[Federal Register Volume 63, Number 137 (Friday, July 17, 1998)]
[Proposed Rules]
[Pages 38525-38537]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-19114]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Parts 1, 17, 18, and 150


Revision of Federal Speculative Position Limits and Associated 
Rules

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has 
long established and enforced speculative position limits for futures 
contracts on various agricultural commodities. On April 7, 1993, the 
Commission promulgated interim final

[[Page 38526]]

rules amending Federal speculative position limits. The interim 
amendments generally maintained the existing speculative position limit 
levels for the delivery months and increased limit levels for the 
deferred months, at levels below those originally proposed. The 
Commission is proposing to raise the levels of speculative position 
limits for the deferred months to the levels originally proposed.
    In addition, the Commission is proposing to codify various policies 
relating to the requirement that exchanges set speculative position 
limits as required by rule 1.61, 17 CFR 1.61. These relate to the 
levels which the Commission has approved for such rules, and to various 
exemptions from the general requirement that exchanges set speculative 
position limits which the Commission has approved over the years. 
Specifically, the Commission is proposing to codify an exemption 
permitting exchanges to substitute position accountability rules for 
position limits for high volume and liquid markets. The Commission is 
proposing elsewhere in this issue of the Federal Register to amend its 
guideline for application for contract market designation to conform it 
to the changes to the speculative position limit rules proposed herein 
that apply at initial contract designation. See,  Guideline No. 1, 17 
CFR Part 5, Appendix A.
    The Commission is also proposing to amend the applicability of the 
limited exemption from non-spot month speculative position limits under 
Commission rule 150.3, 17 CFR 150.3, for entities that authorize 
independent account controllers to trade on their behalf. Specifically, 
the Commission is proposing to amend the definition of entities 
eligible for this relief under Commission rule 150.1(d), 17 CFR 
150.1(d), to expand the categories of eligible entities and to extend 
it to the separately incorporated affiliates of an eligible entity.
    Finally, the Commission is proposing to amend its rule on 
aggregation. In particular, the Commission is proposing to clarify the 
applicability of a limited partnership exemption to limited partners or 
shareholders with less than a 25% ownership interest, or to pooled 
trading accounts with ten or fewer account owners. The Commission is 
also proposing to amend its rules to clarify that a commodity pool 
operator's principals and its affiliates are treated the same as the 
commodity pool operator itself for purposes of the Commission's 
aggregation rule.

DATES: Comments must be received by September 15, 1998.

ADDRESSES: Comments should be mailed to the Commodity Futures Trading 
Commission, Three Lafayette Centre, 1155 21st Street, N.W., Washington, 
D.C. 20581, attention: Office of the Secretariat; transmitted by 
facsimile at (202) 418-5521; or transmitted electronically at 
[<a href="/cdn-cgi/l/email-protection#4132242233243520333801222735226f262e37"><span class="__cf_email__" data-cfemail="f281979180978693808bb291948691dc959d84">[email protected]</span></a>]. Reference should be made to ``Speculative 
Position Limits.''

FOR FURTHER INFORMATION CONTACT: Paul M. Architzel, Chief Counsel, 
Division of Economic Analysis, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, 
(202) 418-5260, or electronically, [PA<a href="/cdn-cgi/l/email-protection#96e4f5feffe2ecf3fad6f5f0e2f5b8f1f9e0"><span class="__cf_email__" data-cfemail="d2a0b1babba6a8b7be92b1b4a6b1fcb5bda4">[email protected]</span></a>].

SUPPLEMENTARY INFORMATION:

I. Background

    Speculative position limits have been a tool for regulation of 
futures markets for over sixty years. Since the Commodity Exchange Act 
of 1936, Congress consistently has expressed confidence in the use of 
speculative position limits as an effective means of preventing 
unreasonable or unwarranted price fluctuations.\1\ Section 4a(1) of the 
Commodity Exchange Act (Act), 7 U.S.C. 6a(1), provides the Commission 
with authority to:

    \1\ See, H.R. Rep. No. 421, 74th Cong., lst Sess. 1 (1935); See 
also, H.R. Rep. No. 624, 99th Cong., 2d Sess. 44 (1986). Section 
4a(1) of the Commodity Exchange Act, 7 U.S.C. 6a(1), makes the 
explicit finding that:
    [e]xcessive speculation in any commodity under contracts of sale 
of such commodity for future delivery made on or subject to the 
rules of contract markets 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.
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fix such limits on the amount of trading which may be done or 
positions which may be held by any person under contracts of sale of 
such commodity for future delivery on or subject to the rules of any 
contract market as the Commission finds are necessary to diminish, 
eliminate, or prevent such burden.

    The Commission directly administers speculative position limits on 
futures contracts for most of the domestic agricultural commodities 
enumerated in section 2(a)(1) of the Act. See, 17 CFR Part 150. Prior 
to the Act's amendment in 1974 which expanded its jurisdiction to all 
``services, rights and interests'' in which futures contracts are 
traded, only these enumerated commodities were regulated. Both prior to 
and after the 1974 amendments to the Act, futures markets which traded 
commodities not so enumerated applied speculative position limits by 
exchange rule, if at all. In 1981, the Commission promulgated rule 
1.61, requiring exchanges to adopt rules setting speculative position 
limits for all contract markets not subject to Commission-set 
speculative position limits. Since then, all contract markets have been 
subject to either Commission or exchange-set speculative position 
limits.\2\ Responsibility for enforcement of speculative position 
limits is shared by the Commission and the exchanges.\3\
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    \2\ Commission rule 1.61, 17 CFR 1.61, requires that, absent an 
exemption, exchanges adopt and enforce speculative position limits 
for all contract markets which are not subject to the Commission-set 
limits. In addition, Commission rule 1.61 permits exchanges to adopt 
and enforce their own speculative position limits for those 
contracts which have Commission speculative position limits, as long 
as the exchange limits are not higher than the Commission's.
    \3\ Section 4a(e) provides that a violation of a speculative 
position limit established by a Commission-approved exchange rule is 
also a violation of the Act. Thus, the Commission can enforce 
directly violations of exchange-set speculative position limits as 
well as those provided under Commission rules.
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    The Commission periodically has reviewed its policies and rules 
pertaining to each of the three elements of the regulatory framework 
for speculative position limits--the levels of the limits, the 
exemptions from them (in particular, for hedgers), and the policy on 
aggregating accounts.\4\ The Commission, in this notice of proposed 
rulemaking, is proposing to raise the levels of the Commission 
speculative position limits and to codify a number of broad exemptions 
from the requirement of rule 1.61 that exchanges establish speculative 
position limits for all contracts not subject to Commission

[[Page 38527]]

limits. These exemptions to rule 1.61 were established through a series 
of Commission interpretations. The Commission is also proposing to 
broaden its speculative position limit exemption under rule 150.3 for 
independent account controllers and to amend its aggregation policy.
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    \4\ Initially, for example, the Commission redefined ``hedging'' 
(42 FR 42748 (August 24, 1977)), raised speculative position limits 
in wheat (41 FR 35060 (August 19, 1976)), and in 1979 issued its 
statement of policy on aggregation of accounts and adoption of 
related reporting rules (1979 Aggregation Policy), 44 FR 33839 (June 
13, 1979).
    Subsequently, the Commission modified and updated speculative 
position limits by issuing a clarification of its hedging definition 
with regard to the ``temporary substitute'' and ``incidental'' tests 
(52 FR 27195 (July 20, 1987)) and guidelines regarding the exemption 
of risk-management positions from exchange-set speculative position 
limits in financial futures contracts. 52 FR 34633 (September 14, 
1987). Moreover, in 1988, the Commission promulgated Commission rule 
150.3(a)(4), an exemption from speculative position limits for the 
positions of multi-advisor commodity pools and other similar 
entities which use independent account controllers. The Commission 
subsequently amended Commission rule 150.3(a)(4), broadening its 
applicability to commodity trading advisors and simplifying and 
streamlining the application process. 56 FR 14308 (April 12, 1991).
    In 1991, the Commission solicited public comment on, and 
subsequently approved, exchange requests for exemptions for futures 
and option contracts on certain financial instruments from the 
Commission rule 1.61 requirement that speculative position limits be 
specified for all contracts. 56 FR 51687 (October 15, 1991).
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II. Commission Speculative Position Limit Levels

    In 1987, the Commission completely revised Commission speculative 
position limits. 52 FR 38914 (October 20, 1987). As part of these 
revisions, the Commission added Commission speculative position limits 
for soybean meal and soybean oil, which, because of an historical 
anomaly, previously were not included. The Commission also amended the 
structure and levels of the Commission speculative position limits. It 
restructured speculative position limits by establishing them by 
contract market, rather than generically by commodity. The Commission 
proposed generally to increase limit levels from the spot-month limits, 
which were not proposed to be increased, to progressively higher 
individual-month and all-futures-combined limits. However, the rules as 
promulgated generally did not provide for such stepped increases. 
Instead, the amended rules generally maintained the then existing 
structure of a uniform spot- and single-month level and only increased 
the all-months-combined level.\5\
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    \5\ However, the Commission did set stepped increases for the 
cotton contract. Those commenting on the grain and soybean complex 
limits opposed telescoping limits, in part, in an attempt to promote 
greater liquidity in the back months. In contrast, those commenting 
on the proposed speculative position limits in cotton did not object 
to the higher single-month limit level. 52 FR 38916.
    In light of the strong preferences expressed by the commenters 
at that time, and the range of acceptable solutions which the data 
supported, the Commission acceded to the views of the commenters. 
Subsequently, as it expected, the Commission's experience monitoring 
both Commission and exchange-set limits with stepped increases was 
favorable. None of the adverse consequences hypothesized by the 
opposing commenters occurred.
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    In 1991, the Chicago Board of Trade (CBT), the New York Cotton 
Exchange (NYCE), the Kansas City Board of Trade (KCBT) and the 
Minneapolis Grain Exchange (MGE) petitioned the Commission to increase 
further the levels of Commission speculative position limits.\6\ On 
August 2, 1991, the Commission published in the Federal Register notice 
of, and requested public comment on, these petitions for rulemaking. 56 
FR 37049.
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    \6\ These petitions requested that the Commission amend its 
rules to increase Commission speculative position limits in the CBT 
corn, wheat, oats, soybeans, soybean oil, and soybean meal futures 
contracts, in the NYCE's cotton No. 2 futures contract, and in the 
KCBT's and MGE's wheat futures contracts. The CBT also requested 
that the Commission expand the current exemption for spread 
positions between months within the same crop year to an exemption 
for spread positions between any months, outside of the spot month, 
regardless of the crop year and to increase the overall level of 
this exemption. The CBT separately sought Commission approval for 
increases to the exchange-set speculative position limits on these 
commodities.
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    On April 13, 1992, the Commission proposed a number of revisions to 
the structure and levels of Commission speculative position limits. 57 
FR 12766. The Commission proposed these revisions to the levels of the 
speculative position limits based upon two criteria: (1) the 
distribution of speculative traders in the markets; and (2) the size of 
open interest. Previously, the Commission had given little weight to 
the size of open interest in the contract in determining the 
appropriate speculative position limit level. The Commission noted, 
however, that the size of open interest and the distribution of 
speculative traders had not increased at the same rate over time. 
Accordingly, the Commission determined that, in proposing the new 
levels, both criteria should be taken into account. The Commission 
noted that:

[t]his approach will permit speculative position limits to reflect 
better the changing needs and composition of the futures markets, 
while adhering to the policies of the Act and Commission Rule 1.61. 
Although the Commission in setting levels is proposing to place 
greater reliance on the criterion of percentage of open interest 
represented by a particular level than previously, it has always 
recognized that there is a range of acceptable limit levels [.] * * 
* even when relying on a single criterion * * *.

57 FR 12770.
    In proposing these increases to the limit levels, the Commission 
reasoned that, as the total open interest of a futures market 
increased, speculative position limit levels could be raised. The 
Commission therefore applied the open interest criterion by using a 
formula that specified appropriate increases to the limit level as a 
percentage of open interest. Specifically, the Commission proposed 
combined futures and option speculative position limits for both a 
single month and for all months combined at the level of 10% of open 
interest up to an open interest of 25,000 contracts, with a marginal 
increase of 2.5% thereafter. It reasoned that such levels were ``not 
excessively large under the criteria of Commission rule 1.61.'' \7\ Id. 
The Commission also determined that this analysis did not apply to 
spot-month levels, which are ``based most appropriately on an analysis 
of current deliverable supplies and the history of various spot-month 
expirations.'' Id.
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    \7\ Providing for a marginal increase to the speculative 
position limit of 2.5% was ``based upon the universal observation 
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.'' Id. The Commission also proposed a minimum 
of 1,000 contracts.
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    The Commission received 63 comments in response to the proposed 
rules.\8\ Typically, commodity pool operators, commodity trading 
advisors and futures commission merchants strongly favored the 
amendments. Most agricultural producers and their representative 
organizations strongly opposed any increase to the speculative position 
limits. Others, however, recommended that the Commission proceed, but 
in a more cautious manner. In particular, they recommended that the 
Commission raise speculative position limits on a phased or test basis. 
These commenters advocated taking additional time to study the need 
for, and the possible effects of, further increasing speculative 
position limits, and in their view, the trial implementation of 
expanded speculative limits would provide such an additional 
opportunity.
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    \8\ Those commenters included three futures exchanges; a broad-
based futures industry association; four futures commission 
merchants; 26 commodity pool operators, commodity trading advisors 
or associations of such entities; 20 groups or firms representing 
agricultural interests; eight individual agricultural producers; and 
one exchange member. In addition, the proposed rules were a topic of 
discussion at the October 19, 1992, meeting of the Commission's 
Agricultural Advisory Committee.
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    Based on its consideration of the comments received and its 
favorable administrative experience with the rule's prior amendment, 
the Commission in April 1993 adopted interim final rules to Commission 
speculative position limits. These interim amendments increased the 
position limit levels by half of the increase originally proposed, in 
two steps. 58 FR 18057 (April 7, 1993). The first phase, which took 
effect on June 7, 1993, increased speculative position limits by 
combining the previously separate futures and option limits. The second 
phase, which took effect on March 31, 1994, increased the back-month 
speculative position limits halfway to the level originally proposed by 
the Commission.
    When the Commission adopted the interim final rules, it provided 
notice that the comment period on the original proposed levels would be 
reopened in March 1994, coinciding with implementation of the second 
phase of the interim rules. The comment period

[[Page 38528]]

was kept open for a year, closing on April 30, 1995. Anticipating that 
it would determine whether to adopt the levels originally proposed 
based upon trading experience under the interim rules, the Commission 
directed the Division of Economic Analysis (Division) to study the 
effects of the phased increases.
    In April 1995, the Division reported to the Commission on the 
interim rule's effects. The report reviewed trading under both phases 
of the interim rules over a period of eighteen months and was based 
upon an analysis of extensive Commission and exchange data relating to 
individual and aggregate positions of reportable traders, as well as 
inter- and intra-day price series for the entire period of 1988 through 
1994. The report concluded that overall the impact of the interim final 
rules on actual, observed large trader position was modest and that any 
changes in market performance were most likely attributable to factors 
other than changes in the rules.
    Specifically, the report concluded that the phase 1 and phase 2 
modifications of futures and option limits had little impact on the 
overall activities of large traders during the first 18 months of the 
interim final rules with relatively few speculative traders increasing 
the size of their positions above the previously permitted levels. The 
report further concluded that the periods of higher volatility and 
measurable changes in market liquidity observed in particular markets 
during the first 18 months of the interim rules appear to have been a 
result of rapidly-changing cash market conditions rather than the 
amended limits. Finally, the report concluded that there was no 
discernable negative impact on commercial use of the markets during the 
time period studied.
    Only 13 comment letters were received during the post-phase 2 
comment period, none from agricultural interests. Generally, all of the 
commenters supported increasing Commission speculative position limit 
levels as originally proposed. However, at that time concerns began to 
arise regarding the continued viability of the delivery provisions of 
the CBT's corn, soybean, and wheat futures contracts. The Commission 
directed its attention to resolving those surveillance-related concerns 
before further raising speculative position limit levels. Accordingly, 
the Commission took no further action on the proposed rules, and they 
remain pending.
    The Commission recently reviewed open interest and trader position 
data to determine market changes since the Division's report to it 
following implementation of the phase 2 limits. With the exception of 
CBT oats, the markets' 1997 open interest substantially exceeded their 
1994 open interest.\9\ Although the Division's report concluded that 
the phase 1 increases to speculative position limits had little 
discernable impact on trader behavior, since then the number of large 
traders in these markets, the general size of their positions and the 
number of large traders holding positions above the phase 1 speculative 
position limits have increased. In addition, a number of traders now 
frequently hold positions greater than 80% of the current phase 2 all-
months-combined level. These increases suggest that, under both of the 
criteria the Commission has applied in the past--size of traders' 
positions and open interest--expansion of the back month speculative 
position limits to the levels originally proposed is appropriate.
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    \9\ In its interim final rulemaking, the Commission determined 
to maintain a parity of limit levels for wheat traded on the CBT, 
KCBT, and MGE. 58 FR 17979-179080. Accordingly, only data from the 
larger CBT wheat market were analyzed.
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    Accordingly, the Commission is reproposing to raise the back month 
speculative position limits to the levels it proposed initially. 
Consistent with its previous determination, the Commission is not 
proposing any change to spot-month limits.\10\ The Commission has 
determined to seek public comment on the reproposed levels because 
commenters may have modified their views or additional persons may have 
formed an opinion during the extended period of time since the comment 
period closed. The following table compares the phase 2 speculative 
position limits now in effect for selected contracts to those that the 
Commission is reproposing.
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    \10\ The Commission originally proposed to increase the spot 
month limit in oats based upon changes in the cash market. See 57 FR 
at 12770, n. 17. The increases noted at the time have since 
reversed. Accordingly, the Commission is not proposing any change to 
the current spot month limit for oats.

                                           Speculative Position Limits                                          
                                               [by contract] \11\                                               
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                                    Current levels (as of March 31, 1994)            Reproposed levels          
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             Contract                               Single                                 Single               
                                     Spot month     month      All months   Spot month     month      All months
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                                             CHICAGO BOARD OF TRADE                                             
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Corn..............................          600        3,400        6,000          600        5,500        9,000
Oats..............................          400          900        1,200          400        1,000        1,500
Soybeans..........................          600        2,400        4,300          600        3,500        5,500
Wheat.............................          600        2,100        3,200          600        3,000        4,000
Soybean Oil.......................          540        2,000        3,100          540        3,000        4,000
Soybean Meal......................          720        2,200        3,400          720        3,000        4,000
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                                          MIDAMERICA COMMODITY EXCHANGE                                         
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Corn..............................          600        1,200        1,200          600        1,200        1,200
Soybeans..........................          600        1,200        1,200          600        1,200        1,200
Wheat.............................          600        1,200        1,200          600        1,200        1,200
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                                           MINNEAPOLIS GRAIN EXCHANGE                                           
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Hard Red Spring Wheat.............          600        2,100        3,200          600        3,000        4,000
White Wheat.......................          600        1,200        1,200          600        1,200        1,200
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[[Page 38529]]

                                                                                                                
                                            NEW YORK COTTON EXCHANGE                                            
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Cotton No. 2......................          300        1,600        2,500          300        2,500        3,500
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                                           KANSAS CITY BOARD OF TRADE                                           
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Hard Winter Wheat.................          600        2,100        3,200          600        3,000        4,000
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\11\ The limits are shown here in terms of the contract size traded on each exchange. The size of the           
  speculative position limit being proposed is based upon the current contract size. Any subsequent change in   
  contract size would require a conforming adjustment to the limit. For comparative purposes, the MCE limits are
  expressed here as though its contracts were for 5,000 bushels, the contract size traded on the CBT. MCE       
  contracts are actually for 1,000 bushels, and its limits therefore would be five times the size shown on the  
  table.                                                                                                        

III. Exemptions From Required Exchange-set Speculative Position 
Limits

    Although Commission rule 1.61 generally requires that all contract 
markets not subject to Commission speculative position limits impose 
exchange-set speculative position limits, the Commission over the years 
has approved a number of significant exemptions from this requirement. 
These exemptions were approved by the Commission under Commission rule 
1.61(e), a broad exemptive provision enabling the Commission to exempt 
contract markets ``consistent with the purposes of this section.'' In 
each case, the Commission considered and granted such an exemption by 
approving a proposed rule change of a contract market.
    The first of these exchange rule changes was submitted for 
Commission approval by the Chicago Mercantile Exchange (CME). In 
requesting public comment on the proposed rule change, the Commission 
explained that it was considering granting exemptive relief based upon 
one of the factors included in rule 1.61 for setting speculative 
positions limit levels--the ``breadth and liquidity of the cash market 
underlying each delivery month and the opportunity for arbitrage 
between the futures market and cash market in the commodity underlying 
the futures contract.'' See, 56 FR 51687, 51688 (October 15, 1991), 
citing Commission rule 1.61(a)(2). The Commission further explained 
that, ``(b)ased upon its over ten-years experience in administering 
rule 1.61, the Commission believes that exemptions for three classes of 
futures and option contacts with varying degrees of exchange 
supervision for each class could be appropriately considered * * *.''
    These three classes were based upon the depth and liquidity of the 
underlying cash market and the ease of arbitrage between the futures 
and underlying cash market. The three classes were futures and option 
contracts on foreign currencies and futures and option contracts on two 
broad categories of financial instruments. The two categories for 
futures and option contracts on financial instruments were based upon 
the relative degree of liquidity in both the futures and option markets 
and in the cash market for the underlying instrument. The Commission 
subsequently added a fourth exemptive class, comprised of contracts for 
certain physical commodities. See, 57 FR 29064.
    The Commission explained that it would exempt contracts in major 
foreign currencies from all of rule 1.61's requirements based upon 
their nearly inexhaustible deliverable supply, the very highly liquid 
underlying cash markets and the great ease of arbitrage between the 
cash and futures markets thereon. Contract markets which have been so 
exempted are the NYCE U.S. dollar index and NYFE foreign 
currencies.\12\
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    \12\ THe CME and the Philadelphia Board of Trade (PBOT), as a 
matter of exchange choice, have not included their foreign currency 
contracts in this category, instead applying to them a position 
accountability rule.
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    The second category of exempt contracts applies to futures and 
option contracts on financial instruments which exhibit the highest 
degree of liquidity in both the futures and cash markets, which are 
readily arbitraged. The Commission noted that for this class of 
contract the required speculative position limit could be replaced with 
a position accountability rule. Position accountability rules impose a 
level which triggers distinct reporting responsibilities by a trader at 
the request of the applicable exchange. The CME Eurodollar contracts 
and the CBT U.S. Treasury bond contracts were exempted under this 
category.\13\
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    \13\ As noted above, the CME and the PBOT voluntarily apply a 
``category 2'' position accountability rule to their foreign 
currency contracts.
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    The third class of exemptions was not contract markets on financial 
instruments having a highly liquid futures or cash market, but not of 
the same magnitude of liquidity as those in the highest class. For this 
class of contract, the position accountability rule should include, in 
addition to the specified reporting requirements, automatic consent of 
the trader not to increase further those positions which exceed the 
triggering level when so ordered by the exchange acting in its 
discretion.\14\ See, 56 FR 51688-89. Examples of contract markets 
falling within this category include CBT U.S. Treasury notes and 
Eurodollars, NYCE 5-year U.S. Treasury notes, CME one-month LIBOR, and 
MCE U.S. Treasury bonds.
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    \14\ The Commission also noted that all such exemptions under 
rule 1.61(e) must include appropriate plans for the continued 
surveillance and exchange supervision of trading in these contract 
markets and for monitoring and review of the operation of the 
exemption.
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    Finally, the Commission noted that certain contractors for tangible 
commodities such as precious metals and energy contracts are 
characterized by underlying cash markets with liquidity equivalent to 
or greater than certain of the financial futures and options which the 
Commission exempted. Because of the limitation on the delivery 
mechanisms of physically-delivered contracts, however, the Commission 
limited the exemption for such contracts on physical commodities to the 
deferred trading months, requiring retention of a spot-month 
speculative position limit. COMEX gold,

[[Page 38530]]

silver, and copper contracts are examples of such contracts.\15\
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    \15\ Although the Commission cited certain energy contracts as 
eligible for such treatment, the New York Mercantile Exchange 
(NYMEX) has not sought such treatment for its contract markets. 
COMEX was acquired by NYMEX and is now a division of NYMEX.
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    These policies were first considered by the Commission in 
connection with specific exemptive requests by exchanges for existing 
contracts and, because they are based in part on the liquidity of the 
futures markets, are applicable only to existing markets. Except for 
several applications for designation of new foreign currency futures 
adoption contracts,\16\ the Commission has approved few additional 
exemptions since granting the initial exemptive requests.\17\ Moreover, 
the Commission has never formally promulgated these exceptions, nor has 
it incorporated these policies into Guideline No. 1, the Commission's 
guideline for exchange compliance with the requirements for contract 
market designation. As a consequence, the exemptions, which appear only 
in a number of Federal Register notices, are not readily accessible to 
those unfamiliar with Commission precedent.
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    \16\ Although the Commission exempted foreign currency contracts 
from the requirement for position accountability rules based upon 
the recognized liquidity of the underlying cash markets in the major 
foreign currencies, it has also approved, as a matter of exchange 
preference, ``category 2'' position accountability rules (a purely 
informational provision) for a number of such contracts. Futures and 
option contracts based on a non-major foreign currency, which are 
required to include position accountability rules, have been 
approved for ``category 4'' position accountability rules with spot-
month speculative position limits.
    \17\ However, the Commission did approve for position 
accountability rules several newly designated contracts which are 
spreads between existing contracts on financial instruments that are 
the subject of contracts already having position accountability 
rules. These spread contracts, the CBT Yield Curve Spreads, were 
approved for the ``category 4'' position accountability exception.
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    Similarly, the open-interest criterion and numeric formula used by 
the Commission in its 1991 proposed amendment of Commission speculative 
position limits, which have provided the most definitive guidance by 
the Commission to date on acceptable levels for speculative position 
limits for tangible commodities, have not been promulgated as 
Commission rules.\18\ Rather, the staff routinely has applied that 
formula (and its associated minimum levels) as a matter of 
administrative practice when reviewing proposed exchange speculative 
position limits under Commission rule 1.61. The staff examines exchange 
speculative position limit rules in connection with its review of 
applications for designation of futures and option contracts and of any 
subsequent proposed increases to those limits. Despite the formula's 
widespread use as a rule of thumb, it is not readily accessible in its 
present form.
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    \18\ In addition, in reviewing applications for contract 
designation for tangible commodities, the staff has relied upon the 
Commission's formulation providing for a minimum level of 1,000 
contracts for non-spot-month speculative position limits. Moreover, 
the Commission has routinely approved a level of 5,000 contracts for 
non-spot months in applications for designation of financial futures 
and energy contracts and that level has become a rule of thumb as a 
matter of administrative practice.
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    The Commission is proposing to promulgate these informal policies 
as rules and, in a companion notice of proposed rulemaking located 
elsewhere in this edition of the Federal Register, is proposing 
conforming amendments to Guideline No. 1. Promulgating these policies 
within a single section of the Commission's rules will increase 
significantly their accessibility and clarify their terms.
    As proposed by the Commission, the rules clarify several issues 
that the policies do not address. First, the proposed rules make clear 
that no speculative position limit or position accountability rule is 
required for designated contract markets in major foreign currencies. 
No such limitations are necessary because of the nearly inexhaustible 
deliverable supply of the major foreign currencies. Such foreign 
currencies are defined in the Commission's fast-track designation rule 
as a foreign currency ``for which there is no legal impediment to 
delivery and for which there exists a liquid cash market.'' 17 CFR 
5.1(a)(2)(i). The Commission is proposing that contract markets in 
other, less liquid foreign currencies be treated as a futures or option 
contract on any other financial instrument or product.\19\
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    \19\ Although the Commission approved an exchange proposal to 
apply ``category 2'' position accountability rules, which is a 
purely informational provision, to its futures and option contracts 
on major foreign currencies, the Commission does not require any 
position accountability rule for such contracts. Futures and option 
contracts on non-major foreign currencies are required to include a 
position accountability rule. Accordingly, the Commission approved a 
``category 4'' position accountability exception (spot month limit 
and a provision enabling the exchange to order a trader not to 
increase further a position) for such a non-major foreign currency.
---------------------------------------------------------------------------

    The remaining position accountability categories are proposed to 
apply only to existing futures and option contracts.\20\ Consistent 
with the policies, under the proposed rule, the type of position 
accountability rule that applies to a particular contract market is 
determined by the liquidity of the futures market, the liquidity of the 
cash market and the Commission's oversight experience. The Commission 
is proposing, however, to restate the criteria with greater clarity and 
precision, particularly in measuring the necessary levels of liquidity 
of the futures and option markets.\21\
---------------------------------------------------------------------------

    \20\ As explained above, the only instances where position 
accountability rules were permitted in the absence of prior trading 
history was where the contracts were closely related to existing 
contracts for which position accountability rules had already been 
approved.
    \21\ The policy provided that position accountability could be 
based on either a liquid futures or cash market. The Commission is 
proposing to require that both the cash and futures markets be 
liquid. Accordingly, no futures contract can meet the proposed 
rule's requirement at the time of its initial designation and must 
first establish a trading history. The Commission will apply the 
rule prospectively, and any designated contracts or pending 
designation applications that have position accountability rules in 
place in reliance on the liquidity of the cash market alone may 
continue to rely on the policy. The Commission is seeking comment 
specifically on this proposed change, its proposed application only 
to designation applications filed after the effective date of the 
rule and whether the proposed rule would entail any adverse 
consequences.
---------------------------------------------------------------------------

    The Commission is proposing to quantify the necessary levels of 
futures market liquidity similar to its use of a formula to set (and to 
increase) speculative position limits. The formula is based upon a 
market's open interest, a measure of its overall relative size.\22\ 
When substituting position accountability rules for speculative 
position limits, however, the liquidity of the futures and option 
market--measured by volume of trading--is also particularly 
important.\23\ Accordingly, the Commission is proposing to restate the 
futures market liquidity criterion as a required minimum level of open 
interest combined with specified, increasing levels of trading volume. 
As the level of open interest increases, the extent of the exemptive 
relief increases as well.
---------------------------------------------------------------------------

    \22\ The rationale for this criterion is that, as a market's 
overall size grows, the size of the individual speculative positions 
that it can absorb and carry without adverse impact increases.
    \23\ A liquid market is one which has sufficient trading 
activity to enable individual trades coming to a market to be 
transacted without significantly affecting the price. A high degree 
of liquidity in the futures and option market better enables traders 
to arbitrage these markets with the underlying cash markets. Where 
the underlying cash markets in turn are very liquid and have 
extremely large deliverable supplies, the threat of market 
manipulation or distortions caused by large speculative positions is 
lessened. See, 56 FR at 51689.
---------------------------------------------------------------------------

    Specifically, the Commission is proposing that contract markets be 
eligible for position accountability rules in the non-spot months if 
they have a minimum month-end open interest of 50,000 contracts and an 
average daily volume of 5,000 contracts, both measured in terms of all 
months combined for the most recent calendar year. Financial futures 
contracts, as well

[[Page 38531]]

as contracts on tangible commodities having the requisite cash market 
liquidity, are eligible for this proposed exemptive treatment. 
Financial futures contracts having a minimum month-end open interest of 
50,000 contracts and an average daily trading volume of 25,000 
contracts need not impose a spot month limit, but must have a position 
accountability rule that enables the exchange to order traders not to 
increase further their positions. Financial futures contracts having a 
minimum month-end open interest of 50,000 contracts and an average 
daily trading volume of 100,000 contracts may have a position 
accountability rule which only requires that traders provide specified 
information to the exchange if so ordered.
    In addition to a liquid futures market, the Commission has looked 
to the liquidity in the underlying cash market and to its 
administrative experience in approving position accountability rules 
for particular contract markets. The Commission is not proposing to 
quantify an acceptable measure of cash market liquidity. Cash markets 
differ greatly, and many are decentralized, making it difficult to 
propose a uniform means of measuring their liquidity. Generally, 
however, in assessing the liquidity of cash markets, the Commission 
looks to the depth of the market and the tightness of bids and offers. 
The final criterion--administrative experience--is based upon a 
contract market's surveillance history, whether it has been subject to 
problem expirations or liquidations and whether its terms or conditions 
are consistent with current cash market conditions.

IV. Issues Relating to Aggregation and Exemptions for Independently 
Controlled Accounts

    Section 4a of the Act provides that, in determining whether a 
position exceeds the speculative position limits,

the positions held and trading done by any persons directly or 
indirectly controlled by such person shall be included with the 
positions held and trading done by such person; and further, such 
limits upon positions and trading shall apply to positions held by, 
and trading done by, two or more persons acting pursuant to an 
expressed or implied agreement or understanding, the same as if the 
positions were held by, or the trading were done by, a single 
person.

    The Commission and its predecessor agency have interpreted the 
``held or controlled'' standard as applying both to ownership of 
positions or to control of trading decisions. Each aggregation 
criterion is applied separately.\24\ However, beginning in 1979, the 
Commission has recognized a number of exceptions from the general 
principle. In its ``Statement of Policy on Aggregation of Accounts,'' 
44 FR 83839 (June 13, 1979) (1979 Aggregation Policy), the Commission 
determined that a futures commission merchant (FCM) need not aggregate 
the discretionary trading accounts or customer trading programs through 
which a trader affiliated with, but independent of, the FCM directs 
trading of customer-owned positions or accounts. To demonstrate the 
trader's independence, the FCM must maintain only supervisory control 
over the trader, and trading decisions in the discretionary account or 
program must be made independently of trading decisions in all other 
accounts held by the FCM.\25\ Id. at 33843
---------------------------------------------------------------------------

    \24\ See, e.g., Commission rule 18.01 (``holds, has a financial 
interest in or controls''). Using two independent criteria may lead 
to positions being aggregated in more than one manner. Although the 
Commission's large trader reporting system routinely aggregates 
positions reported by FCMs on the basis of the control criterion, 
Commission staff may direct FCMs to report particular accounts on 
the basis of ownership, as well. In addition, the Commission may 
require by special call that individual traders file large-trader 
reports for all positions which they own or control.
    \25\ The 1979 Aggregation Policy offered guidance on the 
criteria considered in determining whether the FCM exercises control 
over the trading decisions of the customer discretionary accounts or 
trading programs. These included the customer account agreement, 
advertising, the agreements between the FCM and its employee or 
other trader, the degree of supervision, the confidentiality of the 
program's trading decisions, reliance on the FCM for market 
information, and financial investment by the FCM in the program 
greater than 10% and common trading patterns. Id. at 33844.
---------------------------------------------------------------------------

    The 1979 Aggregation Policy was based in part on structural changes 
made by the futures industry to respond to the increased acceptance of 
professional management of trading accounts and the use of trading 
programs. Id. at 83840. Further responding to this continuing trend, 
the Commission in 1988 promulgated rule 150.3, 17 CFR 150.3, an 
exemption from speculative position limits for commodity pools or 
similar entities which use independent account controllers. 53 FR 41563 
(October 24, 1988). Commodity pools, pension funds, and other similar 
entities are required to aggregate their positions as the owner of the 
trading accounts, even if those accounts are traded independently by 
multiple independent account controllers. Commission rule 150.3 
exempted such entities which use independent account controllers from 
speculative position limits outside of the spot-month. The exemption 
permits the total positions of the trading entity or vehicle to exceed 
speculative limits during non-spot months, but requires that each 
independent account controller trading on the entity's behalf comply 
with the applicable limits. During the spot month, all positions of the 
entity are required to be aggregated and are subject to the spot-month 
speculative position limit level. Under the exemption as originally 
promulgated, those seeking exemptive treatment were required to file an 
application with the Commission and to document the independence of 
their account controllers.
    In 1991, the Commission extended eligibility for this exemption to 
commodity trading advisors and greatly streamlined the application 
procedure. Subsequently, in 1992 the Commission made the exemption 
self-executing. 57 FR 44492 (September 28, 1992). Commenters on both 
the 1991 and 1992 amendments suggested that, in addition to commodity 
trading advisors, the exemption should be extended to others, including 
investment banks, other financial intermediaries, parent/affiliate 
firms, corporate divisions, commercial banks, merchant banks, and 
insurance companies. The Commission declined to do so, saying that it:

is aware of no adverse market effects resulting from the exemptions 
granted so far.
    Nevertheless, * * * [t]he current exemption and the proposed 
expansion are limited to those who trade professionally for others. 
* * * The classes of trader suggested by commenters for inclusion in 
the exemption differ from this pattern. The Commission will 
undertake further expansion of the exemption after it has had an 
opportunity to assess the impact of the current expansion and has 
gained a better understanding of the characteristics of the market 
user who might benefit from, and their need for, such an exemption.

56 FR 14308, 14312 (April 9, 1991).
    Commission rule 150.3 generally has worked well. It has provided 
flexibility to the markets, accommodating the continuing trend toward 
professional management of speculative trading accounts, while at the 
same time protecting the markets from the undue accumulation of large 
speculative positions owned by a single person or entity in the spot 
month. Since its amendment in 1991, most questions concerning rule 
150.3 have related to its application to integrated financial services 
companies. The number and complexity of these companies has grown in 
the intervening years, a consequence of mergers and consolidation in 
the financial services sector. Such companies generally may include 
affiliated futures commission

[[Page 38532]]

merchants (FCMs), commodity pool operators, and non-Commission 
registrants which may also trade futures and option contracts for their 
own accounts. They may grant their affiliates or subsidiaries 
independent trading authority with appropriate safeguards to maintain 
the affiliates' independence and the confidentiality of the affiliates' 
trading decisions. However, presently only affiliated commodity pool 
operators and commodity trading advisors meet the rule's eligibility 
requirement.\26\
---------------------------------------------------------------------------

    \26\ FCMs have similar but not identical relief under the 1979 
Aggregation Policy discussed above.
---------------------------------------------------------------------------

    The Commission is proposing to amend rule 150.3 better to reflect 
the continuing trend to greater complexity in the structure of 
financial services companies. Such companies, as a matter of business 
preference, may provide their affiliates with independent trading 
authority and are structured in a manner which meets the policies of 
rule 150.3. The Commission is proposing to include the separately 
incorporated affiliates of commodity pool operator, commodity trading 
advisor or futures commission merchant as eligible entities for the 
exemptive relief of rule 150.3.\27\
---------------------------------------------------------------------------

    \27\ Affiliated companies are generally understood to include 
one company that owns, or is owned by, another or companies that 
share a common owner.
---------------------------------------------------------------------------

    The Commission is also proposing to expand the classes of entities 
which are eligible for the exemption in response to the continuing 
trend toward greater professional management of trading funds. Single-
investor commodity pools or commodity pools having a very limited 
number of participants have been created as part of this trend. Often 
these pools are organized as limited partnerships, and in many cases, 
the limited partner or partners, who may also trade professionally, 
provide almost all of the trading capital. The operators of such 
commodity pools generally, by virtue of having fewer than fifteen 
participants in the pools and less than $200,000 in capital 
contributions, would be exempt from registration under Commission rule 
4.13. As discussed in greater detail below, the Commission is of the 
view that the trading of these limited partnerships should not be 
disaggregated from trading by such a limited partner. However, because 
these commodity pools may provide for the pool's trading by an 
independent account controller, the Commission believes that they 
appropriately can be included within the exemption from speculative 
position limits for the non-spot month limits under Commission rule 
150.3.
    The Commission is also proposing to include with the exemption 
banks, trust companies, savings and loan associations, insurance 
companies and the separately incorporated affiliates of any of the 
above entities. These additional classes of eligible entity were 
suggested for inclusion by some commenters when the Commission last 
proposed to revise the rule 150.3 exemption. In light of the successful 
operation of the exemption during the intervening years, the Commission 
believes that it should now consider extending the exemption to these 
entities. Accordingly, the Commission is proposing that any of the 
above entities that grants its affiliates or subsidiaries independent 
trading authority, maintains only the supervisory authority over their 
trading activity consistent with its fiduciary, statutory and 
regulatory responsibilities \28\ and creates a system of controls to 
ensure that it or its affiliates have no knowledge of the trading 
decisions of other of its affiliates can exceed speculative position 
limits outside of the spot month. During the spot month, all of the 
affiliates' accounts, except for those of an affiliated FCM qualifying 
under the 1979 Aggregation Policy, must be aggregated for speculative 
position purposes as positions belonging to a single owner.
---------------------------------------------------------------------------

    \28\ See e.g., sections 2(a)(1)(A)(iii) and 4f(c) of the Act and 
Commission rule 166.3.
---------------------------------------------------------------------------

    The Commission is proposing to codify in rule 150.4 the substance 
of its policies on aggregation, particularly its 1979 Aggregation 
Policy. The substance of its aggregation policies currently is 
contained in rules 17.00 and 18.01, 17 CFR 17.00 and 18.01, which 
specify the manner of identifying accounts for reporting purposes. The 
Commission is of the view that its rules on aggregating positions for 
speculative limit compliance should be codified as such, rather than be 
drawn by inference from the Commission's large-trader reporting 
requirements.
    In codifying these policies, the Commission also is proposing to 
amend the limited partner exception of Commission rule 18.01.\29\ 
Commission rule 18.01 governs the Commission's reporting requirements 
and parallels the 1979 Aggregation standard. It defines an account 
owner as a person or entity having a 10% or greater financial interest 
in the account, except for limited partners. Limited partners had been 
exempt from definitions of ownership beginning with the Commission's 
predecessor agency, the Commodity Exchange Authority, based upon the 
assumption that limited partners by definition were required to be 
passive investors and were prohibited from exercising control over the 
trading activities of the partnership. However, the degree to which 
limited partners can be involved in the operation of a partnership 
varies under state law. Although limited partners generally are 
precluded from ``controlling'' the business of the partnership, they 
may not be precluded from being involved to some degree in the 
partnership's trading decisions.\30\
---------------------------------------------------------------------------

    \29\ As discussed above, the Commission is proposing to include 
within the exemption from speculative position limits under 
Commission rule 150.3 the operators of commodity pools which are 
exempt from registration under Commission rule 4.13.
    \30\ Section 303(b) of the Revised Uniform Limited Partnership 
Act provides in part that:
    A limited partner does not participate in the control of the 
business * * * solely by * * * (2) consulting with and advising a 
general partner with respect to the business of the limited 
partnership. * * *
---------------------------------------------------------------------------

    The Commission has become aware of, and concerned of, trading by 
single-investor commodity pools. In these commodity pools, a single 
limited partner may contribute virtually all of the pool's trading 
capital, relying upon the general partner to control trading in the 
account. Previously, persons with this type of ownership interest may 
not have aggregated the pool's positions with their own in reliance of 
the exception under Commission rule 18.01 for limited partners in a 
commodity pool.\31\
---------------------------------------------------------------------------

    \31\ Commission rule 18.01 provides, in part, that:
    If any trader holds, has a financial interest in or controls 
more than one account, * * * all such accounts shall be considered 
as a single account for * * * the purpose of reporting. For the 
purpose of Sec. 18.01, except for the interest of a limited partner 
or shareholder (other than the CPO) in a commodity pool, the term 
``financial interest'' shall mean an interest of 10 percent or more 
in ownership or equity of an account.
---------------------------------------------------------------------------

    In light of the possibility that limited partners may be less than 
wholly passive investors, the likelihood that limited partners may be 
involved to some degree in the trading decisions of the partnership's 
trading activity rises as the overall number of limited partners in a 
commodity pool decreases, such as in the single or limited-number 
investor pool or when a small number of limited partners have a 
relatively dominant ownership interest. Accordingly, the Commission is 
proposing to require a limited partner, shareholder or other type of 
pool participant (such as a member of a limited liability company), to 
aggregate the pool's positions with the trader's other positions if the 
trader has as an ownership interest of 25% or

[[Page 38533]]

greater in the pooled account or if the pool has ten or fewer 
participants.\32\
---------------------------------------------------------------------------

    \32\ It should be noted that, while such positions must be 
aggregated, the Commission has also proposed to include such 
entities within the exemption of rule 150.3. Accordingly, where the 
limited partners in fact treat the partnership as an independent 
trader, they qualify for an exemption from speculative position 
limits for non-spot months. During the spot month, however, the 
limited partners or shareholders would be required to aggregate the 
partnership positions.
---------------------------------------------------------------------------

    The Commission does not intend by this proposal to modify the 
general treatment of limited partners or shareholders in commodity 
pools, but rather intends to require aggregation by limited partners or 
shareholders in unusual or atypical arrangements.\33\ The Commission 
requests comments specifically to address the typical organization for 
pools and whether levels proposed are appropriate for reaching only 
unusual ownership forms.
---------------------------------------------------------------------------

    \33\ The Commission is proposing to clarify that participants in 
additional categories of limited-liability business organizations, 
such as members of limited liability companies, for the purpose of 
these rules, are treated the same as limited partners or 
shareholders.
---------------------------------------------------------------------------

    The Commission is proposing an additional revision to the existing 
limited partnership exemption to clarify its application to commodity 
pool operators. Currently, commodity pools are excluded from the 
limited partnership exemption. Accordingly, commodity pool operators 
which are also a limited partner have a financial interest which causes 
them to aggregate their positions if their ownership interest is ten 
percent or greater. This is apart from the requirement that they 
aggregate positions based upon trading control. The question has arisen 
whether the commodity pool operator's principals or affiliates, if 
investing as limited partners, are covered by the ten percent interest 
requirement. The Commission is of the view that principles and 
affiliates of the commodity pool operator were intended to be treated 
under the rule the same as the commodity pool operator itself. This 
would be consistent with the explicit treatment of FCMs investing in 
customer trading programs or pools under the 1979 Aggregation Policy. 
The Commission is proposing to amend the limited partner exception to 
make explicit its understanding of the rule's application to the 
principals and affiliates of the pool operator.

III. Other Matters

A. Paperwork Reduction Act

    When publishing proposed rules, the Paperwork Reduction Act of 1995 
(Pub. L. 104-13 (May 13, 1996)) imposes certain requirements on federal 
agencies (including the Commission) in connection with their conducting 
or sponsoring any collection of information as defined by the Paperwork 
Reduction Act. In compliance with the Act, the Commission, through this 
rule proposal, solicits comment to:
    (1) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the agency, 
including the validity of the methodology and assumptions used; (2) 
evaluate the accuracy of the agency's estimate of the burden of the 
proposed collection of information including the validity of the 
methodology and assumptions used; (3) enhance the quality utility, and 
clarity of the information to be collected; and (4) minimize the burden 
of the collection of the information on those who are to respond 
through the use of appropriate automated, electronic, mechanical, or 
other technological collection techniques or other forms of information 
technology, e.g., permitting electronic submission of responses.
    The Commission has submitted the proposed rule and its associated 
information collection requirements to the Office of Management and 
Budget. The proposed rules are part of two approved information 
collections. The burdens associated with these rules are as follows:

                            Collection Number                           
                               [3038-0013]                              
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Average burden hours per response........  6                            
Number of respondents....................  12                           
Frequency of response....................  On occasion                  
------------------------------------------------------------------------


                            Collection Number                           
                               [3038-0009]                              
------------------------------------------------------------------------
                                                                        
------------------------------------------------------------------------
Average burden hours per response........  4.74                         
Number of respondents....................  3709                         
Frequency of response....................  On occasion                  
------------------------------------------------------------------------

    Persons wishing to comment on the information which would be 
required by this proposed/amended rule should contact the Desk Officer, 
CFTC, Office of Management and Budget, Room 10202, NEOB, Washington, DC 
20503, (202) 395-7340. Copies of the information collection submission 
to OMB are available from the CFTC Clearance Officer, 1155 21st St 
N.W., Washington, DC 20581, (202) 418-5160.

B. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) 5 U.S.C. 601 et seq., requires 
that agencies, in proposing rules, consider the impact of those rules 
on small businesses. The Commission has previously determined that 
large traders are not small entities for purposes of the RFA.\34\ The 
Commission believes that the proposed rule amendments to raise 
Commission speculative position limits would only impact large traders. 
In addition, the Commission is of the opinion that the proposed 
amendments to Commission rule 150.3, under which certain eligible 
entities will be exempted from speculative limits (except in the spot-
month) would apply exclusively to large traders, as would the proposal 
to codify in rule 150.4 its policies on aggregation. Similarly, the 
Commission's proposal to aggregate the positions of participants in 
pooled accounts with a greater than 25 percent ownership interest in 
the accounts is not expected to impact a significant number of small 
entities. The Chairperson, on behalf of the Commission, hereby 
certifies, pursuant to 5 U.S.C. 605(b), that the action taken herein 
will not have a significant economic impact on a substantial number of 
small entities. The certification is based on the fact that the 
proposed rules will lift speculative limits levels, extend exemptive 
relief from speculative limits (except in the spot-month) to certain 
eligible entities and codify the Commission policies on aggregation, 
including its rules on aggregating positions for speculative limit 
compliance. The proposed rules permitting such transactions subject to 
the specified conditions, therefore, remove a burden for all entities, 
regardless of size.
---------------------------------------------------------------------------

    \34\ 47 FR 18618 (April 30, 1982).
---------------------------------------------------------------------------

List of Subjects

17 CFR Part 1

    Brokers, Commodity futures, Consumer protection, Reporting and 
recordkeeping requirements, Segregation requirements.

17 CFR Part 17

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

17 CFR Part 18

    Brokers, Commodity futures, Reporting and recordkeeping 
requirements.

[[Page 38534]]

17 CFR Part 150

    Agricultural commodities, Bona fide hedge positions, Position 
limits, Spread exemptions.
    In consideration of the foregoing, and pursuant to the authority 
contained in the Act, and in particular sections 2(a)(1), 2(a)(2), 4a, 
4c, 4f, 4g, 4i, 4n, 5, 5a, 6b, 6c, 8a, and 15, 7 U.S.C. 2, 6a, 6c, 6f, 
6g, 6i, 6n, 7, 7a, 12a, 13a, 13a-1, and 19, the Commission hereby 
proposes to amend parts 1, 17, 18, and 150 of 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 for part 1 continues to read as follows:

    Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 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-l, 16, 16a, 19, 21, 23, and 24.

    2. Section 1.61 is proposed to be removed and reserved.

PART 17--REPORTS BY FUTURES COMMISSION MERCHANTS, MEMBERS OF 
CONTRACT MARKETS AND FOREIGN BROKERS

    3. The authority citation for part 17 continues to read as follows:

    Authority: 7 U.S.C. 6a, 6d, 6f, 6g, 6i, 7, and 12a.

    4. Section 17.00 is proposed to be amended by renumbering paragraph 
(b)(1) as (b) and revising it, by removing paragraphs (b)(2) and (c), 
by renumbering paragraphs (b)(1)(i) and (b)(1)(ii) as (b)(1) and 
(b)(2), respectively, and by adding paragraph (b)(3), to read as 
follows:


Sec. 17.00  Information to be furnished by futures commission 
merchants, clearing members and foreign brokers.

* * * * *
    (b) Interest in or control of several accounts. Except as otherwise 
instructed by the Commission or its designee and as specifically 
provided in Sec. 150.4 of this chapter, if any person holds or has a 
financial interest in or controls more than one account, all such 
accounts shall be considered by the futures commission merchant, 
clearing member or foreign broker as a single account for the purpose 
of determining special account status and for reporting purposes. For 
purposes of this section, the following shall apply:
    (1) * * *
    (3) Account ownership--Multiple accounts owned by a trader shall be 
considered a single account as provided under Sec. Sec. 150.4(b), (c) 
and (d) of this chapter.

PART 18--REPORTS BY TRADERS

    5. The authority citation for part 18 continues to read as follows:

    Authority: 7 U.S.C. 2, 4, 6a, 6c, 6f, 6g, 6i, 6k, 6m, 6n, 12a, 
and 19; 5 U.S.C. 552 and 552(b) unless otherwise noted:

    6. Section 18.01 is proposed to be revised to read as follows:


Sec. 18.01  Interest in or control of several accounts.

    If any traders holds, has a financial interest in or controls 
positions in more than one account, whether carried with the same or 
with different futures commission merchants or foreign brokers, all 
such positions and accounts shall be considered as a single account for 
the purpose of determining whether such trader has a reportable 
position and, unless instructed otherwise in the special call to report 
under Sec. 18.00 of this part, for the purpose of reporting.

PART 150--LIMITS ON POSITIONS

    6. The authority citation for part 150 continues to read as 
follows:

    Authority: 7 U.S.C. 6a, 6c and 12a(5).

    7. In Sec. 150.1 the introductory text of paragraph (d), and 
paragraphs (d)(2), (e)(2) and (e)(5) are proposed to be revised to read 
as follows:


Sec. 150.1  Definitions.

* * * * *
    (d) Eligible entity means--
    A commodity pool operator, the operator of a trading vehicle which 
is excluded or who itself has qualified for exclusion from the 
definition of the term ``pool'' or commodity pool operator,'' 
respectively, under Sec. 4.5 of this chapter; the limited partner or 
shareholder in a commodity pool the operator of which is exempt from 
registration under Sec. 4.13 of this chapter; a commodity trading 
advisor; a bank or trust company; a savings and loan association; an 
insurance company; or the separately incorporated affiliates of a 
futures commission merchant or of any of the above entities:
    (1) * * *
    (2) Which maintains: (i) only such minimum control over the 
independent account controller as is consistent with its fiduciary 
responsibilities and necessary to fulfill its duty to supervise 
diligently the trading done on its behalf; or (ii) if a limited partner 
or shareholder of a commodity pool exempt from registration under 
Sec. 4.13 of this chapter, only such limited control as is consistent 
with its status.
    (e) Independent account controller means a person--
    (1) * * *
    (2) Over whose trading the eligible entity maintains only such 
minimum control as is consistent with its fiduciary responsibilities to 
fulfill its duty to supervise diligently the trading done on its behalf 
or as is consistent with such other legal rights or obligations which 
may be incumbent upon the eligible entity to fulfill;
    (3) * * *
    (5) Who is registered as a futures commission merchant, introducing 
broker, commodity trading advisor or an associated person of any such 
registrant or a commodity pool operator that is exempt from 
registration under Sec. 4.13 of this chapter.
    8. Section 150.2 is proposed to be revised to read as follows:


Sec. 150.2  Position limits.

    No person may hold or control positions, separately or in 
combination, net long or net short, for the purchase or sale of a 
commodity for future delivery or, on a futures-equivalent basis, 
options thereon, in excess of the following:

                       Speculative Position Limits                      
                              [By contract]                             
------------------------------------------------------------------------
                                       Limits by number of contracts    
                                  --------------------------------------
             Contract                              Single               
                                   Spot  month     month     All  months
------------------------------------------------------------------------
                         CHICAGO BOARD OF TRADE                         
------------------------------------------------------------------------
Corn.............................          600        5,500        9,000
Oats.............................          600        1,000        1,500

[[Page 38535]]

                                                                        
Soybeans.........................          600        3,500        5,500
Wheat............................          600        3,000        4,000
Soybean Oil......................          540        3,000        4,000
Soybean Meal.....................          720        3,000        4,000
------------------------------------------------------------------------
                     MIDAMERICA COMMODITY EXCHANGE                      
------------------------------------------------------------------------
Corn.............................         3000         6000         6000
Oats.............................         2000         2000         2000
Soybeans.........................         3000         6000         6000
Wheat............................         3000         6000         6000
Soybean Meal.....................          800          800          800
------------------------------------------------------------------------
                       MINNEAPOLIS GRAIN EXCHANGE                       
------------------------------------------------------------------------
Hard Red Spring Wheat............          600        3,000        4,000
White Wheat......................          600        1,200        1,200
------------------------------------------------------------------------
                        NEW YORK COTTON EXCHANGE                        
------------------------------------------------------------------------
Cotton No. 2.....................          300        2,500        3,500
------------------------------------------------------------------------
                       KANSAS CITY BOARD OF TRADE                       
------------------------------------------------------------------------
Hard Winter Wheat................          600        3,000        4,000
------------------------------------------------------------------------

    9. Section 150.4 is proposed to be revised to read as follows:


Sec. 150.4  Aggregation of positions.

    (a) Positions to be aggregated. The position limits set forth in 
Sec. 150.2 of this part shall apply to all positions in accounts for 
which any person by power of attorney or otherwise directly or 
indirectly holds positions or controls trading or to positions held by 
two or more persons acting pursuant to an expressed or implied 
agreement or understanding the same as if the positions were held by, 
or the trading of the position were done by, a single individual.
    (b) Ownership of accounts. For the purpose of applying the position 
limits set forth in Sec. 150.2, except for the ownership interest of 
limited partners or shareholders as set forth in paragraph (c) of this 
section, any trader holding positions in more than one account, or 
holding accounts or positions in which the trader by power of attorney 
or otherwise directly or indirectly has a 10 percent or greater 
ownership or equity interest, must aggregate all such accounts or 
positions.
    (c) Ownership by limited partners, shareholders or other pool 
participants. For the purpose of applying the position limits set forth 
in Sec. 150.2, any trader having a 25 percent or greater ownership or 
equity interest in an account or positions as a limited partner, 
shareholder or other category of pool participant must aggregate those 
accounts or positions with all other accounts or positions owned or 
controlled by the trader; Provided however, that:
    (1) A limited partner, shareholder or other pool participant that 
is also a principal or affiliate of the commodity pool operator must 
aggregate the pooled account or positions with all other accounts or 
positions owned or controlled by that trader if the trader's ownership 
or equity interest in the pooled accounts or positions is 10 percent or 
greater; or
    (2) Each limited partner, shareholder or other pool participant 
having an ownership interest in a pooled account or positions with ten 
or fewer partners or shareholders must aggregate the pooled account or 
positions with all other accounts or positions owned or controlled by 
the trader if the trader's ownership or equity interest in the pooled 
accounts or positions is 10 percent or greater.
    (d) Trading Control by Futures Commission Merchants. The position 
limits set forth in Sec. 150.2 of this part shall be construed to apply 
to all positions held by a futures commission merchant in a 
discretionary account, or in an account which is part of, or 
participates in, or receives trading advice from a customer trading 
program of a futures commission merchant, or any of the officers, 
partners, or employees of such futures commission merchant, unless:
    (1) A trader other than the futures commission merchant directs 
trading in such an account;
    (2) The futures commission merchant maintains only such minimum 
control over the trading in such an account as is necessary to fulfill 
its duty to supervise diligently trading in the account; and
    (3) Each trading decision of the discretionary account or the 
customer trading program is determined independently of all trading 
decisions in other accounts which the futures commission merchant 
holds, has a financial interest of 10 percent or more in, or controls.
    10. New Sec. 150.5 is proposed to be added to read as follows:


Sec. 150.5  Exchange-set speculative position limits.

    (a) Exchange limits. Each contract market, as a condition of 
designation under part 5, appendix A of this chapter, shall by bylaw, 
rule, regulation, or resolution limit the maximum number of contracts a 
person may hold or control, separately or in combination, net long or 
net short, for the purchase or sale of a commodity for future delivery 
or, on a futures equivalent basis, options thereon. This section shall 
not apply to a contract market for

[[Page 38536]]

which position limits are set forth in Sec. 150.2 of this part or for a 
futures or option contract market on a major foreign currency for which 
there is no legal impediment to delivery and for which there exists a 
highly liquid cash market. Nothing in this section shall be construed 
to prohibit a contract market from fixing different and separate 
position limits for different types of futures contracts based on the 
same commodity, different position limits for different futures or for 
different delivery months, or from exempting positions which are 
normally known in the trade as ``spreads, straddles, or arbitrage,'' or 
from fixing limits which apply to such positions which are different 
from limits fixed for other positions.
    (b) Levels at designation. At the time of its initial designation, 
a contract market must provide for speculative position limit levels as 
follows:
    (1) The spot month limit level for physical delivery contracts must 
be no greater than one-quarter of the estimated spot month deliverable 
supply calculated separately for each month to be listed and for cash-
settled contracts based on a small or not highly liquid underlying cash 
market must be at a level that will tend to prevent or diminish price 
manipulation;
    (2) Individual non-spot month or all-months-combined levels must be 
no greater than 1,000 contracts for tangible commodities other than 
energy products;
    (3) individual non-spot month or all-months-combined levels must be 
no greater than 5,000 contracts for energy products and non-tangible 
commodities, including contracts on financial products.
    (c) Adjustments to levels. Twelve months after a contract market's 
initial listing for trading, or an any time thereafter, contract 
markets may adjust their speculative limit levels as follows:
    (1) The spot month limit level for physical delivery contracts must 
be no greater than one-quarter of the estimated spot month deliverable 
supply calculated separately for each month to be listed and for cash-
settled contracts based on a small or not highly liquid underlying cash 
market must be at a level that will tend to prevent or diminish price 
manipulation; and
    (2) Individual non-spot month or all-months-combined levels must be 
no greater than 10 percent of the average combined futures and delta-
adjusted option month-end open interest for the most recent calendar 
year up to 25,000 contracts with a marginal increase of 2.5 percent 
thereafter, or be 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, 
the breadth and liquidity of the cash market underlying each delivery 
month and the opportunity for arbitrage between the futures market and 
cash market in the commodity underlying the futures contract.
    (d) Hedge exemption. (1) No exchange by law, rule regulation, or 
resolution adopted pursuant to this section shall apply to bona fide 
hedging positions as defined by a contract market in accordance with 
Sec. 1.3(z)(1) of this chapter. Provided, that the contract market may 
limit bona fide hedging positions or any other positions which have 
been exempted pursuant to paragraph (e) of this section which it 
determines are not in accord with sound commercial practices or exceed 
an amount which may be established and liquidated in an orderly 
fashion.
    (2) Traders must apply to the contract market for exemption from 
its speculative position limit rules. In considering whether to grant 
such an application for exemption, contract markets must take into 
account the factors contained in paragraph (d)(1) of this section.
    (e) Trader accountability exemption. Tweleve months after a 
contract market's initial listing for trading, or at any time 
thereafter, contract markets may submit for Commission approval under 
section 5a(a)(12) of the Act and Sec. 1.41(b) of this chapter, a bylaw, 
rule, regulation, or resolution, substituting for the position limits 
required under paragraphs (a), (b) and (c) of this section, an exchange 
rule requiring traders to be accountable for large positions as 
follows:
    (1) For futures and option contracts on a financial instrument or 
product having an average month-end 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 the 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 the 
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;
    (4) For purposes of this paragraph, trading volume and month-end 
open interest shall be calculated based upon the futures contract and 
its related option contract, on a delta-adjusted basis, for all trading 
months listed during the most recent twelve month period.
    (f) Other exemptions. Exchange speculative position limits adopted 
pursuant to this section shall not apply to any position acquired in 
good faith prior to the effective date of any bylaw, rule, regulation, 
or resolution which specifies such limit or to a person that is 
registered as a futures commission merchant or as a floor broker under 
authority of the Act except to the extent that transactions made by 
such person are made on behalf of or for the account or benefit of such 
person. In addition to the express exemptions specified in this 
section, a contract market may propose such other exemptions from its 
position limits consistent with the purposes of this section and shall 
submit such rules for Commission review under section 5a(a)(12) of the 
Act and Sec. 1.41(b) of this chapter.
    (g) Aggregation. In determining whether any person has exceeded the 
limits established under this section, all positions in accounts for 
which such person by power of attorney or otherwise directly or 
indirectly controls trading shall be included with the positions held 
by such person; such limits upon positions shall apply to positions 
held by two or more person acting pursuant to an expressed or implied 
agreement or understanding, the same as if the positions were held by a 
single person.


[[Page 38537]]


    Issued by the Commission this 13th day of July, 1998, in 
Washington, D.C.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 98-19114 Filed 7-16-98; 8:45 am]
BILLING CODE 6351-01-M


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