Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38525

Counsel, Federal Aviation

Administration, 2300 East Devon

Avenue, Des Plaines, Illinois. An

informal docket may also be examined

during normal business hours at the Air

Traffic Division, Airspace Branch,

Federal Aviation Administration, 2300

East Devon Avenue, Des Plaines,

Illinois.

FOR FURTHER INFORMATION CONTACT:

Michelle M. Behm, Air Traffic Division,

Airspace Branch, AGL–520, Federal

Aviation Administration, 2300 East

Devon Avenue, Des Plaines, Illinois

60018, telephone (847) 294–7568.

SUPPLEMENTARY INFORMATION:

Comments Invited

Interested parties are invited to

participate in this proposed rulemaking

by submitting such written data, views,

or arguments as they may desire.

Comments that provide the factual basis

supporting the views and suggestions

presented are particularly helpful in

developing reasoned regulatory

decisions on the proposal. Comments

are specifically invited on the overall

regulatory, aeronautical, economic,

environmental, and energy-related

aspects of the proposal.

Communications should identify the

airspace docket number and be

submitted in triplicate to the address

listed above. Commenters wishing the

FAA to acknowledge receipt of their

comments on this notice must submit

with those comments a self-addressed,

stamped postcard on which the

following statement is made:

‘‘Comments to Airspace Docket No. 98–

AGL–43.’’ The postcard will be date/

time stamped and returned to the

commenter. All communications

received on or before the specified

closing date for comments will be

considered before taking action on the

proposed rule. The proposal contained

in this notice may be changed in light

of comments received. All comments

submitted will be available for

examination in the Rules Docket, FAA,

Great Lakes Region, Office of the

Assistant Chief Counsel, 2300 East

Devon Avenue, Des Plaines, Illinois,

both before and after the closing date for

comments. A report summarizing each

substantive public contact with FAA

personnel concerned with this

rulemaking will be filed in the docket.

Availability of NPRM’s

Any person may obtain a copy of this

Notice of Proposed Rulemaking (NPRM)

by submitting a request to the Federal

Aviation Administration, Office of

Public Affairs, Attention: Public Inquiry

Center, APA–230, 800 Independence

Avenue, S.W., Washington, DC 20591,

or by calling (202) 267–3484.

Communications must identify the

notice number of this NPRM. Persons

interested in being placed on a mailing

list for future NPRM’s should also

request a copy of Advisory Circular No.

11–2A, which describes the application

procedure.

The Proposal

The FAA is considering an

amendment to 14 CFR part 71 to modify

Class E airspace at Two Harbors, MN, to

accommodate aircraft executing the

proposed GPS Rwy 24 SIAP at Richard

B. Helgeson Airport by increasing the

radius of, and adding a northeast

extension to, the existing controlled for

the airport. Controlled airspace

extending upward from 700 to 1200 feet

AGL is needed to contain aircraft

executing the approach. The area would

be depicted on appropriate aeronautical

charts. Class E airspace designations for

airspace areas extending upward from

700 feet or more above the surface of the

earth are published in paragraph 6005 of

FAA Order 7400.9E dated September

10, 1997, and effective September 16,

1997, which is incorporated by

reference in 14 CFR 71.1. The Class E

airspace designation listed in this

document would be published

subsequently in the Order.

The FAA has determined that this

proposed regulation only involves an

established body of technical

regulations for which frequent and

routine amendments are necessary to

keep them operationally current.

Therefore this, proposed regulation—(1)

is not a ‘‘significant regulatory action’’

under Executive Order 12866; (2) is not

a ‘‘significant rule’’ under DOT

Regulatory Policies and Procedures (44

FR 11034; February 26, 1979); and (3)

does not warrant preparation of a

Regulatory Evaluation as the anticipated

impact is so minimal. Since this is a

routine matter that will only affect air

traffic procedures and air navigation, it

is certified that this proposed rule will

not have a significant economic impact

on a substantial number of small entities

under the criteria of the Regulatory

Flexibility Act.

List of Subjects in 14 CFR part 71

Airspace, Incorporation by reference,

Navigation (air).

The Proposed Amendment

Accordingly, pursuant to the

authority delegated to me, the Federal

Aviation Administration proposes to

amend 14 CFR part 71 as follows:

PART 71—DESIGNATION OF CLASS A,

CLASS B, CLASS C, CLASS D, AND

CLASS E AIRSPACE AREAS;

AIRWAYS; ROUTES; AND REPORTING

POINTS

1. The authority citation for part 71

continues to read as follows:

Authority: 49 U.S.C. 106(g), 40103, 40113,

40120; E.O. 10854, 24 FR 9565, 3 CFR, 1959–

1963 Comp., p. 389.

§ 71.1 [Amended]

2. The incorporation by reference in

14 CFR 71.1 of the Federal Aviation

Administration Order 7400.9E, Airspace

Designations and Reporting Points,

dated September 10, 1997, and effective

September 16, 1997, is amended as

follows:

Paragraph 6005 Class E airspace areas

extending upward from 700 feet or more

above the surface of the earth.

* * * * *

AGL MN E5 Two Harbors, MN [Revised]

Richard B. Helgeson Airport, MN

(Lat. 47°02′55′′ N, long. 91°44′43′′ W)

ANATE Waypoint

(Lat. 47°05′30′′ N, long. 91°37′46′′ W)

The airspace extending upward from 700 feet

above the surface within a 6.4-mile radius of

Richard B. Helgeson Airport and within 2.7

miles each side of the 073° bearing from

Richard B. Helgeson Airport, extending from

the 6.4-mile radius to 7.4 miles northeast of

the airport, and within 4.0 miles each side of

the 042° bearing from ANATE Waypoint,

extending from the waypoint to 6.4 miles

northeast of the waypoint, excluding that

airspace within the Silver Bay, MN, Class E

airspace area.

* * * * *

Issued in Des Plaines, Illinois on July 6,

1998.

David B. Johnson,

Acting Manager, Air Traffic Division.

[FR Doc. 98–19102 Filed 7–16–98; 8:45 am]

BILLING CODE 4910–13–M

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.

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
38526 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

1See, 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.

2Commission 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 Commissionset 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.

3Section 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.

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).

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

[secretary@cftc.gov]. 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,

[PArchitzel@cftc.gov].

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:

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

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
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38527

5However, 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.

6These 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.

7Providing 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.

8Those 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.

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.

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

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.

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.

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.

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 backmonth 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
38528 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

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.

10The 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.

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.

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.

SPECULATIVE POSITION LIMITS

[by contract] 11

Contract

Current levels (as of March 31, 1994) Reproposed levels

Spot

month

Single

month

All

months

Spot

month

Single

month

All

months

CHICAGO BOARD OF TRADE

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

MIDAMERICA COMMODITY EXCHANGE

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

MINNEAPOLIS GRAIN EXCHANGE

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
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38529

12THe 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.

13As noted above, the CME and the PBOT

voluntarily apply a ‘‘category 2’’ position

accountability rule to their foreign currency

contracts.

14The 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.

SPECULATIVE POSITION LIMITS—Continued

[by contract] 11

Contract

Current levels (as of March 31, 1994) Reproposed levels

Spot

month

Single

month

All

months

Spot

month

Single

month

All

months

NEW YORK COTTON EXCHANGE

Cotton No. 2 ...................................................................... 300 1,600 2,500 300 2,500 3,500

KANSAS CITY BOARD OF TRADE

Hard Winter Wheat ........................................................... 600 2,100 3,200 600 3,000 4,000

11The 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

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

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 onemonth LIBOR, and MCE U.S. Treasury

bonds.

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 physicallydelivered 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,
38530 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

15Although 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.

16Although 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.

17However, 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.

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.

19Although 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.

20As 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.

21The 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.

22The 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.

23A 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.

silver, and copper contracts are

examples of such contracts.15

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.

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.

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

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

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.

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
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38531

24See, 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.

25The 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.

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

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
38532 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

26FCMs have similar but not identical relief

under the 1979 Aggregation Policy discussed above.

27Affiliated companies are generally understood

to include one company that owns, or is owned by,

another or companies that share a common owner.

28See e.g., sections 2(a)(1)(A)(iii) and 4f(c) of the

Act and Commission rule 166.3.

29As 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.

30Section 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.

* * *

31Commission 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

§ 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.

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

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

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.

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

The Commission has become aware

of, and concerned of, trading by singleinvestor 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

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
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38533

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.

33The Commission is proposing to clarify that

participants in additional categories of limitedliability business organizations, such as members of

limited liability companies, for the purpose of these

rules, are treated the same as limited partners or

shareholders. 34 47 FR 18618 (April 30, 1982).

greater in the pooled account or if the

pool has ten or fewer participants.32

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.

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.

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.
38534 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

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:

§ 17.00 Information to be furnished by

futures commission merchants, clearing

members and foreign brokers.

* * * * *

(b) Interest in or control of several

accounts. Except as otherwise

instructed by the Commission or its

designee and as specifically provided in

§ 150.4 of this chapter, if any person

holds or has a financial interest in or

controls more than one account, all such

accounts shall be considered by the

futures commission merchant, clearing

member or foreign broker as a single

account for the purpose of determining

special account status and for reporting

purposes. 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 § § 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:

§ 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 § 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 § 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:

§ 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 § 4.5 of

this chapter; the limited partner or

shareholder in a commodity pool the

operator of which is exempt from

registration under § 4.13 of this chapter;

a commodity trading advisor; a bank or

trust company; a savings 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 § 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 § 4.13 of

this chapter.

8. Section 150.2 is proposed to be

revised to read as follows:

§ 150.2 Position limits.

No person may hold or control

positions, separately or in combination,

net long or net short, for the purchase

or sale of a commodity for future

delivery or, on a futures-equivalent

basis, options thereon, in excess of the

following:

SPECULATIVE POSITION LIMITS

[By contract]

Contract

Limits by number of contracts

Spot

month

Single

month

All

months

CHICAGO BOARD OF TRADE

Corn .......................................................................................................................................................... 600 5,500 9,000

Oats .......................................................................................................................................................... 600 1,000 1,500
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38535

SPECULATIVE POSITION LIMITS—Continued

[By contract]

Contract

Limits by number of contracts

Spot

month

Single

month

All

months

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:

§ 150.4 Aggregation of positions.

(a) Positions to be aggregated. The

position limits set forth in § 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 § 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 § 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 § 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 § 150.5 is proposed to be

added to read as follows:

§ 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
38536 Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules

which position limits are set forth in

§ 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 allmonths-combined levels must be no

greater than 1,000 contracts for tangible

commodities other than energy

products;

(3) individual non-spot month or allmonths-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 allmonths-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 § 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

§ 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 § 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.
Federal Register / Vol. 63, No. 137 / Friday, July 17, 1998 / Proposed Rules 38537

1 Designation as a contract market under the 1921

Act was contingent upon a board of trade’s

providing for the prevention of manipulative

activity and the prevention of dissemination of false

information, upon providing for certain types of

recordkeeping and for admission into exchange

membership of cooperative producer associations,

and upon location of the contract market at a

terminal cash market. See, §§ 5(a), (b), (c), (d) and

(e) of the Futures Trading Act of 1921. Although the

constitutionality of this Act was successfully

challenged as an improper use of the Congressional

taxing power in Hill v. Wallace, 259 U.S. 44 (1922),

all subsequent legislation regulating the futures

industry was patterned after this statutory scheme.

2The Act further requires, as a condition for

contract market designation that the contract

market, inter alia: be located at a terminal cash

market or provide for terms and conditions as

approved by the Commission (Section 5(1) of the

Act); provide for various forms of recordkeeping

(Sections 5(2) and 5a(a)(2) of the Act); permit the

membership of cooperative associations (Section

5(5) of the Act); provide for compliance with

Commission orders (Section 5(6) of the Act); submit

its rules to the Commission (Sections 5a(a)(1) and

5a(a)(12) of the Act); provide that the terms of the

contracts conform to United States commodity

standards or those adopted by the Commission

(Section 5a(a)(6) of the Act); accept warehouse

receipts issued under United States law (Section

5a(a)(3) of the Act); and enforce exchange rules

(Section 5a(a)(8) of the Act).

3 Generally, the burden of demonstrating

compliance rests with the contract market. Section

6 of the Act provides, in part, that:

Any board of trade desiring to be designated a

‘‘contract market’’ shall make application to the

Commission for such designation and accompany

the same with a showing that it complies with the

above conditions, and with a sufficient assurance

that it will continue to comply with the above

requirements.

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

COMMODITY FUTURES TRADING

COMMISSION

17 CFR Part 5

Economic and Public Interest

Requirements for Contract Market

Designation

AGENCY: Commodity Futures Trading

Commission.

ACTION: Proposed rulemaking.

SUMMARY: Commodity Futures Trading

Commission (‘‘Commission’’) is

proposing revisions to its Guideline on

Economic and Public Interest

Requirements for Contract Market

Designation, 17 CFR Part 5, Appendix A

(‘‘Guideline No. 1’’). Guideline No. 1

details the information that an

application for contract market

designation should include in order to

demonstrate that the contract market

meets the economic requirements for

designation. The Commission recently

promulgated fast-track review

procedures to reduce the time for

Commission review of such

applications. In furtherance of these

streamlining efforts, the Commission is

proposing that Guideline No. 1 itself be

revised to reduce any unnecessary

burdens associated with the designation

application.

Specifically, the Commission is

proposing to reorganize Guideline No. 1

into several specific application forms,

making use to the extent possible of a

checklist or chart format. Moreover, the

Commission is clarifying that a portion

of the application may make use of

third-party generated materials. In

addition, the Commission is clarifying

the review standards for several of the

designation requirements. The

Commission is also proposing that a

new appendix be added to Part 5 that

would specify the information that

should be included by a foreign board

of trade seeking no-action relief to offer

and to sell in the United States a futures

contract on a securities index traded on

that exchange.

DATES: Comments must be received by

September 15, 1998.

ADDRESSES: Comments should be sent to

the Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581, attention: Office of the

Secretariat. Comments may be sent by

facsimile transmission to (202) 418–

5521 or, by e-mail to secretary@cftc.gov.

Reference should be made to ‘‘Revisions

to Guideline No. 1.’’

FOR FURTHER INFORMATION CONTACT:

Paul M. Architzel, Chief Counsel,

Division of Economic Analysis, Richard

A. Shilts, Director, Market Analysis

Section or Kimberly A. Browning,

Attorney/Advisor, Division of Economic

analysis, Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581. Telephone: (202) 418–5260.

E-mail: [PArchitzel@cftc.gov],

[RShilts@cftc,gov] or

[KBrowning@cftc.gov].

SUPPLEMENTARY INFORMATION:

I. Background

The requirement that boards of trade

demonstrate that they meet specified

conditions in order to be designated as

a contract market has been a

fundamental tool of federal regulation of

commodity futures exchanges since the

Futures Trading Act of 1921, Pub. L. No.

67–66, 42 Stat. 187 (1921).1 Currently,

the statutory requirements for

designation are found in Sections 5 and

5a of the Commodity Exchange Act

(Act) and, additionally, for indexes of

securities, in Section 2(a)(1)(B) of the

Act. Designated contract markets must

provide for the prevention of

dissemination of false information

(Section 5(3) of the Act); must provide

for the prevention of price manipulation

(Section 5(4) of the Act); must provide

for delivery periods which will prevent

market congestion (Section 5A(a)(4) of

the Act); and must permit delivery on

the contract of such grades, at such

points and at such quality and

locational differentials as will tend to

prevent or to diminish market

manipulation (Section 5a(a)(10) of the

Act).2 Included among these provisions

is the general requirement of Section

5(7) of the Act that trading in a

proposed contract not be contrary to the

public interest. The contract market

must meet these requirements both

initially and on a continuing basis.3

The Commission, as an aid to the

exchanges, has provided guidance in

meeting these statutory requirements. In

1975 the newly formed Commission, in

one of its earliest actions, issued its

Guideline on Economic and Public

Interest Requirements for Contract

Market Designation, 40 FR 25849 (1975)

(‘‘Guideline No. 1’’).

Subsequently, the Commission

revised this guideline, publishing it as

Appendix A to Part 5 of the Code of

Federal Regulations. 47 FR 49832

(November 3, 1982). As revised in 1982,

Guideline No. 1 was updated to address

proposed innovations in the trading of

futures contracts, including in

particular, futures contracts on financial

instruments and on various indexes and

cash-settled futures contracts.

Experience has demonstrated that the

guideline has been adaptable and

flexible, facilitating the designation of a

wide range of innovative products.

Guideline No. 1 was again revised in

1992. 57 FR 3518 (January 30, 1992).

The 1992 revisions streamlined the

designation application for both futures

and option contract markets. Under the

1992 revisions, the standard of review

for specified terms and conditions of

proposed contract market designations

under Sections 5 and 5a of the Act was

clarified. Moreover, the 1992 revisions

eliminated unnecessary and redundant

materials by requiring that an

application for designation of a futures

contract include a cash-market

description only when the proposed

contract differs from a currently

designated contract and that it need

justify only individual contract terms

that are different from terms which