b)(1). 80See 7 U.S.C. 12(a)(1). 

but would limit a trader’s ability to 

acquire swap dealer risk management 

positions or speculative positions when 

that trader holds very large positions 

pursuant to a bona fide hedge 

exemption. 

Proposed regulation 20.01 sets forth 

reporting requirements for persons that 

would acquire positions pursuant to the 

bona fide hedge exemption of proposed 

regulation 151.3(a)(1). Specifically, this 

section would require such persons to 

file a completed CFTC Form 40 and Part 

B of new CFTC Form 404. Part B of 

CFTC Form 404 would collect 

information on: The quantity of stocks 

owned of the commodity that underlies 

the relevant referenced energy contract 

and its products and by-products; the 

ownership of shares of an investment 

vehicle that holds or owns the 

referenced energy contract or the 

commodity that underlies the 

referenced energy contract and its 

products and by-products; the quantity 

of fixed price purchase and sale 

commitments on the relevant referenced 

energy contract’s commodity; and, for 

anticipatory hedging transactions, 

annual sales or requirements for the 

preceding three complete fiscal years 

and anticipated sales or requirements of 

such commodity for the period hedged. 

For cross-hedge positions, traders would 

be required to report the relevant 

commercial activity in terms of the 

actual or anticipated quantity of the 

cross-hedged commodity, and on a 

converted basis, equivalent positions in 

the relevant referenced energy contract. 

The Commission notes that this 

proposed data collection is consistent 

with data currently collected in grain 

and cotton markets using CFTC Forms 

204 and 304, respectively, pursuant to 

part 19 of the Commission’s regulations. 

2. Swap Dealers 

Swap dealers can perform an 

important economic function by taking 

on risks to accommodate the specific 

hedging and risk management needs of 

various customers. Swap dealers often 

are able to aggregate and standardize 

these otherwise particularized risks, and 

in turn, enter into commodity futures 

and option contracts to manage them. 

Accordingly, under the regulations as 

proposed, swap dealers may apply to 

the Commission for an exemption from 

the proposed speculative position limits 

for positions held outside of the spot 

month to manage the risks associated 

with swap agreements entered into to 

accommodate swap customers. 

Proposed regulation 151.1 would define 

‘‘swap agreement’’ to have the same 

meaning as in current Commission 

regulation 35.1(b)(1).79 Proposed 

regulation 151.1 would also define 

‘‘swap dealer’’ to mean ‘‘any person who, 

as a significant part of its business, 

holds itself out as a dealer in swaps, 

makes a market in swaps, regularly 

engages in the purchase of swaps and 

their resale to customers in the ordinary 

course of a business, or engages in any 

activity causing the person to be 

commonly known in the trade as a 

dealer or market maker in swaps.’’ 

The proposed swap dealer exemption 

would be limited to twice an applicable 

all-months-combined or single non-spot 

month speculative position limit. 

Further, traders would be required to 

aggregate positions held as swap dealer 

risk management transactions with net 

speculative positions for the purpose of 

determining compliance with the 

proposed Federal speculative position 

limits. As with bona fide hedgers that 

hold positions in excess of the proposed 

limits, swap dealers holding large 

positions pursuant to the proposed 

swap dealer exemption would be unable 

to also take on positions as speculators. 

In effect, this proposed ‘‘crowding out’’ 

provision would restrict a trader 

controlling a large position used for 

swap risk management from also 

entering into large speculative positions. 

Proposed regulation 1.45 sets forth the 

application procedure for swap dealers 

that would seek an exemption from the 

proposed Commission-set speculative 

position limits. Specifically, this 

regulation would require a person to file 

a completed CFTC Form 40, an initial 

application and an annual update to 

certify that the person remains a swap 

dealer, as defined in proposed 

regulation 151.1. The exemption would 

require the applicant to consent to the 

publication of the fact that such person 

received a swap dealer exemption from 

the Commission. Such publication 

would be made only once a year and 

would not include the identity of a 

swap dealer that first received an 

exemption within the six calendar 

months preceding a publication. 

Furthermore, the publication would not 

include any information that would 

disclose the specific commodities for 

which the swap dealer has sought an 

exemption. In this regard, the 

Commission reiterates that it will 

protect all proprietary information in 

accordance with the Freedom of 

Information Act and part 145 of the 

Commission’s regulations, 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 otherwise 

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.’’ 80

Proposed regulation 20.02 sets forth 

reporting requirements for persons who 

would receive a swap dealer limited risk 

management exemption pursuant to 

proposed regulation 151.3(a)(2). 

Specifically, the proposed regulation 

would require swap dealers to file 

monthly a completed Form 404 Part C 

with the Commission and with any 

registered entity on which the swap 

dealer’s referenced energy contract 

positions are listed. The monthly report 

would include, for each day, swap 

positions based upon the commodity 

underlying the referenced energy 

contracts that are held in proprietary 

and customer accounts and a summary 

of dealing and trading activity in swaps 

based upon the commodity underlying 

the referenced energy contracts. 

Furthermore, proposed regulation 20.02 

would require the swap dealer to file a 

supplemental report whenever it 

establishes a larger position in 

referenced energy contracts than 

previously reported. In addition to the 

above reporting requirements, traders 

that receive a swap dealer limited risk 

management exemption must also 

maintain complete books and records 

relating to their swap dealing activities 

(including transaction data) and make 

such books and records, along with a 

list of counterparties to customer swap 

agreements that support and 

substantiate the need to offset swap 

agreement risks on reporting markets, 

available to the Commission upon 

request. 

3. Exemptions for Delta-Adjusted 

Positions 

The Commission understands that 

option risk factors continuously change 

with movements in the price of an 

underlying futures contract. As the price 

of the underlying futures contract 

changes, a trader offsetting the risk of an 

options position through a delta-neutral 

position in the underlying futures 

contract may need to adjust the futures 

position substantially on an intra-day 

basis to maintain a risk neutral position. 

As currently defined in regulation 

150.1, delta-neutrality is recognized by 

reference to the previous day’s risk 

factor. Proposed regulations 151.3 and 

20.03 would set forth the exemption and 

reporting requirements for persons 

whose positions would have exceeded 

the Federal speculative position limit 

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Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules 4161 

81See, ‘‘Excessive Speculation and Position 

Limits in Energy Derivatives Markets,’’ CME Group, 

at page 10, http://www.cmegroup.com/company/

files/PositionLimitsWhitePaper.pdf. 

82The concept paper did not specify a method to 

determine when a contract month had developed 

liquidity. 

for a referenced energy contract when 

adjusted by the previous day’s risk 

factors (deltas), but that would not 

exceed such a limit when positions are 

calculated using an appropriate 

contemporaneous risk factor. The 

reporting requirements, as proposed, 

would include the submission of 

complete position data to demonstrate 

that such positions remained within an 

otherwise applicable speculative 

position limit when adjusted by an 

appropriate and contemporaneous risk 

factor. 

H. Account Aggregation 

Proposed regulation 151.4 would 

establish account aggregation standards 

specifically for positions in referenced 

energy contracts. Under the proposed 

standards, the Federal position limits in 

referenced energy contracts would 

apply to all positions in accounts in 

which any person, directly or indirectly, 

has an ownership or equity interest of 

10% or greater or, by power of attorney 

or otherwise, controls trading. Proposed 

regulation 151.4 includes a limited 

exemption for positions in pools in 

which a trader that is a limited partner, 

shareholder or similar person has an 

ownership or equity interest of less than 

25% unless the trader in fact controls 

trading that is done by the pool. 

Proposed regulation 151.4 would also 

treat positions held by two or more 

persons acting pursuant to an express or 

implied agreement or understanding the 

same as if the positions were held by, 

or the trading of the positions were done 

by, a single person. Accordingly, the 

proposed regulations would aggregate 

positions in accounts at both the 

account owner and controller levels. 

In contrast to the disaggregation 

exemptions of current regulations 

150.3(a)(4) and 150.4, eligible entities 

(such as mutual funds, commodity pool 

operators and commodity trading 

advisors) and futures commission 

merchants will not be permitted to 

disaggregate positions pursuant to the 

independent account controller 

framework established in part 150 of the 

Commission’s regulations. The current 

account disaggregation exceptions for 

the agricultural contracts enumerated in 

regulation 150.2, may be incompatible 

with the proposed Federal speculative 

position limit framework, however, and 

used to circumvent its requirements. 

The proposed framework sets high 

position levels that are at the outer 

bounds of the largest positions held by 

market participants, permits for the 

netting of positions across reporting 

markets and within contracts of the 

same class and in addition, includes a 

conditional-spot-month limit for cashsettled contracts and exemptions for 

bona fide hedgers, swap dealers and 

delta-adjusted positions. Accordingly, 

an exemption, such as the eligible entity 

exemption, that would allow traders to 

establish a series of positions each near 

a proposed outer bound position limit, 

without aggregation, may not be 

appropriate. Instead, proposed 

regulation 151.4 would establish a clear 

general account aggregation standard 

and a clear exception thereto for passive 

pool participants and similar investors. 

VII. The CME Group’s Proposal 

In a concept paper published in 

September of 2009, the CME Group 

suggested an alternative position limit 

framework that would require each 

reporting market to set position limits 

separately without inter-exchange 

aggregation.81 The single-month and allmonths-combined limits, under the 

CME’s proposal, would apply 

collectively to physically-delivered 

contracts and cash-settled contracts on a 

referenced energy commodity, including 

spread positions within the same 

contract. The level of the limits would 

be based on the collective open interest 

of the lead month (i.e., the month with 

the highest level of open interest) in 

such contracts at that reporting market. 

The CME Group also suggested that 

each reporting market set a singlemonth limit at 10% of the first 25,000 

contracts of that reporting market’s open 

interest with a 5% marginal increase for 

open interest in excess of 25,000 

contracts at that reporting market. The 

CME Group suggested that the allmonths-combined limit be set at 150% 

of the single-month limit and suggested 

establishing a flexible concentration 

limit in deferred-month contracts. 

Under the CME’s proposed approach, a 

suggested concentration limit of 25% of 

open interest would be applicable in a 

single month that has developed 

liquidity.82

With respect to applying aggregate 

limits, the CME Group suggested that 

the CFTC establish and enforce an 

aggregate limit across all reporting 

markets, conditioned on the CFTC 

gaining authority to impose limits on 

OTC trading and on the CFTC 

developing a means to minimize the 

impact of potential transfers of trading 

to foreign jurisdictions or the physical 

markets. With respect to the aggregation 

of positions, the CME Group proposed 

that the aggregation standards of 

Commission regulation 150.4 apply to 

the aggregate limits. 

By way of comparison, the 

Commission’s proposed limits would 

apply aggregately across all exchanges 

that list a referenced energy contract 

and separately to physically-delivered 

contracts and cash-settled contracts that 

are listed by a particular reporting 

market. The Commission’s proposed 

class-based limits would prevent the 

establishment of excessively large 

positions in a single class and, thereby, 

would reduce the potential for price 

distortions. 

Also, by way of contrast to the CME 

Group’s approach, the level of limits 

proposed by the Commission would be 

based on the sum of the open interest in 

all months, rather than only the lead 

month’s open interest as proposed by 

the CME. By using the entire open 

interest, the Commission’s proposal 

would avoid creating an incentive for 

traders to shift open interest into the 

lead month in an attempt to increase the 

level of the limits. Furthermore, rather 

than considering only a reporting 

market’s open interest, the 

Commission’s proposal would establish 

limit levels that reflect both aggregated 

open interest on all reporting markets 

and open interest on an individual 

reporting market. This tiered approach 

would provide an opportunity for small 

markets to grow, while establishing a 

prudential all-months limit for a class of 

contracts of no more than 30% of a 

reporting market’s open interest in a 

class of contracts as defined in proposed 

regulation 151.1. The class limit, as 

proposed by the Commission, would be 

capped at a formula-determined level 

based on the open interest in all 

reporting markets in a referenced energy 

contract. The 30% level was selected in 

light of the expected opportunity for 

arbitrage across classes and the cap was 

set using the traditional all-months 

position limit formula in regulation 

150.5(c)(2). 

As discussed previously, the 

Commission’s proposal first establishes 

an all-months-combined limit, then sets 

a single-month limit at two-thirds of the 

level of that all-months-combined limit. 

This is the same ratio between limits if 

first established in a single-month limit, 

as proposed by the CME, and then 

multiplied by 150% to arrive at an allmonths-combined position limit. This 

two-thirds ratio, as proposed by the 

Commission, is therefore the same ratio 

that is proposed by the CME Group and 

consistent with the ratio between the 

single-month limits and the all-monthcombined limits in the existing Federal 

agricultural positions limits which 

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range from a low of 61% to a high of 

77%. The table below provides a 

comparison of position limits as they 

would be set under the proposed 

Commission and CME Group 

approaches to establishing speculative 

position limits: 

PROPOSED FEDERAL SPECULATIVE POSITION LIMITS FOR REFERENCED ENERGY CONTRACTS

Referenced energy contract Class of contract 

All-months-combined (AMC) 

average open 

interest (January 

2008–December 

2008) 

AMC limit Single-month 

limit 

NYMEX Light Sweet Crude Oil ................ NYMEX Physical Delivery ........................ 2,881,901 98,100 65,400 

NYMEX Cash-Settled ............................... 963,871 98,100 65,400 

Aggregate Limit ........................................ 3,845,772 98,100 65,400 

NYMEX New York Harbor Gasoline 

Blendstock (RBOB).

NYMEX Physical Delivery ........................ 252,564 9,000 6,000 

NYMEX Cash-Settled ............................... 29,306 8,800 5,900 

Aggregate Limit ........................................ 281,870 9,000 6,000 

NYMEX New York Harbor No. 2 Heating 

Oil.

NYMEX Physical Delivery ........................ 254,442 10,100 6,800 

NYMEX Cash-Settled ............................... 73,996 10,100 6,800 

Aggregate Limit ........................................ 328,438 10,100 6,800 

NYMEX Henry Hub Natural Gas .............. NYMEX Physical Delivery ........................ 1,236,257 132,700 88,500 

NYMEX Cash-Settled ............................... 3,088,239 132,700 88,500 

ICE Cash-Settled ...................................... 904,754 132,700 88,500 

Aggregate Limit ........................................ 5,229,250 132,700 88,500 

PROPOSED ENERGY SPECULATIVE LIMITS BY CME GROUP

Reference energy contract Exchange 

Average lead 

month open 

interest 

January 2008– 

December 2008) 

All-monthscombined limit Single-month 

limit 

NYMEX Light Sweet Crude Oil ................ NYMEX ..................................................... 841,607 65,000 43,400 

NYMEX New York Harbor Gasoline 

Blendstock (RBOB).

NYMEX ..................................................... 107,439 10,000 6,700 

NYMEX New York Harbor No. 2 Heating 

Oil.

NYMEX ..................................................... 98,977 9,300 6,200 

NYMEX Henry Hub Natural Gas .............. NYMEX ..................................................... 505,220 39,800 26,600 

ICE ............................................................ 124,860 11,300 7,500 

VIII. Request for Comment 

The Commission requests comment 

on all aspects of this proposal, and 

particularly requests comments on the 

following issues and responses to the 

following questions: 

1. Are Federal speculative position 

limits for energy contracts traded on 

reporting markets necessary to 

‘‘diminish, eliminate, or prevent’’ the 

burdens on interstate commerce that 

may result from position concentrations 

in such contracts? 

2. Are there methods other than 

Federal speculative position limits that 

should be utilized to diminish, 

eliminate, or prevent such burdens? 

3. How should the Commission 

evaluate the potential effect of Federal 

speculative position limits on the 

liquidity, market efficiency and price 

discovery capabilities of referenced 

energy contracts in determining whether 

to establish position limits for such 

contracts? 

4. Under the class approach to 

grouping contracts as discussed herein, 

how should contracts that do not cash 

settle to the price of a single contract, 

but settle to the average price of a subgroup of contracts within a class be 

treated during the spot month for the 

purposes of enforcing the proposed 

speculative position limits? 

5. Under proposed regulation 

151.2(b)(1)(i), the Commission would 

establish an all-months-combined 

aggregate position limit equal to 10% of 

the average combined futures and 

option contract open interest aggregated 

across all reporting markets for the most 

recent calendar year up to 25,000 

contracts, with a marginal increase of 

2.5% of open interest thereafter. As an 

alternative to this approach to an allmonths-combined aggregate position 

limit, the Commission requests 

comment on whether an additional 

increment with a marginal increase 

larger than 2.5% would be adequate to 

prevent excessive speculation in the 

referenced energy contracts. An 

additional increment would permit 

traders to hold larger positions relative 

to total open positions in the referenced 

energy contracts, in comparison to the 

proposed formula. For example, the 

Commission could fix the all-monthscombined aggregate position limit at 

10% of the prior year’s average open 

interest up to 25,000 contracts, with a 

marginal increase of 5% up to 300,000 

contracts and a marginal increase of 

2.5% thereafter. Assuming the prior 

year’s average open interest equaled 

300,000 contracts, an all-monthscombined aggregate position limit 

would be fixed at 9,400 contracts under 

the proposed rule and 16,300 contracts 

under the alternative. 

6. Should customary position sizes 

held by speculative traders be a factor 

in moderating the limit levels proposed 

by the Commission? In this connection, 

the Commission notes that current 

regulation 150.5(c) states contract 

markets may adjust their speculative 

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83See, e.g., the Over-the-Counter Derivatives 

Markets Act of 2009 (OCDMA), H.R. 3795, 111th 

Congress, 1st Session (2009). OCDMA would also 

abolish the DTEF, ECM and ECM–SPDC market 

categories. 

limit levels ‘‘based on position sizes 

customarily held by speculative traders 

on the contract market, which shall not 

be extraordinarily large relative to total 

open positions in the contract * * *’’ 

7. Reporting markets that list 

referenced energy contracts, as defined 

by the proposed regulations, would 

continue to be responsible for 

maintaining their own position limits 

(so long as they are not higher than the 

limits fixed by the Commission) or 

position accountability rules. The 

Commission seeks comment on whether 

it should issue acceptable practices that 

adopt formal guidelines and procedures 

for implementing position 

accountability rules. 

8. Proposed regulation 151.3(a)(2) 

would establish a swap dealer risk 

management exemption whereby swap 

dealers would be granted a position 

limit exemption for positions that are 

held to offset risks associated with 

customer initiated swap agreements that 

are linked to a referenced energy 

contract but that do not qualify as bona 

fide hedge positions. The swap dealer 

risk management exemption would be 

capped at twice the size of any 

otherwise applicable all-monthscombined or single non-spot-month 

position limit. The Commission seeks 

comment on any alternatives to this 

proposed approach. The Commission 

seeks particular comment on the 

feasibility of a ‘‘look-through’’ 

exemption for swap dealers such that 

dealers would receive exemptions for 

positions offsetting risks resulting from 

swap agreements opposite 

counterparties who would have been 

entitled to a hedge exemption if they 

had hedged their exposure directly in 

the futures markets. How viable is such 

an approach given the Commission’s 

lack of regulatory authority over the 

OTC swap markets? 

9. Proposed regulation 20.02 would 

require swap dealers to file with the 

Commission certain information in 

connection with their risk management 

exemptions to ensure that the 

Commission can adequately assess their 

need for an exemption. The Commission 

invites comment on whether these 

requirements are sufficient. In the 

alternative, should the Commission 

limit these filing requirements, and 

instead rely upon its regulation 18.05 

special call authority to assess the merit 

of swap dealer risk management 

exemption requests? 

10. The Commission’s proposed part 

151 regulations for referenced energy 

contracts would set forth a 

comprehensive regime of position limit, 

exemption and aggregation 

requirements that would operate 

separately from the current position 

limit, exemption and aggregation 

requirements for agricultural contracts 

set forth in part 150 of the Commission’s 

regulations. While proposed part 151 

borrows many features of part 150, there 

are notable distinctions between the 

two, including their methods of position 

limit calculation and treatment of 

positions held by swap dealers. The 

Commission seeks comment on what, if 

any, of the distinctive features of the 

position limit framework proposed 

herein, such as aggregate position limits 

and the swap dealer limited risk 

management exemption, should be 

applied to the agricultural commodities 

listed in part 150 of the Commission’s 

regulations. 

11. The Commission is considering 

establishing speculative position limits 

for contracts based on other physical 

commodities with finite supply such as 

precious metal and soft agricultural 

commodity contracts. The Commission 

invites comment on which aspects of 

the current speculative position limit 

framework for the agricultural 

commodity contracts and the framework 

proposed herein for the major energy 

commodity contracts (such as proposed 

position limits based on a percentage of 

open interest and the proposed 

exemptions from the speculative 

position limits) are most relevant to 

contracts based on other physical 

commodities with finite supply such as 

precious metal and soft agricultural 

commodity contracts. 

12. As discussed previously, the 

Commission has followed a policy since 

2008 of conditioning FBOT no-action 

relief on the requirement that FBOTs 

with contracts that link to CFTCregulated contracts have position limits 

that are comparable to the position 

limits applicable to CFTC-regulated 

contracts. If the Commission adopts the 

proposed rulemaking, should it 

continue, or modify in any way, this 

policy to address FBOT contracts that 

would be linked to any referenced 

energy contract as defined by the 

proposed regulations? 

13. The Commission notes that 

Congress is currently considering 

legislation that would revise the 

Commission’s section 4a(a) position 

limit authority to extend beyond 

positions in reporting market contracts 

to reach positions in OTC derivative 

instruments and FBOT contracts. Under 

some of these revisions, the Commission 

would be authorized to set limits for 

positions held in OTC derivative 

instruments and FBOT contracts.83 The 

Commission seeks comment on how it 

should take this pending legislation into 

account in proposing Federal 

speculative position limits. 

14. Under proposed regulation 151.2, 

the Commission would set spot-month 

and all-months-combined position 

limits annually. 

a. Should spot-month position limits 

be set on a more frequent basis given the 

potential for disruptions in deliverable 

supplies for referenced energy 

contracts? 

b. Should the Commission establish, 

by using a rolling-average of open 

interest instead of a simple average for 

example, all-months-combined position 

limits on a more frequent basis? If so, 

what reasons would support such 

action? 

15. Concerns have been raised about 

the impact of large, passive, and 

unleveraged long-only positions on the 

futures markets. Instead of using the 

futures markets for risk transference, 

traders that own such positions treat 

commodity futures contracts as distinct 

assets that can be held for an 

appreciable duration. This notice of 

rulemaking does not propose 

regulations that would categorize such 

positions for the purpose of applying 

different regulatory standards. Rather, 

the owners of such positions are treated 

as other investors that would be subject 

to the proposed speculative position 

limits. 

a. Should the Commission propose 

regulations to limit the positions of 

passive long traders? 

b. If so, what criteria should the 

Commission employ to identify and 

define such traders and positions? 

c. Assuming that passive long traders 

can properly be identified and defined, 

how and to what extent should the 

Commission limit their participation in 

the futures markets? 

d. If passive long positions should be 

limited in the aggregate, would it be 

feasible for the Commission to 

apportion market space amongst various 

traders that wish to establish passive 

long positions? 

e. What unintended consequences are 

likely to result from the Commission’s 

implementation of passive long position 

limits? 

16. The proposed definition of 

referenced energy contract, diversified 

commodity index, and contracts of the 

same class are intended to be simple 

definitions that readily identify the 

affected contracts through an objective 

and administerial process without 

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relying on the Commission’s exercise of 

discretion. 

a. Is the proposed definition of 

contracts of the same class for spot and 

non-spot months sufficiently inclusive? 

b. Is it appropriate to define contracts 

of the same class during spot months to 

only include contracts that expire on the 

same day? 

c. Should diversified commodity 

indexes be defined with greater 

particularity? 

17. Under the proposed regulations, a 

swap dealer seeking a risk management 

exemption would apply directly to the 

Commission for the exemption. Should 

such exemptions be processed by the 

reporting markets as would be the case 

with bona fide hedge exemptions under 

the proposed regulations? 

18. In implementing initial spotmonth speculative position limits, if the 

notice of proposed rulemaking is 

finalized, should the Commission: 

a. Issue special calls for information 

to the reporting markets to assess the 

size of a contract’s deliverable supply; 

b. Use the levels that are currently 

used by the exchanges; or 

c. Undertake an independent 

calculation of deliverable supply 

without substantial reliance on 

exchange estimates? 

IX. Related Matters 

A. Cost Benefit Analysis 

Section 15(a) of the Act requires the 

Commission to consider the costs and 

benefits of its actions before issuing new 

regulations under the Act. Section 15(a) 

does not require the Commission to 

quantify the costs and benefits of new 

regulations or to determine whether the 

benefits of adopted regulations 

outweigh their costs. Rather, section 

15(a) requires the Commission to 

consider the cost and benefits of the 

subject regulations. Section 15(a) further 

specifies that the costs and benefits of 

new regulations 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 the market for 

listed derivatives; (3) price discovery; 

(4) sound risk management practices; 

and (5) other public interest 

considerations. The Commission may, 

in its discretion, give greater weight to 

any one of the five enumerated areas of 

concern and may, in its discretion, 

determine that, notwithstanding its 

costs, a particular regulation is 

necessary or appropriate to protect the 

public interest or to effectuate any of the 

provisions or to accomplish any of the 

purposes of the Act. 

The proposed regulatory framework 

for positions in the referenced energy 

contracts, as defined by the proposed 

regulations, would impose certain 

compliance costs on Commissionregulated exchanges and traders that 

hold large positions in the referenced 

energy contracts. In addition to the 

compliance costs that are directly 

related to the proposed regulations, the 

proposed position limits and their 

concomitant limitation on trading 

activity could impose certain general 

but significant costs. The proposed 

position limits could cause unintended 

consequences by decreasing liquidity in 

the markets for the referenced energy 

contracts, impairing the price discovery 

process in these markets, and pushing 

large positions to trading venues over 

which the Commission has no direct 

regulatory authority. 

Based on data received by the 

Commission’s large trader reporting 

system, the Commission believes the 

proposed position limits would 

accommodate the normal course of 

speculative positions in markets for the 

referenced energy contracts. 

Commission data indicates that possibly 

ten traders, including traders that hold 

positions pursuant to exchangeapproved bona fide hedge exemptions, 

could be affected by the proposed 

limits. For the reasons discussed below, 

the Commission anticipates that the 

compliance costs associated with the 

proposed limits and their impact on the 

efficiency of the markets for the 

referenced energy contracts would be 

minimal. 

The proposed spot-month position 

limits, although applicable to a class of 

contracts and across reporting markets, 

are consistent with current exchange-set 

spot-month position limits that have 

been implemented and enforced by 

NYMEX and ICE pursuant to DCM and 

ECM–SPDC core principles and 

Commission guidance. In addition, both 

NYMEX and ICE implement position 

accountability rules for positions 

outside the spot month and routinely 

monitor and solicit reports from large 

traders. The affected exchanges and 

large traders therefore are accustomed to 

an existing compliance system for large 

positions and the processing of hedge 

and spread exemptions from exchangeset spot-month position limits. In 

addition, a significant portion of the 

affected traders are currently subject to 

the Commission’s large trader reporting 

system and should have compliance 

systems in place to accommodate any 

new potential regulatory requirements. 

For these reasons, the compliance costs 

associated with the proposed limits 

should be minimal. 

Section 4a(a) has identified excessive 

speculation that causes unwarranted 

fluctuations in the price of a commodity 

as an undue burden on commerce. 

Accordingly section 4a(a) of the Act 

gives the Commission the ability to 

establish a position limit framework as 

a prophylactic measure against sudden 

or unreasonable price fluctuations or 

unwarranted price changes in 

accordance with the purposes and 

findings of the Act. The Congressional 

endorsement of the Commission’s 

prophylactic use of speculative position 

limits extends to any commodity and 

does not require a specific finding of an 

extant undue burden on interstate 

commerce. 

A primary intent of the proposed 

position limit framework is to prevent a 

single trader or several traders from 

acquiring large or concentrated 

positions that may cause unwarranted, 

sudden or unreasonable fluctuations in 

the price of energy commodities. The 

Commission is concerned that 

concentrated positions at or near the 

proposed limits may directly lead to 

market disruptions causing 

unwarranted, sudden or unreasonable 

fluctuations in the price of energy 

commodities. 

Another concern regarding the 

existence of large speculative positions 

is the possibility for disruption across 

markets or trading platforms listing 

similar or linked products. Because 

individual markets have knowledge of 

positions only on their own trading 

platforms, it is difficult for them to 

assess the full impact of a trader’s 

activities. In recognition of this, the 

proposed framework also would apply 

to trading done in linked and 

economically similar contracts across 

markets. The Commission notes that it 

has the unique capacity for monitoring 

trading and implementing remedial 

measures across interconnected futures 

and option markets in the referenced 

energy contracts. The position limits, as 

proposed, are purposefully set at the 

outer bounds of the levels that 

speculators are likely to acquire in order 

to avoid disrupting or interfering with 

beneficial trading activity. Still, the 

proposed regulations are intended to 

fully achieve the prophylactic purpose 

of section 4a(a) of the Act. 

B. The Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA), 

5 U.S.C. 601 et seq., requires that 

agencies consider the impact of their 

regulations on small businesses. The 

requirements related to the proposed 

amendments fall mainly on registered 

entities, exchanges, futures commission 

merchants, clearing members, foreign 

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84 47 FR 18618 (April 30, 1982). 

85 7 U.S.C. 12(a)(1). 

brokers, and large traders. The 

Commission has previously determined 

that exchanges, futures commission 

merchants and large traders are not 

‘‘small entities’’ for the purposes of the 

RFA.84 Similarly, clearing members, 

foreign brokers and traders would be 

subject to the proposed regulations only 

if carrying or holding large positions. 

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. 

C. Paperwork Reduction Act 

Certain provisions of the proposed 

regulations would result in new 

collection of information requirements 

within the meaning of the Paperwork 

Reduction Act of 1995 (‘‘PRA’’). The 

Commission therefore is submitting this 

proposal to the Office of Management 

and Budget (‘‘OMB’’), along with 

proposed new CFTC Form 404, for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11. 

The title for this proposed collection 

of information is ‘‘Regulation 1.45 and 

Parts 20 and 151—Position Limit 

Framework For Referenced Energy 

Contracts’’ (OMB control number 3038– 

NEW). 

If adopted, responses to this 

collection of information would be 

mandatory. 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.’’ 85

Under the proposed regulations, 

reporting markets listing, and market 

participants trading, the referenced 

energy contracts would be subject to the 

position limit framework established by 

proposed part 151 and the application 

and reporting requirements of proposed 

regulation 1.45 and part 20. Proposed 

regulation 1.45 sets forth the application 

procedure for swap dealers that would 

seek an exemption from the proposed 

Commission-set Federal speculative 

position limits for referenced energy 

contracts. Proposed part 20 would 

require similar reports from persons 

holding large positions under the 

proposed conditional-spot-month 

position limit, as bona fide hedgers, as 

swap dealers, and as traders with 

certain delta-adjusted positions. The 

Commission estimates that affected 

traders, as a result of their diversified 

business structure, would be subject to 

most or all of the requirements and 

exemptions of proposed regulation 1.45 

and parts 20 and 151. 

Should the proposed regulations be 

adopted, the total number of traders that 

would be subject to the regulations is 

estimated at 10, with each providing an 

estimated 20 reports to the Commission 

at an estimated compliance time of four 

hours per response. Accordingly, the 

Commission estimates the aggregate 

annual burden that would be imposed 

by the regulations, as proposed, to be 

800 hours. The Commission specifically 

notes that the estimated annual burden 

provided on the affected exchanges and 

traders is in addition to, and does not 

include, costs incurred from compliance 

with other regulatory and operational 

requirements. The Commission invites 

the public and other Federal agencies to 

comment on any aspect of the reporting 

and recordkeeping burdens discussed 

above. 

Pursuant to 44 U.S.C. 3506(c)(2)(B), 

the Commission solicits comments in 

order to: (i) Evaluate whether the 

proposed collections of information are 

necessary for the proper performance of 

the functions of the Commission, 

including whether the information will 

have practical utility; (ii) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed 

collections of information; (iii) 

determine whether there are ways to 

enhance the quality, utility, and clarity 

of the information to be collected; and 

(iv) minimize the burden of the 

collections of information on those who 

are to respond, including through the 

use of automated collection techniques 

or other forms of information 

technology. 

You may submit your comments 

directly to the Office of Information and 

Regulatory Affairs, by fax at (202) 395– 

6566 or by e-mail at OIRAsubmissions@omb.eop.gov. Please 

provide the Commission with a copy of 

your comments so that we can 

summarize all written comments and 

address them in any subsequent notice 

of rulemaking. Refer to the Addresses 

section of this notice for comment 

submission instructions to the 

Commission. You may obtain a copy of 

the supporting statements for the 

collection of information discussed 

above by visiting RegInfo.gov. OMB is 

required to make a decision concerning 

the collection of information between 30 

to 60 days after publication of this 

notice. 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. 

List of Subjects 

17 CFR Part 1 

Brokers, Commodity futures, 

Consumer protection, Reporting and 

recordkeeping requirements. 

17 CFR Part 20 

Commodity futures, Reporting and 

recordkeeping requirements. 

17 CFR Part 151 

Position limits, Bona fide hedge 

positions, Spread exemptions, Energy 

commodities. 

In consideration of the foregoing, 

pursuant to the authority contained in 

the Commodity Exchange Act, the 

Commission hereby proposes to amend 

chapter I of title 17 of the Code of 

Federal Regulations as follows: 

PART 1—GENERAL REGULATIONS 

UNDER THE COMMODITY EXCHANGE 

ACT 

1. The authority citation for part 1 is 

revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6b, 6c, 

6d, 6e, 6f, 6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 

6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 13a, 13a–1, 

16, 16a, 19, 21, 23, and 24, as amended by 

Title XIII of the Food, Conservation and 

Energy Act of 2008, Pub. L. No. 110–246, 122 

Stat. 1624 (June 18, 2008). 

2. Add § 1.45 in part 1 to read as 

follows: 

§ 1.45. Application for a swap dealer 

exemption. 

(a) Persons seeking an exemption 

from the speculative position limits 

established by the Commission for 

referenced energy contracts under 

§ 151.2 of this chapter, pursuant to an 

exemption for swap dealers under 

§ 151.3(a)(2) of this chapter, shall: 

(1) File an initial application for an 

exemption and, thereafter, update such 

application annually, as the 

Commission shall require; 

(2) Provide as part of the application, 

all information required by the 

Commission, including but not limited 

to: 

(i) A completed Form 40 along with 

the information required under § 18.04 

of this chapter; 

(ii) A certification that the person is 

a swap dealer as defined in § 151.1 of 

this chapter; and 

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(iii) Specific consent to having their 

name published on the Commission’s 

Web site (http://www.cftc.gov) as having 

received a swap dealer exemption from 

the speculative position limits; provided 

however, that such list shall be 

published no more than once annually, 

that no publication of the name of a 

swap dealer shall be made earlier than 

six calendar months following the date 

on which the exemption was granted, 

and that such publication shall not 

disclose the related commodities in 

which the person is swap dealer or any 

other information provided by the swap 

dealer to the Commission that would be 

inconsistent with section 8(a)(1) of the 

Act; and 

(3) Comply with the reporting 

requirements of § 20.02 of this chapter. 

(b) Form, manner and time of filing. 

(1) An application under paragraph 

(a) of this section shall be submitted in 

the format and in the manner and 

within the time specified by the 

Commission. 

(2) The Commission hereby delegates, 

until such time as the Commission 

orders otherwise, to the Director of the 

Division of Market Oversight and to 

such members of the Commission’s staff 

acting under the Director’s direction as 

the Director may designate, the 

authority to specify the format, manner 

and time period for applications to be 

submitted under paragraph (a) of this 

section. The Director may submit to the 

Commission for its consideration any 

matter that has been delegated in this 

paragraph. Nothing in this paragraph 

prohibits the Commission, at its 

election, from exercising the authority 

delegated in this paragraph. 

3. Add part 20 to read as follows: 

PART 20—REPORTS IN CONNECTION 

WITH POSITIONS IN REFERENCED 

ENERGY CONTRACTS 

Sec. 

20.00 Conditional-spot-month position 

limit. 

20.01 Bona fide hedging. 

20.02 Reports from swap dealers. 

20.03 Delta-adjusted positions. 

20.04 Form, manner and time of filing. 

Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 

6g, 6i, 6k, 6m, 6n, 7, 7a, 12a, 19 and 21, as 

amended by Title XIII of the Food, 

Conservation and Energy Act of 2008, Public 

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

§ 20.00 Conditional-spot-month position 

limit. 

(a) Information required. All persons 

that acquire positions in a referenced 

energy contract pursuant to the 

conditional-spot-month position limit of 

§ 151.2(a)(2) of this chapter shall submit 

to the Commission a Form 40 and 

provide the information required under 

§ 18.04 of this chapter. 

(b) Additional cash and derivatives 

position data. All persons subject to 

paragraph (a) of this section shall also 

submit the following position data, net 

long or short, on Part A of Form 404: 

(1) The trader’s cash positions in 

contracts priced at a fixed price 

differential (including a zero 

differential) to the referenced energy 

contract or the contract’s underlying 

commodity; 

(2) The trader’s cash positions in 

contracts priced to a cash market index 

that includes quotations or prices for 

spot or forward contracts in the 

referenced energy contract’s underlying 

commodity; 

(3) The trader’s positions in cleared or 

bilateral swap agreements with a fixed 

price differential (including zero) to the 

referenced energy contract or the 

contract’s underlying commodity; and 

(4) Positions in any other physically 

or financially settled contracts that are 

economically related to the trader’s 

positions that are acquired pursuant to 

the conditional-spot-month position 

limit. 

§ 20.01 Bona fide hedging. 

(a) Information required. All persons 

that acquire positions in a referenced 

energy contract pursuant to the bona 

fide hedge exemption of § 151.3(a)(1) of 

this chapter shall submit to the 

Commission a Form 40 and provide the 

information required under § 18.04 of 

this chapter. 

(b) Additional information on cash 

market activities. All persons subject to 

paragraph (a) of this section shall also 

submit the following information on 

Part B of Form 404: 

(1) The quantity of stocks owned of 

the commodity that underlies a 

referenced energy contract and its 

products and by-products; 

(2) The quantity of fixed price 

purchase commitments open in such 

commodity and its products and byproducts; 

(3) The quantity of fixed price sale 

commitments open in such commodity 

and its products and by-products; 

(4) For unsold anticipated commercial 

services or output directly connected to 

producing, transporting, refining, 

merchandising, marketing, or processing 

a commodity underlying a referenced 

energy contract: 

(i) Annual sales of such services or 

output for the three complete fiscal 

years preceding the current fiscal year; 

and 

(ii) Anticipated sales of such services 

or output for the period hedged; and 

(5) For unfilled anticipated 

requirements: 

(i) Annual requirements of such 

commodity for the three complete fiscal 

years preceding the current fiscal year; 

and 

(ii) Anticipated requirements of such 

commodity for the period hedged. 

(6) The shares of an investment 

vehicle, including, but not limited to, 

exchange-traded funds, registered 

investment companies, commodity 

pools and private investment 

companies, that holds or owns a 

referenced energy contract or the 

commodity that underlies a referenced 

energy contract and its products and byproducts. 

(c) Conversion methodology. Persons 

engaged in the hedging of commercial 

activity that does not involve the same 

quantity or commodity as the quantity 

or commodity associated with positions 

in referenced energy contracts shall 

furnish this information both in terms of 

the actual quantity and commodity used 

in the trader’s normal course of business 

and in terms of the referenced energy 

contracts that are sold or purchased. In 

addition, such persons shall explain the 

methodology used for determining the 

ratio of conversion between the actual 

or anticipated cash positions and the 

trader’s positions in referenced energy 

contracts. 

§ 20.02 Reports from swap dealers. 

(a) Initial reports. Persons who have 

received a swap dealer exemption 

pursuant to § 151.3(a)(2) of this chapter 

from the speculative position limits 

established by the Commission for 

referenced energy contracts under 

§ 151.2 of this chapter shall provide on 

Part C of Form 404 to the Commission, 

and to any registered entity on which 

the swap dealer’s referenced energy 

contract positions are listed, a monthly 

report including: 

(1) Swap positions based upon the 

commodity underlying the referenced 

energy contracts separately for 

proprietary and customer accounts on a 

daily basis; and 

(2) A daily summary of dealing and 

trading activity in swaps based upon the 

commodity underlying the referenced 

energy contracts. 

(b) Supplemental reports. Whenever 

the risk management requirements of a 

swap dealer require it to increase its 

positions in referenced energy contracts 

from levels justified by information 

provided in its initial application under 

§ 1.45 of this chapter or the swap 

dealer’s most recent report submitted 

under this section, the swap dealer shall 

file, on the business day following the 

date on which such positions were 

acquired, a supplemental report in 

compliance with the requirements of 

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paragraph (a) of this section that 

supports the increase in position levels. 

(c) Recordkeeping. Traders that 

receive a swap dealer exemption under 

§ 151.3(a)(2) of this chapter shall 

maintain complete books and records 

relating to their swap dealing activities 

(including transactional data) and make 

such books and records, along with a 

list of counterparties to customer swap 

agreements that support and 

substantiate the need to offset swap 

agreement risks on reporting markets, 

available to the Commission upon 

request. 

§ 20.03 Delta-adjusted positions. 

(a) Information required. All persons 

with referenced energy contract 

positions in excess of the position limits 

of § 151.2 of this chapter that acquire 

such positions in reliance on 

§ 151.3(a)(3) of this chapter shall submit 

to the Commission a Form 40 and 

provide the information required under 

§ 18.04 of this chapter. 

(b) Additional information. In 

addition, such persons shall provide the 

following on Part D of Form 404: 

(1) A certification that their positions, 

in whole or in part, are in excess of the 

applicable limits as a result of the 

application of a futures-equivalent 

calculation that adjusts option positions 

by the previous day’s risk factor, or 

delta coefficient; and 

(2) Complete position data that 

demonstrates that the application of a 

contemporaneous risk factor, or delta 

coefficient, renders the trader compliant 

with the position limits of § 151.2 of this 

chapter on an adjusted basis. 

§ 20.04 Form, manner and time of filing. 

Unless otherwise instructed in this 

part or by the Commission or its 

designee, the Forms and information 

required to be filed under this part shall 

be submitted at such time and in a form 

and manner specified by the 

Commission. The Commission hereby 

delegates, until such time as the 

Commission orders otherwise, to the 

Director of the Division of Market 

Oversight and to such members of the 

Commission’s staff acting under the 

Director’s direction as the Director may 

designate, the authority to specify the 

format, manner and time period within 

which the Forms and information 

required to be filed under this part shall 

be submitted to the Commission. The 

Director may submit to the Commission 

for its consideration any matter that has 

been delegated in this paragraph. 

Nothing in this paragraph prohibits the 

Commission, at its election, from 

exercising the authority delegated in 

this paragraph. 

4. Add part 151 to read as follows: 

PART 151—FEDERAL SPECULATIVE 

POSITION LIMITS FOR REFERENCED 

ENERGY CONTRACTS 

Sec. 

151.1 Definitions. 

151.2 Position limits for referenced energy 

contracts. 

151.3 Exemptions for referenced energy 

contracts. 

151.4 Aggregation of positions. 

Authority: 7 U.S.C. 1a, 2, 2a, 4, 6a, 6c, 6f, 

6g, 6i, 6k, 6m, 6n, 7, 7a, 12a, 19 and 21, as 

amended by Title XIII of the Food, 

Conservation and Energy Act of 2008, Public 

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

§ 151.1 Definitions. 

As used in this part— 

Basis contract means a futures or 

option contract that is cash settled based 

on the difference in price of the same 

commodity (or substantially the same 

commodity) at different delivery points; 

Calendar spread contract means a 

futures or option contract that 

represents the difference between the 

settlement prices in one month of a 

referenced energy contract and another 

month’s settlement price for the same 

referenced energy contract; 

Contracts of the same class mean 

referenced energy contracts (including 

option contracts on a futures-equivalent 

basis) on a single reporting market that 

are based on the same commodity and 

delivered in the same manner (cashsettled or physically-delivered), 

provided however, that during their spot 

month, contracts shall be considered 

contracts of the same class if, in 

addition, such contracts expire on the 

same trading day; 

Diversified commodity index means a 

commodity index with price 

components that include energy as well 

as non-energy commodities, provided 

however, that futures and option 

contracts based on a diversified 

commodity index that incorporates the 

price of a commodity underlying a 

referenced energy contract’s commodity 

which are used to circumvent the 

speculative position limits, shall be 

considered to be referenced energy 

contracts for the purpose of applying the 

position limits of § 151.2 of this chapter; 

Inter-commodity spread contract 

means a futures or option contract that 

is based on the price difference between 

a referenced energy contract and 

another commodity contract; 

Referenced energy contract means a 

physically-delivered or cash-settled 

futures or option contract, other than a 

basis contract or contract on a 

diversified commodity index, that is a: 

(1) New York Mercantile Exchange 

Henry Hub natural gas contract (NG), or 

any other natural gas contract that is 

exclusively or partially based on a 

trading unit of 10,000 million British 

thermal units (mmBtu) of natural gas 

delivered at the Henry Hub pipeline 

interchange in Erath, Louisiana; 

(2) New York Mercantile Exchange 

Light Sweet crude oil contract (CL), or 

any other crude oil contract that is 

exclusively or partially based on a 

trading unit of 1,000 U.S. barrels of light 

sweet crude oil delivered at the Cushing 

crude oil storage complex in Cushing, 

Oklahoma; 

(3) New York Mercantile Exchange 

New York Harbor No. 2 heating oil 

contract (HO), or any other heating oil 

contract that is exclusively or partially 

based on a trading unit of 1,000 U.S. 

barrels of No. 2 fuel oil delivered at an 

ex-shore facility in New York Harbor; 

(4) New York Mercantile Exchange 

New York Harbor gasoline blendstock 

(RBOB) contract, or any other gasoline 

contract that is exclusively or partially 

based on a trading unit of 1,000 U.S. 

barrels of reformulated gasoline 

blendstock for oxygen blend delivered 

at an ex-shore facility in New York 

Harbor; or 

(5) Fraction or multiple of the 

contracts described in paragraphs (1) 

through (4) of this section, so that when 

viewed on a fractional basis or as a 

multiple, such contract is based on the 

same commodity in equivalent trading 

units; 

Reporting market means a reporting 

market as defined in § 15.00 of this 

chapter; 

Spot month means: 

(1) For a contract that allows trading 

concurrently with the issuance of 

delivery notices, the futures contract 

next to expire during that period of time 

beginning at 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 registered 

entity; 

(2) For a contract that does not allow 

trading concurrently with the issuance 

of delivery notices, the futures contract 

next to expire during that period of time 

beginning at the close of trading on the 

third trading day preceding the last 

trading day; or 

(3) For a contract that cash-settles 

based on the price of one or more 

physically-delivered contracts, the 

period of time that is the spot-month for 

such physically-delivered contracts; 

Spread contract means either a 

calendar spread contract or an intercommodity spread contract; 

Swap agreement means a swap 

agreement as defined in § 35.1(b)(1) of 

this chapter; 

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Swap dealer means, solely for the 

purposes of this part and § 1.45 and part 

20 of this chapter, any person who, as 

a significant part of its business, holds 

itself out as a dealer in swaps, makes a 

market in swaps, regularly engages in 

the purchase of swaps and their resale 

to customers in the ordinary course of 

a business, or engages in any activity 

causing the person to be commonly 

known in the trade as a dealer or market 

maker in swaps; 

Unless specifically defined otherwise, 

the terms defined in § 150.1 of this 

chapter shall have the same meaning as 

they do in that section. 

§ 151.2 Position limits for referenced 

energy contracts. 

(a) Spot-month position limits. Except 

as otherwise authorized in § 151.3, no 

person may hold or control positions in 

contracts of the same class when such 

positions, net long or net short, are in 

excess of: 

(1) For physically-delivered contracts, 

a spot-month position limit, fixed by the 

Commission at one-quarter of the 

estimated spot-month deliverable 

supply; or 

(2) For contracts that cash settle based 

on prices of physically-delivered 

contracts, a conditional-spot-month 

position limit, fixed by the Commission 

at one-quarter of the estimated spotmonth deliverable supply, provided 

that, a trader may, if permitted by 

reporting market rules adopted to 

implement this paragraph, acquire or 

hold spot-month positions equal to the 

product of the above specified level and 

the spot-month multiplier of five if the 

trader does not hold positions in spotmonth physically-delivered referenced 

energy contracts and the trader complies 

with the reporting requirements of part 

20 of this chapter. 

(b) All-months-combined and singlemonth limits. Except as otherwise 

authorized in § 151.3, no person may 

hold or control positions in a referenced 

energy contract when such positions, 

net long or net short, are in excess of: 

(1) Aggregate position limits: 

(i) An all-months-combined aggregate 

position limit, across reporting markets, 

fixed by the Commission at 10% of the 

open interest of that referenced energy 

contract aggregated across all reporting 

markets up to an open interest level of 

25,000 contracts with a marginal 

increase of 2.5% of aggregated open 

interest thereafter; or 

(ii) A single-month aggregate position 

limit that is two-thirds of the position 

limit fixed pursuant to paragraph 

(b)(1)(i) of this section. 

(2) Reporting market position limits: 

(i) For a reporting market, an allmonths-combined position limit for 

contracts of the same class that is the 

lower of the aggregate position limit for 

a referenced energy contract under 

paragraph (b)(1)(i) of this section or, for 

contracts of the same class, 30% of a 

class’s average combined futures and 

delta-adjusted option month-end open 

interest for the most recent calendar 

year on that reporting market; or 

(ii) For a reporting market, a singlemonth position limit for contracts of the 

same class that is two-thirds of the 

position limit fixed pursuant to 

paragraph (b)(2)(i) of this section, 

provided however, that such positions 

shall not be greater than two times the 

level of the position limit fixed pursuant 

to paragraph (b)(2)(i) of this section on 

a gross basis. 

(c) Minimum position limit. The 

position limits of § 151.2(b)(2)(i) shall be 

replaced by an all-months-combined 

position limit, fixed by the Commission 

at the greater of 5,000 contracts or 1% 

of the open interest aggregated across all 

reporting markets, if the resulting 

position limit calculated under this 

paragraph is higher than an otherwise 

applicable position limit. 

(d) Deliverable supply. 

(1) Reporting markets listing 

physically-delivered referenced energy 

contracts are required to submit to the 

Commission an estimate of deliverable 

supply by the 31st of December of each 

calendar year. 

(2) The estimate submitted under 

paragraph (d)(1) of this section shall be 

accompanied by a description of the 

methodology used to derive the estimate 

along with any statistical data 

supporting the reporting market’s 

estimate of deliverable supply. 

(3) The Commission shall base its 

fixing of spot-month position limits on 

the estimate provided under paragraph 

(d)(1) of this section unless the 

Commission determines to rely on its 

own estimate of deliverable supply. 

(4) The Commission may base its 

initial fixing of spot-month position 

limits solely on its own estimates of 

deliverable supply. 

(e) Calculation of limits for the 

purposes of this section. 

(1) For the purpose of calculating 

positions under this section, referenced 

energy option contracts that do not 

settle into futures contracts shall be 

included in any calculation on a 

futures-equivalent basis and treated as 

futures contracts under the provisions of 

this section. 

(2) Open interest shall be calculated 

by combining the month-end futures 

open interest and the open interest in its 

related option contract, on a deltaadjusted basis, for all months listed on 

a reporting market during the most 

recent calendar year. 

(3) In determining or calculating all 

levels and limits under this section, a 

resulting number shall be rounded up to 

the nearest hundred. 

(4) For the purpose of calculating 

position limits under this section, 

referenced energy contracts that are 

spread contracts, as defined by § 151.1, 

shall be excluded from any calculation 

of open interest. 

(f) Administrative process for fixing 

and publishing position limits. 

(1) The Commission shall fix the spotmonth position limits (and estimates of 

deliverable supply) and the all-monthscombined position limits under § 151.2, 

aggregately across all reporting markets 

and separately for each reporting 

market, by January 31st of each calendar 

year, provided that, the initial fixing of 

position limits may occur on a different 

date. 

(2) The Commission hereby delegates, 

until such time as the Commission 

orders otherwise, to the Director of the 

Division of Market Oversight and to 

such members of the Commission’s staff 

acting under the Director’s direction as 

the Director may designate, the 

authority to fix the position limits to be 

established pursuant to paragraph (f)(1) 

of this section. The Director may submit 

to the Commission for its consideration 

any matter that has been delegated in 

this paragraph. Nothing in this 

paragraph prohibits the Commission, at 

its election, from exercising the 

authority delegated in this paragraph. 

(3) The fixed position limits shall be 

published on the Commission’s Web 

site (http://www.cftc.gov) and shall 

become effective on the 1st day of 

March immediately following the fixing 

date (or 30 complete calendar days 

following an initial fixing of position 

limits under this part if such fixing is on 

a date other than the 31st of January) 

and shall remain effective until the last 

day of the immediately following 

February. 

§ 151.3 Exemptions for referenced energy 

contracts. 

(a) Positions that may exceed limits. 

The position limits set forth in § 151.2 

may be exceeded to the extent that such 

positions are: 

(1) Upon application to a reporting 

market for an exemption, positions 

(other than positions that are held to 

offset risks associated with swap 

agreements under paragraph (a)(2) of 

this section) held in a proprietary 

account (as defined in § 1.3(y) of this 

chapter) shown to be bona fide hedging 

transactions, as defined and approved 

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by a reporting market in a manner 

consistent with, but that may differ from 

(to the extent that such differences are 

consistent with commercial activity in 

the physical energy markets), 

§§ 1.3(z)(1) and (2) of this chapter, 

provided that: 

(i) Traders holding positions outside 

the spot month, and traders holding 

spot-month positions with respect to 

spot-month positions only, that are 

greater than or equal to a position limit 

set under § 151.2 pursuant to a bona fide 

hedge exemption shall not also hold or 

control positions speculatively; and 

(ii) Traders holding positions that are 

greater than or equal to twice a position 

limit set under to § 151.2 pursuant to a 

bona fide hedge exemption shall not 

also hold or control positions pursuant 

to an exemption under paragraph (a)(2) 

of this section; 

(2) Upon application under § 1.45 of 

this chapter, swap dealer risk 

management transactions outside of the 

spot month that are held to offset risks 

associated with swap agreements, which 

are entered into to accommodate swap 

customers and are either directly linked 

to the referenced energy contracts or the 

fluctuations in value of the swap 

agreements are substantially related to 

the fluctuations in the value of the 

referenced energy contracts, and which 

do not exceed twice the applicable 

speculative position limits in allmonths-combined or in any single nonspot-month, provided that traders 

holding positions under this paragraph 

shall not also hold or control positions 

speculatively when such the trader’s 

total positions are greater than or equal 

to a position limit set under to § 151.2; 

or 

(3) Subsequently demonstrated, in a 

report to be filed on the calendar day 

following the acquisition of such 

positions pursuant to part 20 of this 

chapter, to be below an applicable 

position limit once option contracts that 

are a part of a trader’s overall position 

are adjusted by a contemporaneous risk 

factor or delta coefficient for such 

options. 

(b) Other exemptions. The position 

limits set forth in § 151.2 of this chapter 

may be exceeded to the extent that such 

positions remain open and were entered 

into in good faith prior to the effective 

date of any rule, regulation, or order that 

specifies a limit. 

(c) Call for information. Upon call by 

the Commission, the Director of the 

Division of Market Oversight or the 

Director’s designee, any reporting 

market issuing, or 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 futures, options, 

over-the-counter, or cash market 

positions that support the claim of 

exemption, and the relevant business 

relationships supporting a claim of 

exemption. 

§ 151.4 Aggregation of positions. 

(a) Positions to be aggregated. The 

position limits set forth in § 151.2 of this 

chapter shall apply to: 

(1) All positions in accounts in which 

any person, directly or indirectly, has an 

ownership or equity interest of 10% or 

greater or, by power of attorney or 

otherwise, controls trading; or 

(2) Positions held by two or more 

persons acting pursuant to an expressed 

or implied agreement or understanding 

the same as if the positions were held 

by, or the trading of the positions were 

done by, a single person. 

(b) Positions in pools. Positions in 

pools in which a trader that is a limited 

partner, shareholder or similar person 

has an ownership or equity interest of 

less than 25% need not be aggregated 

with other positions of the trader unless 

such person, by power of attorney or 

otherwise, controls trading that is done 

by the pool. 

Issued by the Commission this 14th day of 

January 2010, in Washington, DC. 

David Stawick, 

Secretary of the Commission. 

Note: The following appendix will not 

appear in the Code of Federal Regulations. 

Appendix Statements 

Statement of Gary Gensler Chairman, 

Commodity Futures Trading Commission 

Meeting of the Commodity Futures Trading 

Commission 

The CFTC is charged with a significant 

responsibility to ensure the fair, open and 

efficient functioning of futures markets. Our 

duty is to protect both market participants 

and the American public from fraud, 

manipulation and other abuses. Central to 

these responsibilities is our duty to protect 

the public from the undue burdens of 

excessive speculation that may arise, 

including those from concentration in the 

marketplace. 

The CFTC does not set or regulate prices. 

Rather, the Commission is directed to ensure 

that commodity markets are fair and orderly. 

It is for that reason that I support the staff’s 

recommended rulemaking regarding position 

limits in the energy markets and exemptions 

for swap dealer risk management 

transactions. 

The CFTC is directed in its original 1936 

statute to set position limits to protect against 

the burdens of excessive speculation, 

including those caused by large concentrated 

positions. In that law—the Commodity 

Exchange Act (CEA)—Congress said that the 

CFTC ‘‘shall’’ impose limits on trading and 

positions as necessary to eliminate, diminish 

or prevent the undue burdens that may come 

as a result of excessive speculation. We are 

directed by statute to act in this regard to 

protect the American public. 

A transparent and consistent playing field 

for all physical commodity futures should be 

the foundation of our regulations. Thus, 

position limits should be applied 

consistently to all markets and trading 

platforms and exemptions to them also 

should be consistent and well-defined. 

While we currently set and enforce 

position limits on certain agriculture 

products, we do not for energy markets. 

Though there are some differences between 

energy markets and agricultural markets, 

those distinctions do not suggest to me that 

the federal government should set position 

limits on one and not the other. 

When the CFTC set position limits in the 

past, the agency sought to ensure that the 

markets were made up of a broad group of 

market participants with a diversity of views. 

At the core of our obligations is promoting 

market integrity, which the agency has 

historically interpreted to include ensuring 

markets do not become too concentrated. 

Position limits help to protect the markets 

both in times of clear skies and when there 

is a storm on the horizon. In 1981, the 

Commission said that ‘‘the capacity of any 

contract market to absorb the establishment 

and liquidation of large speculative positions 

in an orderly manner is related to the relative 

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

market is not unlimited.’’ I believe this is still 

true today. 

The futures exchanges also have 

obligations with regard to the setting of 

position limits. As was explored in our 

summer hearings, though, the Commodity 

Futures Modernization Act (CFMA) changed 

the exchanges’ obligations. They have to 

comply with a core principal that speaks to 

protecting against manipulation or 

congestion, ‘‘especially during trading in the 

delivery month.’’ These core principles do 

not explicitly require the exchanges to set 

position limits to guard against the burdens 

of excessive speculation. The CEA, in section 

4a, though, left the obligations of the CFTC 

unchanged with regard to setting position 

limits to protect against the possible burdens 

of excessive speculation. Our governing 

statute importantly distinguishes between 

these two distinct, but sometimes related, 

public policy goals—protecting against 

manipulation and protecting against possible 

burdens of excessive speculation. The CFMA 

clearly established that the exchanges had to 

address the first while the CFTC had a 

broader mandate to address both. Though the 

CFTC had in 1992 first allowed exchanges to 

establish accountability regimes, it was only 

in 2001 that they did so in lieu of position 

limits in the energy markets. 

The past eight years have provided further 

evidence as to the difference. Accountability 

levels are regularly and repeatedly exceeded. 

In fact, they are neither stop signs nor even 

yield signs for market participants. As 

reviewed at our summer hearings, in the 12 

months between July 2008 and June 2009, 

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accountability levels for individual months 

were exceeded in the four main energy 

contracts by 69 different traders, some 

exceeding the levels during every trading day 

in the period. 

The staff recommendation builds upon the 

Commission’s experience and previous 

guidance in setting position limits, 

particularly for agricultural commodities. 

• Limits are set across the same contract 

month groupings: All-months-combined 

(AMC); single-month; and spot-month. 

• Limits apply to aggregate positions in 

futures and options combined. 

• There are exemptions for bona fide 

hedging transactions involving commodity 

inventory hedges and anticipatory purchases 

or sales of the commodity. 

In addition, the proposed energy limits 

incorporate CFTC guidance to exchanges in 

setting speculative position limits: 

• The basic formula for the level of the allmonths-combined limit is the same—10% of 

the first 25,000 contracts of open interest 

plus 2.5% of open interest over 25,000 

contracts. 

• The approach to setting the level of the 

spot-month limit in the physical delivery 

contracts is the same—25% of the estimated 

deliverable supply. 

The proposed energy Federal limits builds 

upon the Commission’s experience in several 

ways: 

• The proposed energy limits would be 

responsive to the size of the market and 

administratively reset on an annual basis, 

rather than remaining unchanged until a new 

rule is issued. 

• The proposal extends contract 

aggregation by applying all-monthscombined and single-month energy 

speculative position limits both to classes of 

contracts (all physical delivery or cash 

settled contracts in a commodity at a 

reporting market) and to positions held 

across all reporting markets. 

• The proposed energy limits aggregate 

positions at the owner level rather than 

permitting disaggregation for independent 

account controllers. 

I believe that the staff recommendation is 

a measured and balanced approach to setting 

position limits in the energy markets. 

In addition to resetting position limits in 

the energy futures and options markets, the 

proposed rulemaking both addresses 

exemptions for bona fide hedgers and 

establishes a consistent framework for certain 

swap dealer risk management exemptions. 

The Commission and the exchanges currently 

grant relief from agriculture and energy 

position limits to swap dealers on a case-bycase basis via staff no-action letters or similar 

methods at the exchanges. The proposed rule 

would, for the first time, bring uniformity to 

swap dealer exemptions. Swap dealers would 

be required to file an exemption application 

and update the application annually. 

Exempted swap dealers also would be 

required to provide monthly reports of their 

actual risk management needs and maintain 

records that demonstrate their net risk 

management needs. The CFTC would 

publicly disclose the names of swap dealers 

that have filed for an exemption after a sixmonth delay. 

This rule proposal is one step in a very 

important process. Our vote on the proposed 

rulemaking begins a 90-day public comment 

period. Many important questions are listed 

in the proposal, and we are all very 

interested to hear from the public on these 

significant issues. 

I look forward to hearing from hedgers and 

speculators, dealers and exchanges and other 

market participants and economists regarding 

the proposal and how and if it would 

improve the functioning of the markets. I am 

also interested in hearing any changes that 

they may suggest. 

As we vote to on a proposed rulemaking 

to set position limits in the energy futures 

and options markets, we also are working 

with Congress to bring comprehensive 

regulatory reform to the over-the-counter 

derivatives markets. I was pleased that the 

House included in the recently passed 

financial reform legislation enhanced 

authority for the CFTC to set aggregate 

position limits for over-the-counter 

derivatives contracts when they perform or 

affect a significant price discovery function 

with respect to regulated entities. While 

Congress continues to work on regulatory 

reform, it is important that the Commission 

continue its work under current authority to 

consider setting energy position limits. The 

CFTC is working in parallel with the 

legislative process. 

I thank the staff and my fellow 

Commissioners for all of the preparation that 

went into the recommended rulemaking. I 

will now entertain a motion that the 

Commission issue a proposed rule to set 

position limits for futures and option 

contracts in the major energy markets and 

establish consistent, uniform exemptions for 

certain swap dealer risk management 

transactions. 

Statement of Commissioner Michael V. Dunn 

Regarding the Notice of Proposed 

Rulemaking for Speculative Position Limits 

for Referenced Energy Contracts 

Today I am voting to release the proposed 

notice of rulemaking entitled Federal 

Speculative Position Limits for Referenced 

Energy Contracts and Associated Regulations. 

My vote to release this proposed rule should 

in no way be construed as an agreement with 

the opinions expressed in the proposal or to 

the approach advocated in setting these 

proposed position limits. Despite my serious 

reservations, I have agreed to the release of 

this proposal so that the public at-large has 

ample opportunity to voice their opinions 

and concerns on this topic. 

At the close of the Commission’s position 

limits hearings on August 5, 2009, I stated 

that: 

[T]he CFTC does not have the authority to 

set speculative position limits in all of the 

venues that may be affected by excessive 

speculation, specifically over-the-counter 

markets (OTC) and on foreign boards of trade 

(FBOT). Unilateral Commission action in 

only the markets we currently regulate may 

not have the desired effect of reigning in 

excessive speculation in the futures market. 

Without similar steps in the OTC markets 

and on FBOTs, those seeking to evade the 

limits we set could simply move to venues 

outside our authority. 

I believe this is still true today, and that 

forging ahead on a position limits regime for 

political expediency is not the course of 

action that this agency needs or one that 

promotes the health and integrity of the 

futures industry in the United States. The 

simple announcement of our hearings several 

months ago caused business to migrate to 

OTC markets and FBOTs currently outside 

our purview. This is an unacceptable 

consequence of regulation and is, I fear, a 

sign of things to come if this agency does not 

take a coordinated approach to bringing 

sensible regulation to the futures markets. 

I think it needs to be made clear that the 

Proposed Position Limits do not set trading 

limitations on any particular class of 

investor, including passively managed longonly index funds. The Proposed Position 

Limits’ sole objective is to prevent excessive 

speculation by a single entity. I would be 

very interested to hear from the public on 

whether this incremental approach best 

addresses the market wide concerns raised by 

those who participated in our hearings last 

summer. 

I would like to reiterate that my vote to 

release this document should in no way be 

construed as an agreement of any kind to 

final rules setting federal speculative position 

limits on energy contracts. My commitment 

remains to accept comments and information 

during the next few months with an open 

mind, and to work with my fellow 

Commissioners to ensure that we have a 

functioning futures industry. 

Statement of Commissioner Jill Sommers 

Regarding the Notice of Proposed 

Rulemaking for Speculative Position Limits 

for Referenced Energy Contracts 

Dissenting 

The Commission and its predecessors have 

grappled with the complex issues 

surrounding federal speculative position 

limits for many years in connection with 

transactions based on agricultural 

commodities. As prices rose across the board 

in virtually all commodities throughout 2007 

and 2008, the Commission focused its 

attention on possible causes, including the 

influx of new traders into the markets, in 

particular swap dealers hedging the risk 

resulting from over-the-counter (OTC) 

business and traders seeking exposure to 

commodities as an asset class through 

passive, long-term investment in exchange 

traded funds (ETFs) and commodity index 

funds. Concerns were raised in numerous 

Congressional hearings that excessive 

speculation in both exchange-traded and 

OTC markets was to blame for rising prices, 

particularly in the energy sector. The 

Commission held three days of hearings in 

July and August of 2009 to discuss a number 

of different approaches and has received 

continuous feedback from the industry for 

the past several months. We now have before 

us a proposal from staff which would 

implement federal speculative position limits 

for futures and options contracts in certain 

energy commodities. 

I dissent from issuing the proposal for the 

following reasons. I am concerned that hard 

positions limits may be imposed on exchange 

trading without similar limits in place for 

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Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules 4171 

OTC markets. Legislation giving us the 

authority to impose OTC limits may be 

enacted this year, but the timing and final 

form of such legislation is unknown. While 

I wholeheartedly support efforts to enhance 

our authority in this area, I am concerned 

that forging ahead with federal limits in a 

piecemeal fashion is unwise. I am especially 

concerned that doing so will have the 

perverse effect of driving portions of the 

market away from centralized trading and 

clearing at the very time we are urging all 

standardized OTC activity to be traded onexchange or cleared. Likewise, I am 

concerned that, without global standards, 

trading will move to other financial centers 

around the world. A report issued by the 

United Kingdom’s Financial Services 

Authority and HM Treasury last month urges 

caution in introducing a position limits 

regime. See Financial Services Authority & 

HM Treasury, Reforming OTC Derivative 

Markets, A UK Perspective at 31–35 (Dec. 

2009). Clearly, more work is needed to 

achieve a uniform approach. 

A delay in promulgating position limits 

will not leave the markets unprotected. The 

proposal before us ‘‘sets high position levels 

that are at the outer bounds of the largest 

positions held by market participants.’’ 

Proposal at 59. Exchange position limits and 

accountability rules remain in place and will 

continue to trigger the first line of defense 

against potential market manipulations or 

other disruptions. Even if the proposed 

federal limits were enacted, exchanges would 

be obligated to begin monitoring positions on 

their markets well before traders reach the 

federal limits. Aggressive use of the 

Commission’s surveillance authority in 

partnership with the exchanges should be 

sufficient to closely monitor and protect the 

integrity of the markets. 

Finally, the proposal makes no distinction 

between passive ETF and index traders and 

speculators. While the proposal does seek 

comment on the feasibility of categorizing 

such traders differently, I am discouraged 

that we are no closer to an answer than we 

were prior to our 2009 hearings, the 

numerous Congressional hearings that 

focused on index trading, and the 

Commission’s extensive collection of index 

investment data since June 2008, which it 

now publishes on a quarterly basis. There is 

no doubt that passive long-only investors do 

not behave as typical speculative traders. 

They have a unique footprint in the markets. 

If the data demonstrates that passive long 

traders are disrupting the markets, through 

the rolling of their positions or otherwise, the 

Commission should make an affirmative 

finding and tailor a solution that addresses 

the problem. 

It is also my hope that if the Commission 

adopts the limits included in the proposal, 

that it also promulgate federal limits for all 

other commodities with a finite supply, such 

as metals and the agricultural commodities 

not currently subject to federal limits. The 

rationale given for the current proposal 

applies equally to contracts in those 

commodities. Another inconsistency that 

would result if the Commission adopts the 

proposed rulemaking is that swap dealers 

would continue to receive bona fide hedge 

exemptions for positions related to 

agricultural commodities subject to federal 

limits, but the new proposed risk 

management exemption regime would apply 

to positions related to the four energy 

commodities included in the proposal. A 

uniform policy would benefit not only the 

Commission and market participants from an 

operational efficiency standpoint, but would 

also enhance transparency by eliminating 

needless complexities in the process. 

Statement of Commissioner Bart Chilton 

Regarding the Notice of Proposed 

Rulemaking for Speculative Position Limits 

for Referenced Energy Contracts 

‘‘Moving Forward’’ 

During the last decade, while traditional 

hedgers and speculators increased their use 

of the futures markets, many new nontraditional participants entered the arena, 

bringing with them capital and a wealth of 

innovative approaches to trading. The trend 

helped fuel the economic engine of our 

democracy—a good and positive outcome. As 

markets and market participants evolve, the 

Commission has an inherent responsibility to 

examine the impact, as well as to proactively 

anticipate the potential impact, of changing 

dynamics on those markets we are entrusted 

to oversee. 

There is certainly no consensus about the 

potential and net impact of new nontraditional speculators on commodity 

markets. Did the massive passives—very 

large traders who have no interest in the 

underlying physical commodity and have, in 

general, a fairly inactive long trading 

strategy—contribute to $147 barrel oil in 

2008? Some say there is no impact on 

markets, others (like researchers at MIT, Rice 

and Princeton—and a new study out this 

week from Lincoln University of Missouri) 

absolutely disagree. 

Regardless, what is important to remember 

is that having an impact is not equivalent to 

manipulation (or other abuse) under current 

law, rule or regulation; it is not per se 

negative. However, any conduct that 

potentially can distress markets, that has the 

propensity to create artificiality in the 

markets, needs to be understood and curbed 

as necessary. 

The Commodity Exchange Act (CEA) has 

as its fundamental purpose the deterrence 

and prevention of fraud, market abuse and 

manipulation. To accomplish our mission 

requires vigilance and thoughtful 

consideration of the potential for market 

aberrations. It requires agile, balanced and 

prudent action in a timely manner—not 

usually the mark of government. Our role in 

striking the right balance with regard to the 

massive passives and other new dynamics in 

the futures industry requires that we not 

merely review and respond, but that we 

anticipate, deter and prevent. 

That is why I support moving forward on 

the energy proposal before the Commission. 

This proposal strikes a reasonable balance. 

Simply put, it seeks to impose mandatory 

hard cap position limits. Doing so is not the 

mark of wild-eyed overzealous regulators. In 

fact, the position limits called for in the 

proposal are similar to limits already in effect 

for agricultural commodities. This proposal 

simply seeks to expand such mandatory hard 

cap position limits to four heavily traded 

energy contracts. 

Specifically, the energy proposal would 

establish four different hard cap mandatory 

speculative position limits. They are: An 

exchange-specific spot-month limit; a single 

month limit; an all-months-combined limit; 

and an all-encompassing, cumulative U.S. 

exchange position limit for substantially 

similar-traded contracts. These limits would 

be dynamic in that they would be responsive 

to the size of the market and subject to 

annual recalculation by the Commission. 

While I have been a staunch advocate for 

strong position limits, the levels set for the 

limits, in my opinion, actually err on the 

high side. The proposed limits will certainly 

be seen by some as higher than appropriate. 

However, should the limits prove inadequate, 

the agency can, and I hope will, recalibrate 

to ratchet them down or even increase them 

as deemed appropriate. The most important 

thing is to establish a thoughtful position 

limit system. 

Furthermore, while the proposed limits err 

on the high side, such levels would still 

ensure that the very largest traders’ positions, 

those with the greatest potential for causing 

market-contortions, would be limited. 

Moreover, if limits were set too low, there 

would be a possibility that trading migration 

could take place, transferring traders to overthe-counter markets or overseas exchanges. 

This is particularly noteworthy because 

Congress has yet to pass regulatory reform 

legislation that would grant the CFTC 

authority to properly regulate the over-thecounter markets—markets that are currently 

dark in that there is not government 

regulation or oversight. Hundreds of trillions 

of dollars are traded in these dark markets 

and they can influence the price that 

consumers pay for everything from gasoline, 

to a loaf of bread, to a home mortgage. 

Passage of such legislation to provide 

regulators with authority in this area is 

critically needed, and soon. 

In addition to position limits, the proposal 

contains a mechanism to consider certain 

exemptions to those limits. I have suggested 

that any exemptions should be approved by 

the CFTC, targeted for legitimate business 

purposes, verifiable and transparent. This 

proposal meets all four of those criteria. 

Traders hedging commercial risks, i.e. 

those who have inventory or have an interest 

in the underlying physical commodity, 

would qualify for a bona fide hedging 

exemption from the proposed speculative 

position limits upon application to the 

exchange. The CFTC would audit the use of 

this exemption to ensure its consistency with 

our rules and regulations. Importantly, no 

longer included in this class of traders would 

be swap dealers who establish positions to 

offset the financial risk of customer initiated 

swap positions. Instead, those traders could 

apply directly to the CFTC for a limited risk 

management exemption for positions held 

outside of the spot month. Swap dealers who 

receive this exemption from the CFTC would 

be subject to rigorous and regular reporting 

requirements to verify and qualify their need 

for the exemption. Currently, neither the 

names nor the numbers of such exemptions 

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4172 Federal Register / Vol. 75, No. 16 / Tuesday, January 26, 2010 / Proposed Rules 

are available to the public. Under the 

proposal, in order to increase transparency, 

the CFTC would make public the identities 

of those who receive exemptions. 

Finally, the proposal seeks comment from 

the public on the question of expanding 

position limits to the metals complex and to 

soft agricultural commodities. While I am 

pleased that this question is at least posited 

through the proposed rule, I am extremely 

disappointed that metals are not a part of this 

proposal as I have sought. In essence, failure 

to include a proposed rule relative to metals 

such as gold and silver prevents the 

inclusion of metals in the final rule covering 

position limits in energy. As a result of the 

omission, CFTC attorneys have opined that 

should the Commission wish to establish 

position limits in metals as a result of public 

comment, the agency would have to 

undertake an entirely separate rulemaking. I 

strongly support thoughtful position limits in 

the metals complex. I have advocated for 

their inclusion in this proposal with each of 

my colleagues and staff, and regret the lack 

of consensus that remains. It is my sincere 

hope and expectation that the upcoming 

hearing on position limits with regard to 

metals will enable us to move more 

expeditiously on a parallel regulatory process 

for metals. 

I thank everyone involved in conceiving 

and designing this thoughtful proposal with 

regard to energy. We seek comment, for an 

ample period of 90 days, on not only the 

overall proposal, but also specifically on the 

question of expanding the concept to the 

metals and soft agricultural commodities and 

on the question of imposing separate position 

limits for the massive passives as a class of 

investors. I look forward to the comments 

and ultimately to putting a sensible position 

limit system in place. 

Concurring Statement of Commissioner Scott 

D. O’Malia 

Regarding the Proposed Federal Speculative 

Position Limits for Referenced Energy 

Contracts and Associated Regulations 

I concur on the release of the Federal 

Register notice of proposed Federal 

speculative position limits for certain energy 

commodities because I think it is important 

that the Commission receive comments on 

the proposal. I encourage our market 

participants, the public, and anyone with an 

interest in the markets to inform the 

Commission about the impact of the 

proposed limits or other limits, meaning 

limits as currently proposed, or potentially 

lower limits as a result of this rulemaking or 

future rulemaking. 

Notwithstanding my concurrence on the 

release for comments, I have many concerns 

regarding the proposal’s effectiveness and 

justification. Keeping in mind the importance 

of maintaining the market’s fundamental 

purpose of allowing customers to hedge 

commercial risk, I question the utility of 

rules that either present any potential for 

circumventing CFTC authority or make 

energy markets less transparent or liquid. 

The Proposed Limits Could Result in Less 

U.S. Regulatory Oversight 

I question the effectiveness of these 

regulatory changes, especially as Congress is 

considering a much broader and 

comprehensive financial reform package. I 

remain particularly concerned with the 

impact of enacting the proposed position 

limits on the regulated exchanges, while the 

Commission lacks the regulatory authority to 

impose limits equitably upon all similar 

energy transactions, including over-thecounter transactions. As we work to increase 

transparency in these markets, the proposed 

position limits may undermine our efforts by 

allowing participants to turn to the less 

regulated and less transparent over-thecounter markets, which would be detrimental 

to the markets and to the public. 

Status Quo for Index and Speculative 

Investors 

Earlier this year, the Commission held 

hearings and heard testimony from witnesses 

who were frustrated with recent prices and 

volatility in commodity markets. Some 

advocated that the Commission immediately 

impose position limits as a solution. This 

created high expectations that any 

Commission proposal would impose 

limitations on passive index and speculative 

investors. The release states that no more 

than ten trading entities would be affected 

and most of those would likely be entitled to 

a bona fide hedge exemption. This means 

that few, if any, passive index and 

speculative investors will be significantly 

impacted by the proposed position limits. 

The proposed position limits will not change 

the investing behavior of passive index 

investors, so long as they remain under the 

limits or utilize the over-the-counter markets 

over which the Commission has limited 

authority. The Commission would benefit 

from receiving information on the impact, if 

any, the proposed position limits might have 

on the trading strategies of passive index 

investors going forward. In addition, the 

Commission should endeavor to improve its 

understanding of the impacts of passive 

index investors rolling over their position on 

a monthly basis to determine what, if any, 

action is required. 

Concerns About Effectiveness and Necessity 

This proposal makes a case for the 

statutory justification for the CFTC to impose 

position limits under Section 4a(a) of the Act. 

However, the proposal fails to make a 

compelling argument that the proposed 

position limits, which only target large 

concentrated positions, would dampen price 

distortions or curb excessive speculation. In 

large part, the lack of a compelling 

justification may be due to the CFTC’s own 

research and the Interagency Task Force on 

Commodity Market’s conclusion that the rise 

in oil prices was largely attributable to 

fundamental supply and demand factors, 

which is also supported by independent 

analysis. In addition, the fact that the 

proposed position limits are modeled on the 

agricultural commodities position limits 

forces us to examine whether those 

agriculture limits were effective in 

preventing the price spikes in 2007 and 2008. 

Despite federal position limits, contracts 

such as wheat, corn, soybeans, and cotton 

contracts were not spared record setting price 

increases. 

Missed Opportunity for Transparency 

The proposed position limits provide swap 

dealers with twice the single and all-months 

combined levels. This is a divergence from 

the current practice of providing swap 

dealers with a hedge exemption for 

commercial risk taken on over-the-counter 

transactions. I question whether the 

Commission has missed an opportunity to 

consider an alternative approach to provide 

swap dealers with a ‘‘look through’’ 

exemption, meaning swap dealers would 

receive a bona fide hedge exemption for 

business related to counterparties who would 

have been entitled to a hedge exemption if 

the counterparties had used the futures 

markets. In exchange for this ‘‘look through’’ 

exemption, swap dealers would provide the 

Commission with their customer’s over-thecounter position data. That data would allow 

the Commission to determine whether 

customers are attempting to circumvent the 

position limits. I would be interested to 

receive comments on whether the 

Commission should impose this ‘‘look 

through’’ exemption, rather than the swap 

dealer exemption in the proposed rule. In 

addition, I am interested to know what types 

of data could be made available under a ‘‘look 

through’’ exemption. While I am aware that 

the proposed rule contains a provision for 

‘‘look through’’ recordkeeping, meaning data 

would be provided only upon Commission 

request, this would not provide the same 

transparency as the above. 

Position Limits Must Not Hinder Commercial 

Risk Management 

If position limits are implemented, the 

Commission must ensure that such limits do 

not affect market liquidity and thus hinder 

the market’s fundamental purpose of 

allowing commercial hedgers to manage risk. 

This is true for position limits on energy 

products or for any other commodity. 

In light of the many questions and 

concerns I have, I look forward to receiving 

comments from market participants, the 

public, and anyone with an interest in the 

markets that would be impacted by the 

proposed position limits. 

[FR Doc. 2010–1209 Filed 1–25–10; 8:45 am] 

BILLING CODE 6351–01–P 

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