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[Federal Register: June 21, 2006 (Volume 71, Number 119)]
[Notices]
[Page 35627-35632]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21jn06-61]

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COMMODITY FUTURES TRADING COMMISSION


Comprehensive Review of the Commitments of Traders Reporting
Program

AGENCY: Commodity Futures Trading Commission.

ACTION: Request for comments.

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SUMMARY: The Commitments of Traders ("COT") reports are weekly
reports, published by the Commodity Futures Trading Commission
("CFTC" or "Commission"), showing aggregate trader positions in
certain futures and options markets. Over time, both the trading
activity that is the subject of the COT reports, and the reports
themselves, have continued to change and evolve. As part of its ongoing
efforts both to maintain an information system that reflects changing
market conditions, and to provide the public with useful information
regarding futures and options markets, the Commission is undertaking a
comprehensive review of the COT reporting program. This release is
intended to: (1) Provide useful background information regarding the
COT reports; (2) lay out various issues and questions regarding the COT
reports; and (3) solicit public comment regarding the reports,
including suggestions as to possible changes in the COT reporting
system.

DATES: Responses must be received by August 21, 2006.

ADDRESSES: Written responses should be sent to Eileen Donovan, Acting
Secretary, Commodity Futures Trading Commission, Three Lafayette
Center, 1155 21st Street, NW., Washington, DC 20581. Responses may also
be submitted via e-mail at [email protected]. "COT reports" must be
in the subject field of responses submitted via e-mail, and clearly
indicated in written submissions. This document is also available for
comment at http://www.regulations.gov.


FOR FURTHER INFORMATION CONTACT: Donald H Heitman, Senior Special
Counsel, Division of Market Oversight, Commodity Futures Trading
Commission, Three Lafayette Center, 1155 21st Street, NW., Washington,
DC 20581. Telephone: 202-418-5041. E-mail: [email protected].

SUPPLEMENTARY INFORMATION:

[[Page 35628]]

I. Background

A. The COT Reports

    The COT reports provide a breakdown of each Tuesday's open interest
\1\ for all futures and option markets in which 20 or more traders hold
positions equal to or above the reporting levels \2\ established by the
CFTC. The weekly reports for Futures-Only Commitments of Traders and
for Futures-and-Options-Combined Commitments of Traders are released
every Friday at 3:30 p.m. Eastern time. Reports are available in both a
short and long format. The short report shows open interest separately
by reportable and nonreportable \3\ positions. For reportable
positions, additional data are provided for commercial and non-
commercial holdings.
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    \1\ Open interest is the total of all futures and/or option
contracts entered into and not yet offset by a transaction, by
delivery, by exercise, etc. The aggregate of all long open interest
is equal to the aggregate of all short open interest. Open interest
held or controlled by a trader is referred to as that trader's
position. For the COT Futures & Options Combined report, option open
interest and traders' option positions are computed on a futures-
equivalent basis using delta factors supplied by the exchanges.
Long-call and short-put open interest are converted to long futures-
equivalent open interest. Likewise, short-call and long-put open
interest are converted to short futures-equivalent open interest.
For example, a trader holding a long put position of 500 contracts
with a delta factor of 0.50 is considered to be holding a short
futures-equivalent position of 250 contracts. A trader's long and
short futures-equivalent positions are added to the trader's long
and short futures positions to give "combined-long" and
"combined-short" positions. Open interest, as reported to the
Commission and as used in the COT report, does not include open
futures contracts against which notices of deliveries have been
stopped by a trader or issued by the clearing organization of an
exchange.
    \2\ Clearing members, futures commission merchants, and foreign
brokers (collectively called "reporting firms") file daily reports
with the Commission. Those reports show the futures and option
positions of traders that hold positions above specific reporting
levels set by CFTC regulations. These reporting levels range from 25
contracts for new or relatively small markets to 3,000 contracts for
three-month Eurodollar time deposit rates (See 17 CFR 15.03). If, at
the daily market close, a reporting firm has a trader with a
position at or above the Commission's reporting level in any single
futures month or option expiration, it reports that trader's entire
position in all futures and options expiration months in that
commodity, regardless of size. The aggregate of all traders'
positions reported to the Commission usually represents 70 to 90
percent of the total open interest in any given market. From time to
time, the Commission will raise or lower the reporting levels in
specific markets to strike a balance between collecting sufficient
information to oversee the markets and minimizing the reporting
burden on the futures industry.
    \3\ The long and short open interest shown as "Nonreportable
Positions" are derived by subtracting total long and short
"Reportable Positions" from the total open interest. Accordingly,
for "Nonreportable Positions," the number of traders involved and
the commercial/non-commercial classification of each trader are
unknown.
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    When an individual reportable trader is identified to the
Commission, the trader is classified either as "commercial" or "non-
commercial." All of a trader's reported futures positions in a
commodity are classified as commercial if the trader uses futures
contracts in that particular commodity for hedging as defined in the
Commission's regulations (17 CFR 1.3(z)). A trading entity generally
gets classified as a "commercial" by filing a statement with the
Commission (on CFTC Form 40) that it is commercially " * * * engaged
in business activities hedged by the use of the futures or option
markets." In order to ensure that traders are classified with accuracy
and consistency, the Commission staff reviews this self-classification
and may re-classify a trader if the staff has additional information
about the trader's use of the markets. A trader may be classified as a
commercial in some commodities and as a non-commercial in other
commodities. A single trading entity cannot be classified as both a
commercial and non-commercial in the same commodity. Nonetheless, a
multi-functional organization that has more than one trading entity may
have each trading entity classified separately in a commodity. For
example, a financial organization trading in financial futures may have
a banking entity whose positions are classified as commercial and have
a separate money-management entity whose positions are classified as
non-commercial.
    The short report also provides additional data for reportable
positions regarding spreading,\4\ changes from the previous report,\5\
percent of open interest by category,\6\ and numbers of traders.\7\ The
long report, in addition to the information in the short report, also
groups the data by crop year,\8\ where appropriate, and shows the
concentration of positions held by the largest four and eight
reportable traders, without regard to whether they are classified as
commercial or non-commercial. Current COT data are available on the
internet at the Commission's Web site, /www.cftc.gov/index.htm">http://www.cftc.gov.\9\

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    \4\ For the futures-only report, spreading measures the extent
to which each non-commercial trader holds equal long and short
futures positions. For the options-and-futures-combined report,
spreading measures the extent to which each non-commercial trader
holds equal combined-long and combined-short positions. For example,
if a non-commercial trader in Eurodollar futures holds 5,000 long
contracts and 4,500 short contracts, 500 contracts will appear in
the "Long" category and 4,500 contracts will appear in the
"Spreading" category. These figures do not include intermarket
spreading (e.g., spreading Eurodollar futures against Treasury Note
futures).
    \5\ Changes in commitments from the previous report represent
the differences between the data for the current report date and the
data published in the previous report.
    \6\ Percents are calculated against the total open interest for
the futures-only report and against the total futures-equivalent
open interest for the options-and-futures-combined report. Percents
less than 0.05 are shown as 0.0, and the percents may not add to
exactly 100.0 due to rounding.
    \7\ To determine the total number of reportable traders in a
market, a trader is counted only once regardless whether the trader
appears in more than one category (non-commercial traders may be
long or short only and may be spreading; commercial traders may be
long and short). To determine the number of traders in each
category, however, a trader is counted in each category in which the
trader holds a position. Therefore, the sum of the numbers of
traders in each category will often exceed the "Total" number of
traders in that market.
    \8\ For selected commodities where there is a well-defined
marketing season or crop year, the COT data are broken down by
"old" and "other" crop years.
    \9\ Also available at that site are historical COT data going
back to 1986 for futures-only reports and to 1995 for option-and-
futures-combined reports.
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B. Evolution of the COT Reports and the Marketplace

    The COT reports can trace their antecedents all the way back to
1924. In that year, the U.S. Department of Agriculture's ("USDA")
Grain Futures Administration, predecessor of the USDA's Commodity
Exchange Authority, which is in turn the predecessor of the Commission,
published its first comprehensive annual report. The report was
published pursuant to the provisions of the Grain Futures Act of
1922,\10\ the predecessor statute of today's Commodity Exchange Act
("CEA" or "the Act"), which was enacted in 1936.\11\
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    \10\ 42 Stat. 998, September 21, 1922.
    \11\ 49 Stat. 1491, June 15, 1936, 7 U.S.C. 1 et seq..
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    The Grain Futures Administration noted that the general objectives
of the Grain Futures Act included "[t]o obtain for the use of Congress
and the enlightenment of the public authentic and comprehensive
information regarding trading in grain futures."\12\ To that end, that
legislation imposed recordkeeping and reporting requirements on boards
of trade. One requirement of the implementing regulations was that
records should be made in such a manner as to show whether the persons
for whom transactions were executed were "engaged in the cash grain
business."\13\ The express purpose of this requirement was
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    \12\ Annual Reports of the Department of Agriculture for 1924,
Report of the Grain Futures Administration on Administration of the
Grain Futures Act, at 2, September 9, 1924.
    \13\ Id. at 6.


[[Page 35629]]


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    to insure that the basic records of all transactions in grain
futures will contain information which can be utilized for
distinguishing transactions originating with persons engaged in the
cash grain business (and therefore presumably representing in
considerable part "hedging") from transactions originating with
persons not so engaged (and therefore presumably representing for
the most part "speculation").\14\
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    \14\ Id.
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    The report characterized the distinction between hedging and
speculation as being of "fundamental significance from the public
point of view" and one that "deserves systematic reflection in the
records kept of transactions in grain futures."
    Over the years, the Grain Futures Administration and, after 1936,
its successor organization the Commodity Exchange Authority, continued
to publish annual statistics concerning hedging versus speculative
transactions. Beginning with the adoption of the Commodity Exchange Act
in 1936, and as part of amendments to that Act on a number of
subsequent occasions, the Commodity Exchange Authority's jurisdiction
was expanded beyond grains to cover additional agricultural
commodities. The Commodity Exchange Authority designated the exchanges
where futures contracts in those commodities were traded as "contract
markets" in such commodities.\15\ As contract markets in additional
commodities were designated, the Authority expanded its annual reports
of hedging and speculative positions in futures markets to include
additional commodities.\16\
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    \15\ In this context, a "contract market designation" refers
to designating an exchange where futures contracts on a particular
commodity are traded as a "contract market" in that commodity. For
example, after the 1936 Act brought a number of additional
agricultural commodities within the Commodity Exchange Authority's
jurisdiction, the Authority designated the New York Cotton Exchange
as a contract market in cotton and the Chicago Mercantile Exchange
as a contract market in butter, eggs and potatoes. As subsequent
amendments brought additional commodities within the scope of the
Act, further contract market designations followed, including
soybeans (1940), soybean oil (1950), soybean meal (1951), frozen
concentrated orange juice (1968), and livestock futures (live and
feeder cattle, live hogs and frozen pork bellies--all in 1968).
Under the Commodity Futures Modernization Act of 2000 ("CFMA"),
however, a "contract market designation" refers to the Commission
designating (licensing) a board of trade (exchange) as a
"designated contract market" ("DCM"). Once designated, a DCM can
trade any number of commodities. A DCM can list any new product by
filing with the Commission a copy of the rules pursuant to which the
product will trade, along with a certification that the product
complies with the Act and the Commission's rules thereunder.
    \16\ In addition, starting in 1942, the Commodity Exchange
Authority began issuing "Commodity Futures Statistics" as a
separate publication, distinct from the USDA annual report. The
Commodity Futures Statistics were also expanded to include monthly
data, but were still published only on an annual basis.
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    In 1962, the Commodity Exchange Authority took what it called
"another step forward in the policy of providing the public with
current and basic data on futures market operations" by moving beyond
an annual statistical recap and initiating the publication of monthly
COT reports. The original COT reports were compiled on an end-of-month
basis and published on the 11th or 12th calendar day of the following
month. The first COT report, covering 13 agricultural commodities, was
published on June 13, 1962.
    Over the 44 years since then, both the COT reports and the
underlying futures markets have undergone a number of significant
changes. With respect to the COT reports, the number of commodities
covered in the COT reports has continued to expand. In April 1975, the
newly formed CFTC succeeded the Commodity Exchange Authority. The
Commission continued to publish the COT reports, but expanded the
reports' content to include new commodities first brought under the
Commission's jurisdiction by the Commodity Futures Trading Commission
Act of 1974.\17\ In the years since then, scores of new futures and
option products have been listed for trading on designated futures
exchanges. As noted above, not all these commodities are included in
the COT reports, since reports are published only for commodities in
which 20 or more traders hold reportable positions. The most recent COT
reports published cover 85 to 90 commodities trading on six different
DCMs.\18\
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    \17\ Public Law 93-463, 88 Stat. 1389, October 23, 1974. The new
commodities added in 1974 included coffee, sugar, cocoa, metals,
energy products and financial products, among other things.
    \18\ The COT reports are the most frequently visited section of
the Commission's Web site. During 2005, nearly half of the visitors
to the Commission's Web site were there primarily to access the COT
reports, with approximately 460,000 visitors viewing the reports.
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    In addition to covering additional commodities, the Commission has
improved the COT reports in several other ways as well. The Commission
has changed the publication schedule several times to provide
information to the public more frequently--switching publication from
monthly to twice monthly (mid-month and month-end) in 1990, to every
two weeks in 1992, and to weekly in 2000. The Commission has also acted
to improve the timeliness of the reports--moving publication to the
sixth business day after the "as of" date in 1990, and then to the
third business day after the "as of" date in 1992. The Commission has
also expanded the scope of the information included in the reports--
adding data on the numbers of traders in each category, a crop-year
breakout and concentration ratios in the early 1970s and adding data on
option positions in 1992. Finally, the Commission has made the COT
reports more widely available--moving from a paid subscription-based
mailing list to fee-based electronic access in 1993 and, since 1995,
making the COT data freely available on the Commission's internet
website.

C. Issues Regarding COT Data

1. Elimination of the Series '03 Reports
    One of the historical changes in the COT reports has raised
questions with respect to the usage of the COT data in today's market
environment. In 1981, the Commission adopted regulations \19\ to
eliminate the routine filing of series '03 reports by large
traders.\20\ The purpose of these rules was to reduce paperwork burdens
on large traders and the Commission.
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    \19\ 46 FR 59960, December 8, 1981.
    \20\ Series '03 reports were required to be filed with the
Commission by any trader who owned or controlled a reportable
futures position. Once traders acquired a reportable position in a
commodity, they were required to report trades, positions, exchanges
of futures for physicals and delivery information regarding that
commodity on series '03 reports, and to classify how much of their
position was speculative and how much was hedging.
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    Because the series '03 reports included both position information
for all reportable traders and the traders' classification of how much
of their positions was speculative and how much was hedging, the series
'03 reports had provided the data that went to make up the COT reports.
In its rulemaking eliminating the series '03 reports, the Commission
stated its intention to continue publishing the COT reports using data
from the series '01 reports and Form 102,\21\ as well as the Form 40,

[[Page 35630]]

Statement(s) of Reporting Trader.\22\ However, publication of the COT
reports was suspended for approximately 18 months in order to implement
computer system changes that would enable the Commission to generate
COT data under the revised reporting system.\23\ When the COT reports
resumed, reportable positions were no longer classified as "hedging"
or "speculative" (the series '03 forms that required traders to make
these classifications no longer being available). Rather, reportable
positions were classified as "commercial" or "non-commercial,"
based on the declarations made in the reporting traders" Form 40
statements.
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    \21\ Series '01 reports are reports filed by futures commission
merchants ("FCMs"), foreign brokers and exchange clearing members
clearing their own trades, with respect to all customer or (for the
exchange clearing members) proprietary accounts that attain a
reportable position. A series '01 report itemizes the account number
and certain positions, deliveries and exchanges of futures
(including exchanges of futures for physicals ["EFPs"], swaps
["EFSs"], risk ["EFRs"] and options ["EFOs"] or other
exchanges of futures for a commodity or for a derivatives position)
associated with each account carrying a reportable position (See 17
CFR 17.00). The name, address and occupation of the person or
persons who own such accounts are separately identified on Form 102
(See 17 CFR 17.01). By aggregating the series '01 and Form 102
information filed with respect to traders with accounts at multiple
FCMs or foreign brokers, the Commission can determine the size of
each reportable trader's overall position.
    \22\ Each person that holds or controls a reportable position is
required to file a Form 40. The Form 40 requires a trader to list
its principal business or occupation and to state whether it is
"commercially engaged in business activities hedged by the use of
the futures or option markets." If the trader answers "yes," it
is instructed to complete a separate schedule "listing the futures
or option contract used, the cash commodity(ies) hedged, or the risk
exposure covered, and the marketing occupations associated with
hedging uses."
    \23\ The Commission notes that eliminating the series '03 forms
as the basis for the COT reports improved the timing and accuracy of
the COT reports because: (1) Series '03 forms were mostly mailed to
the Commission from wherever the trader resided, in some cases
taking several days to arrive and be processed, whereas series '01
reports are filed electronically by the following morning; and (2)
series '03 forms were only required to be filed when a reportable
trader's position changed, so that a trader's delay or failure to
file a report often led to an erroneous assumption that the position
had not changed.
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    The Commission believes that the public perception was, and is,
that the "commercial vs. non-commercial" classification in current
COT reports is analogous (if not identical) to the "hedging vs.
speculation" distinction in the pre-1982 COT reports. Over time,
however, derivatives markets (including both exchange-traded and over-
the-counter ["OTC"] markets), as well as derivatives trading patterns
and practices, have evolved tremendously. Changes have been
particularly evident over the last 15 years. As a result of these
changes in markets and trading practices, questions have been raised as
to whether the "commercial" and "non-commercial" categories of
today's COT reports appropriately classify trading practices that were
not contemplated when the "hedging vs. speculation" categories were
removed in 1982.
2. The Impact of Speculative Position Limit and Hedge Exemption Rules
    To protect futures markets from excessive speculation that can
cause unreasonable or unwarranted price fluctuations, and to reduce the
potential threat of market manipulation, the Act and Commission
regulations require the Commission \24\ and the exchanges \25\ to
impose limits on the size of speculative positions in futures markets.
For certain agricultural markets, the speculative limits are determined
by the Commission and set out in federal regulations.\26\ For all other
markets, the speculative limits are determined as necessary by the
exchanges according to standards established by the Commission.\27\ The
Commission and exchanges grant exemptions from their respective
speculative position limits for "bona fide hedging." A hedge is a
futures or option transaction or position that normally represents a
substitute for transactions to be made or positions to be taken at a
later time in a physical marketing channel. Hedges must be
"economically appropriate to the reduction of risks in the conduct and
management of a commercial enterprise" [emphasis supplied] and must
arise from a change in the value of a hedger's (current or anticipated)
assets or liabilities.\28\
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    \24\ See section 4a of the Act.
    \25\ See section 5(d)(5) of the Act and 17 CFR 150.5.
    \26\ Speculative position limits for corn, oats, wheat,
soybeans, soybean oil, soybean meal, and cotton are set out at 17
CFR 150.2.
    \27\ Pursuant to those standards, some markets are subject to
position accountability rules in lieu of speculative position
limits.
    \28\ See 17 CFR 1.3(z) for the full regulatory definition of
"bona fide hedging."
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3. Hedge Exemptions and the COT Reports
    Because both the hedge exemption rules and the standards whereby
positions are classified for purposes of the COT reports refer to
"commercial" positions, the Commission has considered the
classification of a position as "commercial" under the hedge
exemption rule as being an appropriate indicator for how the position,
and the trader holding it, should be classified for COT purposes. In
other words, if an entity holding a particular futures or option
position has received a hedge exemption with respect to that position,
the position is, by definition, held by a "commercial enterprise."
Accordingly, that position should be reported (via the series '01
reports, Forms 102 and Forms 40) to the Commission as a "commercial"
position, and it would be included within the "commercial" category
on the COT reports. Entities in the same type of business, holding
similar hedge positions (as reported on their Form 40) are likewise
treated as commercials for purposes of the COT reports, even though the
entities may not have sought hedge exemptions because they are trading
below the level of the position limit so no exemption is required.
    As trading practices in the derivatives markets (both exchange and
OTC) have continued to evolve over the past 5 years, the Commission has
granted hedge exemptions from the Commission speculative limits for
certain agricultural commodities to entities whose futures positions
reflected various innovative, non-traditional risk management
strategies. Based on their classification for hedge exemption purposes,
positions based on these non-traditional strategies have been
classified in the COT reports as "commercial." The result is that,
over time, the nature of the positions carried in the COT reports for
some commodities has changed significantly, raising questions as to
whether the COT reports should be reviewed to determine if revisions
are needed to reflect changing market conditions.
    This issue may be illustrated by reviewing the history of hedge
exemption requests.\29\ For example, in 1991, the Commission received a
request from a "large commodity merchandising firm," that "engage[d]
in commodity related swaps \30\ as a part of a commercial line of
business." The firm, through an affiliate, wished to enter into an OTC
swap transaction, with a qualified counterparty (a large pension fund),
involving an index based on the returns afforded by investments in
exchange-traded futures contracts on certain non-financial commodities
meeting specified criteria. The commodities making up the index
included wheat, corn and soybeans, all of which were (and still are)
subject to Commission speculative position limits. As a result of the
swap, the swap dealing firm would, in effect, be going short the index.
In other words, it would be required to make payments to the
counterparty if the value of the index was higher at the end of the
swap payment period than at the beginning.

[[Page 35631]]

In order to hedge itself against this risk, the swap dealer planned to
establish a portfolio of long futures positions in the commodities
making up the index, in such amounts as would replicate its exposure
under the swap transaction. By design, the index did not include
contract months that had entered the delivery period and the swap
dealer, in replicating the index, stated that it would not maintain
futures positions based on index-related swap activity into the
delivery month. The result of the hedge was that the composite return
on the futures portfolio would offset the net payments the swap dealer
would be required to make to the counterparty.
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    \29\ Specific requests, and the Commission's responses granting
or denying those requests, by their very nature, include information
regarding the nature of the requesting entity's trading activities.
The express terms of the Act prohibit the Commission from publicly
disclosing such information. Section 8(a)(1) of the Act provides in
relevant part that "the Commission may not publish data and
information that would separately disclose the business transactions
or market positions of any person and trade secrets or names of
customers." However, it is possible, without disclosing prohibited
information, to provide an overview of certain hedge exemption
letters that will illustrate how the nature of the information
included in the COT reports has changed over time.
    \30\ A swap is a privately negotiated exchange of one asset or
cash flow for another asset or cash flow. In a commodity swap, at
least one of the assets or cash flows is related to the price of one
or more commodities.
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    Because the futures positions the swap dealer would have to
establish to hedge its exposure on the swap transaction would be in
excess of the speculative position limits on wheat, corn and soybeans,
it requested, and was granted, a hedge exemption for those positions.
As discussed above, when those reportable futures positions were
incorporated into the COT reports, they were reported as "commercial"
positions. Similar hedge exemptions were subsequently granted in other
cases where the futures positions clearly offset risks related to swaps
or similar OTC positions involving both individual commodities and
commodity indexes. These non-traditional hedges were all subject to the
same limitations as the original hedge exemption--that the futures
positions must offset specific price exposure on a non-discretionary
basis (i.e., would not over-weight or under-weight the size or mix of
futures based upon a market outlook), would be of equal dollar value to
the underlying risk (i.e., be unleveraged), and would not be carried
into the delivery month.
4. The Effect on the COT Report
    The effect of the entry of these non-traditional hedgers into the
marketplace has been to change the composition of the COT reports.
Prior to 1991, both the long and the short side of the commercial open
interest listed in the COT reports represented traditional hedgers
(producers, processors, manufacturers or merchants handling the
commodity or its products or byproducts). Since that time, though,
trading practices have evolved to such an extent that today, a
significant proportion of the long side open interest in a number of
major physical commodity futures contracts is held by non-traditional
hedgers (e.g., swap dealers), while the traditional hedgers may be
either net long or net short (more often, the latter). This has raised
questions as to whether the COT report can reliably be used to assess
futures hedging activity by persons hedging exposure in the underlying
physical commodity markets.
    It should be noted that the Commission's treatment of
professionally managed funds\31\ in the COT reports generally does not
raise the same issue. Professionally managed funds, although they may
be appropriately treated as commercials with respect to markets in
financial commodities,\32\ are usually treated as non-commercials for
COT purposes in the markets for physical commodities (including not
only agricultural commodities, but energy products, metals and other
physical commodities as well).
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    \31\ For these purposes, "professionally managed funds"
includes traders registered as commodity trading advisors and
commodity pool operators, as well as funds commonly referred to as
"hedge funds." A hedge fund has been described as a private
investment fund or pool that trades and invests in various assets
such as securities, commodities, currency, and derivatives on behalf
of its clients.
    \32\ A professionally managed fund trading in futures markets
for financial products (equity, debt or foreign currency) might very
well be hedging various OTC or exchange-traded products.
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II. Alternatives in Addressing Issues Related to the COT Reports

    In view of the changes in markets and trading patterns described
above, the Commission is now seeking public comment concerning whether
it should adopt any changes to the way data are presented in the COT
reports. Such action could be taken as part of the Commission's ongoing
efforts both to maintain an information system that reflects changing
market conditions, and to provide the public with useful information
regarding futures and option markets. In addition, the Commission is
seeking comment as to whether it should stop publishing the COT reports
altogether if it is determined that either: (1) There are data
anomalies in the reports for which no satisfactory solution can be
found; or (2) the data in the reports provide no public benefit.\33\
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    \33\ The COT reporting program is not mandated by either the Act
or Commission regulations. Therefore, if, after reviewing the
comments received in response to this notice, the Commission decides
to take any action with respect to the COT reporting program, it can
do so without further notice or opportunity for comment.
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III. Questions

    The Commission has formulated the following questions based upon
its initial review of issues relating to the COT reports. Responses
from interested parties will advance the Commission's understanding of
these issues and, it is hoped, point the way to a satisfactory
resolution of any problems that are identified regarding the COT
reports. Each enumerated question should be addressed individually.
Interested parties are also welcome to address other topics or issues
that they believe are relevant to the COT reports.
    1. What types of traders in the futures and option markets use the
COT reports in their current form, and how are they using the COT data?
More specifically:
    (a) How do traders use the COT information on commercial positions?
    (b) How do they use the COT information on non-commercial
positions?
    (c) In particular, with respect to information on non-commercial
positions, what information or insights do traders gain from the COT
reports regarding the possible impact of futures trading on the
underlying cash market?
    2. Are other individuals or entities (academic researchers or
others) using the COT reports and, if so, how?
    3. Do the COT reports, in their current form, provide any
particular segment of traders with an unfair advantage?
    4. Should the Commission continue to publish the COT reports?
    5. If the Commission continues to publish the COT reports, should
the reports be revised to include additional categories of data--for
example, non-traditional commercial positions, such as those held by
swap dealers?
    6. As a general matter, would creating a separate category in the
COT report for "non-traditional commercials" potentially put swap
dealers or other non-traditional commercials at a competitive
disadvantage (since other market participants would generally know that
their positions are usually long, are concentrated in a single futures
month, and are typically rolled to a deferred month on a specific
schedule before the spot month)?
    7. More specifically, if the data in the COT reports are made
subject to further, and finer, distinctions, such as adding a category
for non-traditional commercials:
    (a) Would it increase the likelihood that persons reading the
reports would be able to deduce the identity of the position holders,
or other proprietary information, from the reports?
    (b) Could such persons use information gleaned from the reports to
gain a trading advantage over the reported position holders?
    (c) In such case, in order to reduce the likelihood of publishing
categories with few traders, which might provide information giving
other traders a competitive advantage over the reported traders, should
the Commission consider raising the threshold number of reportable
traders needed to publish

[[Page 35632]]

data for a market from 20 traders to some larger number of traders?
    8. If the data in the COT reports are made subject to further, and
finer, distinctions, should the reports be revised for all commodities,
or only for those physical commodity markets in which non-traditional
commercials participate?
    9. If a non-traditional commercial category were added to markets
in physical commodities, what should be done with financial
commodities, where "non-traditional commercials" would be essentially
an empty category (since, in financial commodities, swap dealers would
fall within the pre-existing "commercial" category)?
    10. The Commission has observed that the non-traditional
commercials tend to be long only and tend not to shift their futures
positions dramatically--even in the face of substantial price
movements. If the data in the COT reports are made subject to further,
and finer, distinctions, would issuing the additional data on a
periodic basis, in the form of a quarterly or monthly supplement, be
sufficient?
    11. Some reportable traders engage in both traditional (physical)
and non-traditional (financial) commercial activity in the same
commodity market. If the data in the COT reports are made subject to
further, and finer, distinctions, such traders would have to break out
their non-traditional commercial OTC hedging activity into a separate
account. Would such a requirement represent an undue burden to those
traders?

    Issued in Washington, DC, on June 15, 2006, by the Commission.
Eileen Donovan,
Acting Secretary of the Commission.
 [FR Doc. E6-9722 Filed 6-20-06; 8:45 am]

BILLING CODE 6351-01-P
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