U.S. COMMODITY FUTURES TRADING COMMISSION

Three Lafayette Centre

1155 21st Street, NW, Washington, DC 20581

Telephone: (202) 418-5000

Facsimile: (202) 418-5521

www.cftc.gov

Agricultural Advisory Committee Meeting

Estimating Deliverable Supply in the Context of Spot Month Position Limits

We would like to discuss four general topics regarding deliverable supply at the December 9, 

2014 meeting, as follows. 

I. Commission guidance on estimating deliverable supply

II. Guidance for physical delivery vs. cash settled contracts

III. Standards for Commission review of exchange estimates and appropriate discretion for 

the Commission to adopt its own estimate

IV. Implementation timing issues for re-setting of spot month limits

We also have attached a more detailed series of questions that were motivated by comments

received in response to notices of proposed rulemakings regarding position limits.1 The 

Commission has re-opened the comment periods for those rulemakings.

2

 The Committee and 

members of the public are invited to submit written comments through January 22, 2015.3

 

1

See 78 Fed. Reg. 75680 (Dec. 12, 2013) (“re-proposal”) and 78 Fed. Reg. 68946 (Nov. 15, 2013) (“aggregation 

proposal”).

2

See 79 Fed. Reg. 71793 (December 4, 2014).

3 The re-proposal would re-set the level of each spot month speculative position limit at no greater than 25 percent 

of the estimated deliverable supply submitted by the designated contract market (DCM or exchange) listing a core 

referenced futures contract. See re-proposal at 75728.
AAC: Position Limits Questions

December 9, 2014

Page 2

I. Commission guidance on estimating deliverable supply

Proposed Regulation 150.2(e)(3) would require an exchange listing a core referenced futures 

contract to submit an estimate of spot-month deliverable supply, including a description of the 

methodology used to derive the estimate and any statistical data supporting the estimate to the 

Commission no less frequently than every two calendar years.4 

The proposed regulation would permit, but not mandate, that an exchange use the guidance 

regarding deliverable supply in Appendix C of Part 38 of the Commission’s regulations --

Guidance on, and Acceptable Practices in, Compliance with the Core Principles (attached). This 

guidance has historically been employed by the Commission in evaluating new contracts and 

contract amendments submitted under Part 40 of the Commission’s regulations, as well as in 

instances when the Commission requires a DCM to demonstrate compliance with the core 

principles under Regulations 38.5 or 40.2. 

1. In your view, is the Commission’s guidance appropriate for estimating the deliverable 

supplies for all 19 core referenced agricultural commodities identified in the proposed 

rule? Why or why not? 

2. Is there an alternative approach to permitting DCMs and SEFs to set spot month 

speculative position limits at a level no greater than (that is, lower than) the level of limits 

set by the Commission?

3. DCMs, in estimating the amount of supply committed to long-term contracts, historically 

have relied upon confidential business information of market participants. Is it 

appropriate for a DCM to rely on that business information, when such information is not 

made available to the public? If it is not appropriate, can you suggest an alternative 

method for estimating the amount of supply committed to long-term contracts and, of that 

amount, the portion that is consistently and regularly made available at prevailing 

economic values? If it is appropriate, how should the Commission verify the long-term 

contract information/data provided by the DCMs?

4. Some commenters have suggested permitting a commodity that is not currently of 

deliverable quality on a futures contract to be included in the deliverable supply

calculation if an exchange would permit such commodity in an exchange for physical 

(EFP) transaction. Would including a commodity that does not meet a contract’s delivery 

specifications raise any concerns, such as interfering with convergence? If appropriate, 

how should such a commodity be incorporated into the deliverable supply estimation?

 

4

See Id. Appendix C to Part 38 provides guidance to exchanges in demonstrating compliance with DCM Core 

Principle 3. DCM Core Principle 3 requires an exchange to list only contracts that are not readily susceptible to 

manipulation. See Commodity Exchange Act (CEA) Section 5(d)(3).
AAC: Position Limits Questions

December 9, 2014

Page 3

II. Guidance for physical delivery vs. cash settled contracts

The guidance on estimating deliverable supplies is located under subheading (b), Futures 

Contracts Settled by Physical Delivery, of Appendix C to Part 38 of the Commission’s 

regulations. The guidance for Futures Contracts Settled by Cash Settlement, located in 

subheading (c) of Appendix C to Part 38, states that, “[i]n evaluating the susceptibility of a cashsettled contract to manipulation, a designated contract market should consider the size and 

liquidity of the cash market that underlies the listed contract in a manner that follows the 

determination of deliverable supply as noted above in (b)(1).” 

1. What consideration, if any, should the Commission give to the settlement method 

(physical delivery or cash settled) for a particular contract in assessing whether the 

deliverable supply estimate and proposed spot month speculative position limit levels are 

reasonable?

III. Standards for Commission review of exchange estimates and appropriate discretion for 

the Commission to adopt its own estimate

Under one alternative in the re-proposal, the Commission explained that in the event the 

Commission is not able to verify an exchange’s estimate of deliverable supply for any 

commodity as reasonable, then the Commission may determine to adopt a level based on the 

Commission’s estimate of deliverable supply for such commodity, but not greater than would 

result from the exchange’s estimate of deliverable supply.5

1. What standard should be applied to the Commission’s verification of whether an 

exchange’s estimated deliverable supply is reasonable? 

2. If the Commission does not verify a DCM’s estimate as reasonable, what discretion 

should the Commission exercise in adopting its own spot month speculative position limit 

level given a particular deliverable supply estimate? 

3. Is the guidance in Appendix C to Part 38 sufficiently specified to be used as a method by 

the Commission, in the event the Commission determines to rely on its own estimate of 

deliverable supply in re-setting the levels of the spot month limits?

4. What concerns do you have regarding the use of estimated deliverable supply as a basis 

for setting spot month speculative position limits?

 

5

See re-proposal at 75727. However, under proposed Regulation 150.2(e)(3), the Commission could rely upon its 

estimate of deliverable supplies to set a level higher than would result from the exchange’s estimate of deliverable 

supply. 
AAC: Position Limits Questions

December 9, 2014

Page 4

5. Given a particular estimated deliverable supply, what, if any, additional factors should 

the Commission or DCMs consider in proposing a spot month speculative positon limit 

level that would, to the maximum extent practicable: (i) diminish, eliminate, or prevent 

excessive speculation; (ii) deter and prevent market manipulation; (iii) ensure sufficient 

liquidity for bona fide hedgers; and (iv) ensure that the price discovery function of the 

underlying market is not disrupted?

IV. Implementation timing issues for re-setting of spot month limits

The proposed rule states that after the adoption of initial levels, “subsequent speculative position 

limit levels, shall each apply beginning on the close of business of the last business day of the 

second complete calendar month after publication of such levels; provided however, if such close 

of business is in a spot month of a core referenced futures contract, the subsequent spot-month 

level shall apply beginning with the next spot month for that contract.” The proposed rule further 

states that for legacy agricultural contracts, deliverable supply estimates from DCMs shall be due 

May 31 of the second calendar year following the most recent Commission action establishing 

such limit levels; and August 31 for other agricultural commodities.

1. Does the proposed rule provide ample time for traders to adjust to newly issued spot 

month speculative position limit levels? 

2. How, if at all, should the Commission consider seasonality of the core-referenced 

agricultural commodities – legacy and other agricultural commodities – in the 

implementation of newly determined spot month speculative position limit levels?

3. Should there be a restriction on how much the Commission could reduce a spot month 

speculative position limit for a particular commodity in one biennial cycle? For example, 

in circumstances where the most recent three years of data show reduced deliverable 

supplies that may not be reflective of longer term product data, should the Commission 

leave the spot month limits at existing levels, and rely on the exchanges to set a lower 

level for their spot month limits? What support can you provide for your position?
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT

17 CFR Part 38—DESIGNATED CONTRACT MARKETS

Appendix C—Demonstration of Compliance That a Contract Is Not Readily Susceptible to 

Manipulation

(a) Futures Contracts—General Information. When a designated contract market certifies or 

submits for approval contract terms and conditions for a new futures contract, that submission 

should include the following information:

(1) A narrative describing the contract, including data and information to support the contract's 

terms and conditions, as set by the designated contract market. When designing a futures 

contract, the designated contract market should conduct market research so that the contract 

design meets the risk management needs of prospective users and promotes price discovery of 

the underlying commodity. The designated contract market should consult with market users to 

obtain their views and opinions during the contract design process to ensure the contract's term 

and conditions reflect the underlying cash market and that the futures contract will perform the 

intended risk management and/or price discovery functions. A designated contract market should 

provide a statement indicating that it took such steps to ensure the usefulness of the submitted 

contract.

(2) A detailed cash market description for physical and cash-settled contracts. Such descriptions 

should be based on government and/or other publicly-available data whenever possible and be 

formulated for both the national and regional/local market relevant to the underlying commodity. 

For tangible commodities, the cash market descriptions for the relevant market (i.e., national and 

regional/local) should incorporate at least three full years of data that may include, among other 

factors, production, consumption, stocks, imports, exports, and prices. Each of those cash market 

variables should be fully defined and the data sources should be fully specified and documented 

to permit Commission staff to replicate the estimates of deliverable supply (defined in paragraph 

(b)(1)(A) of this appendix C). Whenever possible, the Commission requests that monthly or 

daily prices (depending on the contract) underlying the cash settlement index be submitted for 

the most recent three full calendar years and for as many of the current year's months for which 

data are available. For contracts that are cash settled to an index, the index's methodology should 

be provided along with supporting information showing how the index is reflective of the 

underlying cash market, is not readily subject to manipulation or distortion, and is based on a 

cash price series that is reliable, acceptable, publicly available and timely (defined in paragraphs 

(c)(2) and (c)(3) of this appendix C). The Commission recognizes that the data necessary for 

accurate and cogent cash market analyses for an underlying commodity vary with the nature of 

the underlying commodity. The Commission may require that the designated contract market 

submit a detailed report on commodity definitions and uses.

(b) Futures Contracts Settled by Physical Delivery. (1) For listed contracts that are settled by 

physical delivery, the terms and conditions of the contract should conform to the most common 

commercial practices and conditions in the cash market for the commodity underlying the futures 

contract. The terms and conditions should be designed to avoid any impediments to the delivery 
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 2

of the commodity so as to promote convergence between the price of the futures contract and the 

cash market value of the commodity at the expiration of a futures contract.

(i) Estimating Deliverable Supplies.

(A) General definition. The specified terms and conditions, considered as a whole, should result 

in a “deliverable supply” that is sufficient to ensure that the contract is not susceptible to price 

manipulation or distortion. In general, the term “deliverable supply” means the quantity of the 

commodity meeting the contract's delivery specifications that reasonably can be expected to be 

readily available to short traders and salable by long traders at its market value in normal cash 

marketing channels at the contract's delivery points during the specified delivery period, barring 

abnormal movement in interstate commerce. Typically, deliverable supply reflects the quantity 

of the commodity that potentially could be made available for sale on a spot basis at current 

prices at the contract's delivery points. For a non-financial physical-delivery commodity contract, 

this estimate might represent product which is in storage at the delivery point(s) specified in the 

futures contract or can be moved economically into or through such points consistent with the 

delivery procedures set forth in the contract and which is available for sale on a spot basis within 

the marketing channels that normally are tributary to the delivery point(s). Furthermore, an 

estimate of deliverable supply would not include supply that is committed for long-term 

agreements (i.e., the amount of deliverable supply that would not be available to fulfill the 

delivery obligations arising from current trading). The size of commodity supplies that are 

committed to long-term agreements may be estimated by consulting with market participants. 

However, if the estimated deliverable supply that is committed for long-term agreements, or 

significant portion thereof, can be demonstrated by the designated contract market to be 

consistently and regularly made available to the spot market for shorts to acquire at prevailing 

economic values, then those “available” supplies committed for long-term contracts may be 

included in the designated contract market's estimate of deliverable supply for that commodity. 

An adequate measure of deliverable supply would be an amount of the commodity that would 

meet the normal or expected range of delivery demand without causing futures prices to become 

distorted relative to cash market prices. Given the availability of acceptable data, deliverable 

supply should be estimated on a monthly basis for at least the most recent three years for which 

data are available. To the extent possible and that data resources permit, deliverable supply 

estimates should be constructed such that the data reflect, as close as possible, the market defined 

by the contract's terms and conditions, and should be formulated, whenever possible, with 

government or publicly available data. All deliverable supply estimates should be fully defined, 

have all underlying assumptions explicitly stated, and have documentation of all 

data/information sources in order to permit estimate replication by Commission staff.

(B) Accounting for variations in deliverable supplies. To assure the availability of adequate 

deliverable supplies and acceptable levels of commercial risk management utility, contract terms 

and conditions should account for variations in the patterns of production, consumption and 

supply over a period of years of sufficient length to assess adequately the potential range of 

deliverable supplies. This assessment also should consider seasonality, growth, and market 

concentration in the production/consumption of the underlying cash commodity. Deliverable 
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 3

supply implications of seasonal effects are more straightforwardly delineated when deliverable 

supply estimates are calculated on a monthly basis and when such monthly estimates are 

provided for at least the most recent three years for which data resources permit. In addition, 

consideration should be given to the relative roles of producers, merchants, and consumers in the 

production, distribution, and consumption of the cash commodity and whether the underlying 

commodity exhibits a domestic or international export focus. Careful consideration also should 

be given to the quality of the cash commodity and to the movement or flow of the cash 

commodity in normal commercial channels and whether there exist external factors or regulatory 

controls that could affect the price or supply of the cash commodity.

(C) Calculation of deliverable supplies. Designated contract markets should derive a quantitative 

estimate of the deliverable supplies for the delivery period specified in the proposed contract. For 

commodities with seasonal supply or demand characteristics, the deliverable supply analysis 

should include that period when potential supplies typically are at their lowest levels. The 

estimate should be based on statistical data, when reasonably available, covering a period of time 

that is representative of the underlying commodity's actual patterns of production, patterns of 

consumption, and patterns of seasonal effects (if relevant). Often, such a relevant time period 

should include at least three years of monthly deliverable supply estimates permitted by available 

data resources. Deliverable supply estimates should also exclude the amount of the commodity 

that would not be otherwise deliverable on the futures contract. For example, deliverable 

supplies should exclude quantities that at current price levels are not economically obtainable or 

deliverable or were previously committed for long-term agreements.

(2) Contract terms and conditions requirements for futures contracts settled by physical delivery.

(i) For physical delivery contracts, an acceptable specification of terms and conditions would 

include, but may not be limited to, rules that address, as appropriate, the following criteria and 

comply with the associated standards:

(A) Quality Standards. The terms and conditions of a commodity contract should describe or 

define all of the economically significant characteristics or attributes of the commodity 

underlying the contract. In particular, the quality standards should be described or defined so that 

such standards reflect those used in transactions in the commodity in normal cash marketing 

channels. Documentation establishing that the quality standards of the contract's underlying 

commodity comply with those accepted/established by the industry, by government regulations, 

and/or by relevant laws should also be submitted. For any particular commodity contract, the 

specific attributes that should be enumerated depend upon the individual characteristics of the 

underlying commodity. These may include, for example, the following items: grade, quality, 

purity, weight, class, origin, growth, issuer, originator, maturity window, coupon rate, source, 

hours of trading, etc. If the terms of the contract provide for the delivery of multiple qualities of a 

specific attribute of the commodity having different cash market values, then a “par” quality 

should be specified with price differentials applicable to the “non-par” qualities that reflect 

discounts or premiums commonly observed or expected to occur in the cash market for that 

commodity.
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 4

(B) Delivery Points and Facilities. Delivery point/area specifications should provide for futures 

delivery at a single location or at multiple locations where the underlying cash commodity is 

normally transacted or stored and where there exists a viable cash market(s). If multiple delivery 

points are specified and the value of the commodity differs between these locations, contract 

terms should include price differentials that reflect usual differences in value between the 

different delivery locations. If the price relationships among the delivery points are unstable and 

a designated contract market chooses to adopt fixed locational price differentials, such 

differentials should fall within the range of commonly observed or expected commercial price 

differences. In this regard, any price differentials should be supported with cash price data for the 

delivery location(s). The terms and conditions of the contracts also should specify, as 

appropriate, any conditions the delivery facilities and/or delivery facility operators should meet 

in order to be eligible for delivery. Specification of any requirements for delivery facilities also 

should consider the extent to which ownership of such facilities is concentrated and whether the 

level of concentration would be susceptible to manipulation of the futures contract's prices. 

Commodity contracts also should specify appropriately detailed delivery procedures that 

describe the responsibilities of deliverers, receivers and any required third parties in carrying out 

the delivery process. Such responsibilities could include allocation between buyer and seller of 

all associated costs such as load-out, document preparation, sampling, grading, weighing, 

storage, taxes, duties, fees, drayage, stevedoring, demurrage, dispatch, etc. Required 

accreditation for third-parties also should be detailed. These procedures should seek to minimize 

or eliminate any impediments to making or taking delivery by both deliverers and takers of 

delivery to help ensure convergence of cash and futures at the expiration of a futures delivery 

month.

(C) Delivery Period and Last Trading Day. An acceptable specification of the delivery period 

would allow for sufficient time for deliverers to acquire the deliverable commodity and make it 

available for delivery, considering any restrictions or requirements imposed by the designated 

contract market. Specification of the last trading day for expiring contracts should consider 

whether adequate time remains after the last trading day to allow for delivery on the contract.

(D) Contract Size and Trading Unit. An acceptable specification of the delivery unit and/or 

trading unit would be a contract size that is consistent with customary transactions, transportation 

or storage amounts in the cash market (e.g., the contract size may be reflective of the amount of 

the commodity that represents a pipeline, truckload or railcar shipment). For purposes of 

increasing market liquidity, a designated contract market may elect to specify a contract size that 

is smaller than the typical commercial transaction size, storage unit or transportation size. In such 

cases, the commodity contract should include procedures that allow futures traders to easily take 

or make delivery on such a contract with a smaller size, or, alternatively, the designated contract 

market may adopt special provisions requiring that delivery be made only in multiple contracts to 

accommodate reselling the commodity in the cash market. If the latter provision is adopted, 

contract terms should be adopted to minimize the potential for default in the delivery process by 

ensuring that all contracts remaining open at the close of trading in expiring delivery months can 

be combined to meet the required delivery unit size. Generally, contract sizes and trading units 

should be determined after a careful analysis of relevant cash market trading practices, 
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 5

conditions and deliverable supply estimates, so as to ensure that the underlying market 

commodity market and available supply sources are able to support the contract sizes and trading 

units at all times.

(E) Delivery Pack. The term “delivery pack” refers to the packaging standards (e.g., product may 

be delivered in burlap or polyethylene bags stacked on wooden pallets) or non-quality related 

standards regarding the composition of commodity within a delivery unit (e.g., product must all 

be imported from the same country or origin). An acceptable specification of the delivery pack or 

composition of a contract's delivery unit should reflect, to the extent possible, specifications 

commonly applied to the commodity traded or transacted in the cash market.

(F) Delivery Instrument. An acceptable specification of the delivery instrument (e.g., warehouse 

receipt, depository certificate or receipt, shipping certificate, bill of lading, in-line transfer, book 

transfer of securities, etc.) would provide for its conversion into the cash commodity at a 

commercially-reasonable cost. Transportation terms (e.g., FOB, CIF, freight prepaid to 

destination) as well as any limits on storage or certificate daily premium fees should be specified. 

These terms should reflect cash market practices and the customary provision for allocating 

delivery costs between buyer and seller.

(G) Inspection Provisions. Any inspection/certification procedures for verifying compliance with 

quality requirements or any other related delivery requirements (e.g., discounts relating to the 

age of the commodity, etc.) should be specified in the contract rules. An acceptable specification 

of inspection procedures would include the establishment of formal procedures that are 

consistent with procedures used in the cash market. To the extent that formal inspection 

procedures are not used in the cash market, an acceptable specification would contain provisions 

that assure accuracy in assessing the commodity, that are available at a low cost, that do not pose 

an obstacle to delivery on the contract and that are performed by a reputable, disinterested third 

party or by qualified designated contract market employees. Inspection terms also should detail 

which party pays for the service, particularly in light of the possibility of varying inspection 

results.

(H) Delivery (Trading) Months. Delivery months should be established based on the risk 

management needs of commercial entities as well as the availability of deliverable supplies in the 

specified months.

(I) Minimum Price Fluctuation (Minimum Tick). The minimum price increment (tick) should be 

set at a level that is equal to, or less than, the minimum price increment commonly observed in 

cash market transactions for the underlying commodity. Specifying a futures' minimum tick that 

is greater than the minimum price increment in the cash market can undermine the risk 

management utility of the futures contract by preventing hedgers from efficiently establishing 

and liquidating futures positions that are used to hedge anticipated cash market transactions or 

cash market positions.
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 6

(J) Maximum Price Fluctuation Limits. Designated contract markets may adopt price limits to: 

(1) Reduce or constrain price movements in a trading day that may not be reflective of true 

market conditions but might be caused by traders overreacting to news; (2) Allow additional time 

for the collection of margins in times of large price movements; and (3) Provide a “cooling-off” 

period for futures market participants to respond to bona fide changes in market supply and 

demand fundamentals that would lead to large cash and futures price changes. If price limit 

provisions are adopted, the limits should be set at levels that are not overly restrictive in relation 

to price movements in the cash market for the commodity underlying the futures contract.

(K) Speculative Limits. Specific information regarding the establishment of speculative position 

limits are set forth in part 150, and/or part 151, as applicable, of the Commission's regulations.

(L) Reportable Levels. Refer to §15.03 of the Commission's regulations.

(M) Trading Hours. Should be set by the designated contract market to delineate each trading 

day.

(c) Futures Contracts Settled by Cash Settlement. (1) Cash settlement is a method of settling 

certain futures or option contracts whereby, at contract expiration, the contract is settled by cash 

payment in lieu of physical delivery of the commodity or instrument underlying the contract. An 

acceptable specification of the cash settlement price for commodity futures and option contracts 

would include rules that fully describe the essential economic characteristics of the underlying 

commodity (e.g., grade, quality, weight, class, growth, issuer, maturity, source, rating, 

description of the underlying index and index's calculation methodology, etc.), as well as how 

the final settlement price is calculated. In addition, the rules should clearly specify the trading 

months and hours of trading, the last trading day, contract size, minimum price change (tick size) 

and any limitations on price movements (e.g., price limits or trading halts).

(2) Cash settled contracts may be susceptible to manipulation or price distortion. In evaluating 

the susceptibility of a cash-settled contract to manipulation, a designated contract market should 

consider the size and liquidity of the cash market that underlies the listed contract in a manner 

that follows the determination of deliverable supply as noted above in (b)(1). In particular, 

situations susceptible to manipulation include those in which the volume of cash market 

transactions and/or the number of participants contacted in determining the cash-settlement price 

are very low. Cash-settled contracts may create an incentive to manipulate or artificially 

influence the data from which the cash-settlement price is derived or to exert undue influence on 

the cash-settlement price's computation in order to profit on a futures position in that commodity. 

The utility of a cash-settled contract for risk management and price discovery would be 

significantly impaired if the cash settlement price is not a reliable or robust indicator of the value 

of the underlying commodity or instrument. Accordingly, careful consideration should be given 

to the potential for manipulation or distortion of the cash settlement price, as well as the 

reliability of that price as an indicator of cash market values. Appropriate consideration also 

should be given to the commercial acceptability, public availability, and timeliness of the price 

series that is used to calculate the cash settlement price. Documentation demonstrating that the 
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 7

settlement price index is a reliable indicator of market values and conditions and is commonly 

used as a reference index by industry/market agents should be provided. Such documentation 

may take on various forms, including carefully documented interview results with 

knowledgeable agents.

(3) Where an independent, private-sector third party calculates the cash settlement price series, a 

designated contract market should consider the need for a licensing agreement that will ensure 

the designated contract market's rights to the use of the price series to settle the listed contract.

(i) Where an independent, private-sector third party calculates the cash settlement price series, 

the designated contract market should verify that the third party utilizes business practices that 

minimize the opportunity or incentive to manipulate the cash-settlement price series. Such 

safeguards may include lock-downs, prohibitions against derivatives trading by employees, or 

public dissemination of the names of sources and the price quotes they provide. Because a cashsettled contract may create an incentive to manipulate or artificially influence the underlying 

market from which the cash-settlement price is derived or to exert undue influence on the cashsettlement computation in order to profit on a futures position in that commodity, a designated 

contract market should, whenever practicable, enter into an information-sharing agreement with 

the third-party provider which would enable the designated contract market to better detect and 

prevent manipulative behavior.

(ii) Where a designated contract market itself generates the cash settlement price series, the 

designated contract market should establish calculation procedures that safeguard against 

potential attempts to artificially influence the price. For example, if the cash settlement price is 

derived by the designated contract market based on a survey of cash market sources, the 

designated contract market should maintain a list of such entities which all should be reputable 

sources with knowledge of the cash market. In addition, the sample of sources polled should be 

representative of the cash market, and the poll should be conducted at a time when trading in the 

cash market is active.

(iii) The cash-settlement calculation should involve computational procedures that eliminate or 

reduce the impact of potentially unrepresentative data.

(iv) The cash settlement price should be an accurate and reliable indicator of prices in the 

underlying cash market. The cash settlement price also should be acceptable to commercial users 

of the commodity contract. The registered entity should fully document that the settlement price 

is accurate, reliable, highly regarded by industry/market agents, and fully reflects the economic 

and commercial conditions of the relevant designated contract market.

(v) To the extent possible, the cash settlement price should be based on cash price series that are 

publicly available and available on a timely basis for purposes of calculating the cash settlement 

price at the expiration of a commodity contract. A designated contract market should make the 

final cash settlement price and any other supporting information that is appropriate for release to 

the public, available to the public when cash settlement is accomplished by the derivatives 
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 8

clearing organization. If the cash settlement price is based on cash prices that are obtained from 

non-public sources (e.g., cash market surveys conducted by the designated contract market or by 

third parties on behalf of the designated contract market), a designated contract market should 

make available to the public as soon as possible after a contract month's expiration the final cash 

settlement price as well as any other supporting information that is appropriate or feasible to 

make available to the public.

(4) Contract terms and conditions requirements for futures contracts settled by cash settlement.

(i) An acceptable specification of the terms and conditions of a cash-settled commodity contract 

will also set forth the trading months, last trading day, contract size, minimum price change (tick 

size) and daily price limits, if any.

(A) Commodity Characteristics: The terms and conditions of a commodity contract should 

describe the commodity underlying the contract.

(B) Contract Size and Trading Unit: An acceptable specification of the trading unit would be a 

contract size that is consistent with customary transactions in the cash market. A designated 

contract market may opt to set the contract size smaller than that of standard cash market 

transactions.

(C) Cash Settlement Procedure: The cash settlement price should be reliable, acceptable, 

publicly available, and reported in a timely manner as described in paragraphs (c)(3)(iv) and 

(c)(3)(v) of this appendix C.

(D) Pricing Basis and Minimum Price Fluctuation (Minimum Tick): The minimum price 

increment (tick) should be set a level that is equal to, or less than, the minimum price increment 

commonly observed in cash market transactions for the underlying commodity. Specifying a 

futures' minimum tick that is greater than the minimum price increment in the cash market can 

undermine the risk management utility of the futures contract by preventing hedgers from 

efficiently establishing and liquidating futures positions that are used to hedge anticipated cash 

market transactions or cash market positions.

(E) Maximum Price Fluctuation Limits: Designated contract markets may adopt price limits to: 

(1) Reduce or constrain price movements in a trading day that may not be reflective of true 

market conditions but might be caused by traders overreacting to news; (2) Allow additional time 

for the collection of margins in times of large price movements; and (3) Provide a “cooling-off” 

period for futures market participants to respond to bona fide changes in market supply and 

demand fundamentals that would lead to large cash and futures price changes. If price-limit 

provisions are adopted, the limits should be set at levels that are not overly restrictive in relation 

to price movements in the cash market for the commodity underlying the futures contract. For 

broad-based stock index futures contracts, rules should be adopted that coordinate with New 

York Stock Exchange (“NYSE”) declared Circuit Breaker Trading Halts (or other market 

coordinated Circuit Breaker mechanism) and would recommence trading in the futures contract 

only after trading in the majority of the stocks underlying the index has recommenced.
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 9

(F) Last Trading Day: Specification of the last trading day for expiring contracts should be 

established such that it occurs before publication of the underlying third-party price index or 

determination of the final settlement price. If the designated contract market chooses to allow 

trading to occur through the determination of the final settlement price, then the designated 

contract market should show that futures trading would not distort the final settlement price 

calculation.

(G) Trading Months: Trading months should be established based on the risk management needs 

of commercial entities as well as the availability of price and other data needed to calculate the 

cash settlement price in the specified months. Specification of the last trading day should take 

into consideration whether the volume of transactions underlying the cash settlement price would 

be unduly limited by occurrence of holidays or traditional holiday periods in the cash market. 

Moreover, a contract should not be listed past the date for which the designated contract market 

has access to use a proprietary price index for cash settlement.

(H) Speculative Limits: Specific rules and policies for speculative position limits are set forth in 

part 150 and/or part 151, as applicable, of the Commission's regulations.

(I) Reportable Levels: Refer to §15.03 of the Commission's regulations.

(J) Trading Hours: Should be set by the designated contract market to delineate each trading day.

(d) Options on a Futures Contract. (1) The Commission's experience with the oversight of 

trading in futures option contracts indicates that most of the terms and conditions associated with 

such trading do not raise any regulatory concerns or issues. The Commission has found that the 

following terms do not affect an option contract's susceptible to manipulation or its utility for 

risk management. Thus, the Commission believes that, in most cases, any specification of the 

following terms would be acceptable; the only requirement is that such terms be specified in an 

automatic and objective manner in the option contract's rules:

o Exercise method;

o Exercise procedure (if positions in the underlying futures contract are established via book 

entry);

o Strike price listing provisions, including provisions for listing strike prices on a discretionary 

basis;

o Strike price intervals;

o Automatic exercise provisions;

o Contract size (unless not set equal to the size of the underlying futures contract); and
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 10

o Option minimum tick should be equal to or smaller than that of the underlying futures 

contract.

(2) Option Expiration & Last Trading Day. For options on futures contracts, specification of 

expiration dates should consider the relationship of the option expiration date to the delivery 

period for the underlying futures contract. In particular, an assessment should be made of 

liquidity in the underlying futures market to assure that any futures contracts acquired through 

exercise can be liquidated without adversely affecting the orderly liquidation of futures positions 

or increasing the underlying futures contract's susceptibility to manipulation. When the 

underlying futures contract exhibits a very low trading activity during an expiring delivery 

month's final trading days or has a greater risk of price manipulation than other contracts, the last 

trading day and expiration day of the option should occur prior to the delivery period or the 

settlement date of the underlying future. For example, the last trading day and option expiration 

day might appropriately be established prior to first delivery notice day for option contracts with 

underlying futures contracts that have very limited deliverable supplies. Similarly, if the futures 

contract underlying an option contract is cash settled using cash prices from a very limited 

number of underlying cash market transactions, the last trading and option expiration days for 

the option contract might appropriately be established prior to the last trading day for the futures 

contract.

(3) Speculative Limits. In cases where the terms of an underlying futures contract specify a spotmonth speculative position limit and the option contract expires during, or at the close of, the 

futures contract's delivery period, the option contract should include a spot-month speculative 

position limit provision that requires traders to combine their futures and option position and be 

subject to the limit established for the futures contract. Specific rules and policies for speculative 

position limits are set forth in part 150 and/or part 151, as applicable, of the Commission's 

regulations.

(4) Options on Physicals Contracts.

(i) Under the Commission's regulations, the term “option on physicals” refers to option contracts 

that do not provide for exercise into an underlying futures contract. Upon exercise, options on 

physicals can be settled via physical delivery of the underlying commodity or by a cash payment. 

Thus, options on physicals raise many of the same issues associated with trading in futures 

contracts regarding adequacy of deliverable supplies or acceptability of the cash settlement price 

series. In this regard, an option that is cash settled based on the settlement price of a futures 

contract would be considered an “option on physicals” and the futures settlement price would be 

considered the cash price series.

(ii) In view of the above, acceptable practices for the terms and conditions of options on 

physicals contracts include, as appropriate, those practices set forth above for physical-delivery 

or cash-settled futures contracts plus the practices set forth for options on futures contracts.
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 11

(e) Security Futures Products. The listing of security futures products are governed by the 

special requirements of part 41 of the Commission's regulations.

(f) Non-Price Based Futures Contracts. (1) Non-price based contracts are typically construed as 

binary options, but also may be designed to function similar to traditional futures or option 

contracts.

(2) Where the contract is settled to a third party cash-settlement series, the designated contract 

market should consider the nature and sources of the data comprising the cash-settlement 

calculation, the computational procedures, and the mechanisms in place to ensure the accuracy 

and reliability of the index value. The evaluation also considers the extent to which the third 

party has, or will adopt, safeguards against unauthorized or premature release of the index value 

itself or any key data used in deriving the index value.

(3) The designated contract market should follow the guidance in paragraph (c)(4) (Contract 

Terms and Conditions Requirements for Futures Contracts Settled by Cash Settlement) of this 

appendix C to meet compliance.

(g) Swap Contracts. (1) In general, swap contracts are an agreement to exchange a series of cash 

flows over a period of time based on reference price indices. When listing a swap for trading, a 

swap execution facility or designated contract market should determine that the reference price 

indices used for its contracts are not readily susceptible to manipulation. Accordingly, careful 

consideration should be given to the potential for manipulation or distortion of the cash 

settlement price, as well as the reliability of that price as an indicator of cash market values. 

Appropriate consideration also should be given to the commercial acceptability, public 

availability, and timeliness of the price series that is used to calculate the cash settlement price. 

Documentation demonstrating that the settlement price index is a reliable indicator of market 

values and conditions and is highly regarded by industry/market agents should be provided. Such 

documentation may take on various forms, including carefully documented interviews with 

principal market trading agents, pricing experts, marketing agents, etc. Appropriate consideration 

also should be given to the commercial acceptability, public availability, and timeliness of the 

price series that is used to calculate the cash flows of the swap.

(i) Where an independent, private-sector third party calculates the referenced price index, the 

designated contract market should verify that the third party utilizes business practices that 

minimize the opportunity or incentive to manipulate the cash-settlement price series. Such 

safeguards may include lock-downs, prohibitions against derivatives trading by employees, or 

public dissemination of the names of sources and the price quotes they provide. Because a cashsettled contract may create an incentive to manipulate or artificially influence the underlying 

market from which the cash-settlement price is derived or to exert undue influence on the cashsettlement computation in order to profit on a futures position in that commodity, a designated 

contract market should, whenever practicable, enter into an information-sharing agreement with 

the third-party provider which would enable the designated contract market to better detect and 

prevent manipulative behavior.
AAC: Appendix C to Part 38

December 9, 2014

ATTACHMENT: Page 12

(ii) Where a designated contract market itself generates the cash settlement price series, the 

designated contract market should establish calculation procedures that safeguard against 

potential attempts to artificially influence the price. For example, if the cash settlement price is 

derived by the designated contract market based on a survey of cash market sources, the 

designated contract market should maintain a list of such entities which all should be reputable 

sources with knowledge of the cash market. In addition, the sample of sources polled should be 

representative of the cash market, and the poll should be conducted at a time when trading in the 

cash market is active.

(iii) The cash-settlement calculation should involve appropriate computational procedures that 

eliminate or reduce the impact of potentially unrepresentative data.

(2) Speculative Limits: Specific rules and policies for speculative position limits are set forth in 

part 151 and/or part 151, as applicable, of the Commission's regulations.

(3) Intraday Market Restrictions: Designated contract markets or swap execution facilities should 

have in place intraday market restrictions that pause or halt trading in the event of extraordinary 

price moves that may result in distorted prices. Such restrictions need to be coordinated with 

other markets that may be a proxy or a substitute for the contracts traded on their facility. For 

example, coordination with NYSE rule 80.B Circuit Breaker Trading Halts. The designated 

contract market or swap execution facility should adopt rules to specifically address who is 

authorized to declare an emergency; how the designated contract market or swap execution 

facility will notify the Commission of its decision that an emergency exists; how it will address 

conflicts of interest in the exercise of emergency authority; and how it will coordinate trading 

halts with markets that trade the underlying price reference index or product.

(4) Settlement Method. The designated contract market or swap execution facility should follow 

the guidance in paragraph (c)(4) (Contract Terms and Conditions Requirements for Futures 

Contracts Settled by Cash Settlement) of this appendix C to meet compliance, or paragraph 

(b)(2) (Contract Terms and Conditions Requirements for Futures Contracts Settled by Physical 

Delivery) of this appendix C, as appropriate.

[77 FR 36717, June 19, 2012]