Federal Register / Vol. 72, No. 227 / Tuesday, November 27, 2007 / Proposed Rules 66097 

emissions. Under this view, for 

example, it would not be appropriate to 

sell offsets based on a project (e.g., 

capturing methane from a landfill) 

implemented to comply with existing 

environmental regulations because any 

greenhouse gas reductions would have 

occurred without the sale of the offsets. 

The practical application of the 

‘‘additionality’’ concept to specific fact 

scenarios has raised a large number of 

questions and produced a variety of 

opinions among industry members and 

other stakeholders. 

III. Issues and Questions for Discussion 

at the Workshop 

As discussed above, the Commission’s 

public workshop will explore 

advertising claims for carbon offsets and 

RECs, as well as advertising claims 

based on the purchase of those 

products. We have identified several 

possible issues for discussion at the 

workshop: (1) Trends in marketing 

carbon offsets and RECs, (2) the nature 

of the commodities in question (i.e., the 

property rights transferred from seller to 

buyer through the sale of offsets and 

RECs), (3) product marketing based on 

offset or REC purchases, (4) consumer 

perception of carbon offset and REC 

claims, (5) potential market problems 

such as double-counting and other 

forms of fraud, (6) third-party 

certification and other standard-setting 

programs, (7) the issue of 

‘‘additionality’’ for carbon offsets and its 

relationship to potential consumer 

deception, (8) the use of RECs as a basis 

for carbon offset claims, (9) the state of 

substantiation for offsets and REC 

claims, and (10) the need for additional 

FTC guidance in these areas. 

In addition to considering these 

possible topics, the Commission invites 

written comments on any or all of the 

following questions regarding the 

consumer protection aspects of the 

carbon offset and REC market. The 

Commission requests that responses to 

these questions be as specific as 

possible, including a reference to the 

question being answered, and reference 

to empirical data or other evidence 

wherever available and appropriate. 

(1) What express claims are sellers making 

for carbon offsets and RECs? What claims, if 

any, are implied by that advertising? How do 

consumers interpret these claims? Please 

provide any supporting evidence. What 

evidence constitutes a reasonable basis to 

support these claims? What challenges do 

offset and REC sellers face in substantiating 

their claims? Is there evidence that any 

claims in the current marketplace are 

unsubstantiated or otherwise deceptive? 

(2) What express claims are companies 

making for their products and services based 

on their purchase of carbon offsets or RECs 

(e.g., ‘‘our product is made with renewable 

energy’’)? What claims, if any, are implied by 

that advertising? How do consumers interpret 

these claims? Please provide any supporting 

evidence. What evidence constitutes a 

reasonable basis to support these claims? Is 

there evidence that any claims in the current 

marketplace are unsubstantiated or otherwise 

deceptive? 

(3) When consumers purchase carbon 

offsets or RECs, what property rights do they 

acquire? 

(4) When consumers purchase carbon 

offsets or RECs, what do they think they are 

buying? Please provide any supporting 

evidence. 

(5) What impact do consumers believe 

their carbon offset purchases will have on the 

future quantities of greenhouse gasses in the 

atmosphere? Please provide any supporting 

evidence. 

(6) Do consumers understand that some 

activities supported by carbon offset 

programs do not result in immediate carbon 

emission reductions? If so, when do 

consumers expect such offset programs will 

have an impact? Please provide any 

supporting evidence. 

(7) What is the relationship between the 

concept of ‘‘additionality’’ in carbon offset 

markets and the FTC’s standard for deception 

under the FTC Act? 

(8) Please identify state laws that 

specifically address consumer protection 

issues in the carbon offset and REC markets. 

Please explain how the laws address these 

issues and whether they are effective. 

(9) Please identify third-party and selfregulatory programs that address consumer 

protection issues in the carbon offset and 

REC markets. Please explain how the 

programs address these issues and whether 

they are effective. 

By direction of the Commission. 

Donald S. Clark, 

Secretary. 

[FR Doc. E7–23006 Filed 11–26–07; 8:45 am] 

BILLING CODE 6750–01–P 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Part 150 

RIN 3038–AC40 

Risk Management Exemption From 

Federal Speculative Position Limits 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: Section 150.2 of the 

Commodity Futures Trading 

Commission’s (‘‘Commission’’) 

regulations imposes limits on the size of 

speculative positions that traders may 

hold or control in futures and futures 

equivalent option contracts on certain 

designated agricultural commodities 

named therein. Section 150.3 lists 

certain types of positions that may be 

exempted from these Federal 

speculative position limits. The 

Commission is proposing to provide an 

additional exemption for ‘‘risk 

management positions.’’ A risk 

management position would be defined 

as a futures or futures equivalent 

position, held as part of a broadly 

diversified portfolio of long-only or 

short-only futures or futures equivalent 

positions, that is based upon either: A 

fiduciary obligation to match or track 

the results of a broadly diversified index 

that includes the same commodity 

markets in fundamentally the same 

proportions as the futures or futures 

equivalent position; or a portfolio 

diversification plan that has, among 

other substantial asset classes, an 

exposure to a broadly diversified index 

that includes the same commodity 

markets in fundamentally the same 

proportions as the futures or futures 

equivalent position. The exemption 

would be subject to conditions, 

including that the positions must be 

passively managed, must be 

unleveraged, and may not be carried 

into the spot month. 

DATES: Comments must be received on 

or before January 28, 2008. 

ADDRESSES: Comments should be 

submitted to David Stawick, Secretary, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581. Comments also may be sent by 

facsimile to (202) 418–5521, or by 

electronic mail to secretary@cftc.gov. 

Reference should be made to ‘‘Proposed 

Risk Management Exemption from 

Federal Speculative Position Limits.’’

Comments may also be submitted by 

connecting to the Federal eRulemaking 

Portal at http://www.regulations.gov and 

following comment submission 

instructions. 

FOR FURTHER INFORMATION CONTACT: 

Donald Heitman, Senior Special 

Counsel, Division of Market Oversight, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581, telephone (202) 418–5041, 

facsimile number (202) 418–5507, 

electronic mail dheitman@cftc.gov; or 

John Fenton, Director of Surveillance, 

Division of Market Oversight, telephone 

(202) 418–5298, facsimile number (202) 

418–5507, electronic mail 

jfenton@cftc.gov. 

SUPPLEMENTARY INFORMATION: 


ycherry on PROD1PC66 with PROPOSALS
66098 Federal Register / Vol. 72, No. 227 / Tuesday, November 27, 2007 / Proposed Rules 

1Provisions regarding the establishment of 

exchange-set speculative position limits were 

originally set forth in CFTC regulation 1.61. In 

1999, the Commission simplified and reorganized 

its rules by relocating the substance of regulation 

1.61’s requirements to part 150 of the Commission’s 

rules, thereby incorporating within part 150 

provisions for both Federal speculative position 

limits and exchange-set speculative position limits 

(see 64 FR 24038, May 5, 1999). With the passage 

of the Commodity Futures Modernization Act in 

2000 and the Commission’s subsequent adoption of 

the Part 38 regulations covering DCMs in 2001 (66 

FR 42256, August 10, 2001), Part 150’s approach to 

exchange-set speculative position limits was 

incorporated as an acceptable practice under DCM 

Core Principle 5—Position Limitations and 

Accountability. Section 4a(e) provides that a 

violation of a speculative position limit set 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. 

2 53 FR 41563 (October 24, 1988). 

3 56 FR 14308 (April 9, 1991). 

4 52 FR 27195 (July 20, 1987). 

5 52 FR 34633 (September 14, 1987). 

6The argument has also been made that 

commodities act as a general hedge of liability 

obligations that are linked to inflation. 

I. Background 

A. Statutory Framework 

Speculative position limits have been 

a tool for the regulation of the U.S. 

futures markets since the adoption of 

the Commodity Exchange Act of 1936. 

Section 4a(a) of the Commodity 

Exchange Act (‘‘Act’’), 7 U.S.C. 6a(a), 

states that: 

Excessive speculation in any commodity 

under contracts of sale of such commodity 

for future delivery made on or subject to the 

rules of contract markets or derivatives 

transaction execution facilities causing 

sudden or unreasonable fluctuations or 

unwarranted changes in the price of such 

commodity, is an undue and unnecessary 

burden on interstate commerce in such 

commodity. 

Accordingly, section 4a(a) of the Act 

provides the Commission with the 

authority to: 

Fix such limits on the amounts of trading 

which may be done or positions which may 

be held by any person under contracts of sale 

of such commodity for future delivery on or 

subject to the rules of any contract market or 

derivatives transaction execution facility as 

the Commission finds are necessary to 

diminish, eliminate, or prevent such burden. 

This longstanding statutory 

framework providing for Federal 

speculative position limits was 

supplemented with the passage of the 

Futures Trading Act of 1982, which 

acknowledged the role of exchanges in 

setting their own speculative position 

limits. The 1982 legislation also 

provided, under section 4a(e) of the Act, 

that limits set by exchanges and 

approved by the Commission were 

subject to Commission enforcement. 

Finally, the Commodity Futures 

Modernization Act of 2000 (‘‘CFMA’’) 

established designation criteria and core 

principles with which a designated 

contract market (‘‘DCM’’) must comply 

to receive and maintain designation. 

Among these, Core Principle 5 in 

section 5(d) of the Act states: 

Position Limitations or Accountability—To 

reduce the potential threat of market 

manipulation or congestion, especially 

during trading in the delivery month, the 

board of trade shall adopt position 

limitations or position accountability for 

speculators, where necessary and 

appropriate. 

B. Regulatory Framework 

The regulatory structure based upon 

these statutory provisions consists of 

three elements, the levels of the 

speculative position limits, certain 

exemptions from the limits (for hedging, 

spreading/arbitrage, and other 

positions), and the policy on aggregating 

commonly owned or controlled 

accounts for purposes of applying the 

limits. This regulatory structure is 

administered under a two-pronged 

framework. Under the first prong, the 

Commission establishes and enforces 

speculative position limits for futures 

contracts on a limited group of 

agricultural commodities. These Federal 

limits are enumerated in Commission 

regulation 150.2, and apply to the 

following futures and option markets: 

Chicago Board of Trade (‘‘CBOT’’) corn, 

oats, soybeans, wheat, soybean oil, and 

soybean meal; Minneapolis Grain 

Exchange (‘‘MGE’’) hard red spring 

wheat and white wheat; ICE Futures 

U.S. (formerly the New York Board of 

Trade) cotton No. 2; and Kansas City 

Board of Trade (‘‘KCBOT’’) hard winter 

wheat. Under the second prong, 

individual DCMs establish and enforce 

their own speculative position limits or 

position accountability provisions 

(including exemption and aggregation 

rules), subject to Commission oversight 

and separate authority to enforce 

exchange-set speculative position limits 

approved by the Commission. Thus, 

responsibility for enforcement of 

speculative position limits is shared by 

the Commission and the DCMs.1

Commission regulation 150.3, 

‘‘Exemptions,’’ lists certain types of 

positions that may be exempted from 

(and thus may exceed) the Federal 

speculative position limits. For 

example, under § 150.3(a)(1), bona fide 

hedging transactions, as defined in 

§ 1.3(z) of the Commission’s regulations, 

may exceed the limits. The Commission 

has periodically amended the exemptive 

rules applicable to Federal speculative 

position limits in response to changing 

conditions and practices in futures 

markets. These amendments have 

included an exemption from speculative 

position limits for the positions of 

multi-advisor commodity pools and 

other similar entities that use 

independent account controllers,2 and 

an amendment to extend the exemption 

for positions that have a common owner 

but are independently controlled to 

include certain commodity trading 

advisors.3 In 1987, the Commission also 

issued an agency interpretation 

clarifying certain aspects of the hedging 

definition.4 The Commission has also 

issued guidance with respect to 

exchange speculative limits, including 

guidelines regarding the exemption of 

risk-management positions from 

exchange-set speculative position limits 

in financial futures contracts.5 However, 

the last significant amendment to the 

Commission’s exemptive rules was 

implemented in 1991. 

C. Changes in Trading Practices 

The intervening 16 years have seen 

significant changes in trading patterns 

and practices in derivatives markets, 

thus prompting the Commission to 

reassess its policies regarding 

exemptions from the Federal 

speculative position limits. These 

changes primarily involve trading 

strategies and programs based on 

commodity indexes. In particular, 

pension funds and other investors 

(including individual investors 

participating in commodity index-based 

funds or trading programs) have become 

interested in taking on commodity price 

exposure as a way of diversifying 

portfolios that might otherwise be 

limited to stocks and interest rate 

instruments. Financial research has 

shown that the risk/return performance 

of a portfolio is improved by acquiring 

uncorrelated or negatively correlated 

assets, and commodities (including 

agricultural commodities) generally 

perform that role in a portfolio of other 

financial assets.6

The components of a commodity 

index-based investment might include 

energy commodities, metals (both 

precious metals and industrial metals), 

agricultural commodities that are 

subject to exchange limits (including 

coffee, sugar, cocoa, and orange juice, as 

well as livestock and meat), and those 

agricultural commodities named above 

that are subject to Federal speculative 

position limits (grains, the soybean 

complex and cotton). With respect to 

agricultural commodities subject to 

Federal limits, the Commission has 

responded to various instances where 


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7A 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. 

8The pension fund would have been limited in 

its ability to take on this commodities exposure 

directly, by putting on the long futures position 

itself, because the pension fund—having no 

offsetting price risk incidental to commercial cash 

or spot operations—would not have qualified for a 

hedge exemption with respect to the position. (See 

§ 1.3(z) of the Commission’s regulations.) 

9CFTC Letter 06–09 (April 19, 2006); CFTC Letter 

06–19 (September 6, 2006). 

index-based positions in such 

commodities exceed (or might grow to 

exceed) the Federal speculative position 

limits. In certain cases, the Commission 

has granted exemptive or no-action 

relief from Federal speculative position 

limits. In granting such relief, the 

Commission has included conditions to 

protect the market from the potential for 

the sudden or unreasonable fluctuations 

or unwarranted changes in prices that 

speculative limits are designed to 

prevent. 

For example, in 1991, the 

Commission received a request from a 

large commodity merchandising firm 

that engaged in commodity related 

swaps 7 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 exchangetraded futures contracts on certain nonfinancial commodities meeting specified 

criteria. The commodities making up 

the index included wheat, corn and 

soybeans, all of which were (and still 

are) subject to Federal 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 pension fund counterparty if the 

value of the index was higher at the end 

of the swap payment period than at the 

beginning. 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 spot month (when 

physical commodity markets are most 

vulnerable to manipulation and 

attendant unreasonable price 

fluctuations). 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 pension fund 

counterparty. 

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. The swap transaction 

allowed the pension fund to add 

commodities exposure to its portfolio 

indirectly, through the OTC trade with 

the swap dealer—something it could 

have done directly, but only in a limited 

fashion.8

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 specific limitations to 

protect the marketplace from potential 

ill effects. The limitations included: (1) 

The futures positions must offset 

specific price risk; (2) the dollar value 

of the futures positions would be no 

greater than the dollar value of the 

underlying risk; and (3) the futures 

positions would not be carried into the 

spot month. 

The Commission’s Division of Market 

Oversight (‘‘Division’’ or ‘‘DMO’’) has 

also recently issued two no-action 

letters involving another type of indexbased trading.9 Both cases involved 

trading that offered investors the 

opportunity to participate in a broadly 

diversified commodity index-based 

fund or program (‘‘index fund’’). The 

futures positions of these index funds 

differed from the futures positions taken 

by the swap dealers described above. 

The swap dealer positions were taken to 

offset OTC swaps exposure that was 

directly linked to the price of an index. 

For that reason, the Division granted 

hedge exemptions to these swap dealer 

positions. On the other hand, in the 

index fund positions described in the 

no-action letters, the price exposure 

results from a promise or obligation to 

track an index, rather than from holding 

an OTC swap position whose value is 

directly linked to the price of the index. 

The Division believed that this 

difference was significant enough that 

the index fund positions would not 

qualify for a hedge exemption. 

Nevertheless, because the index fund 

positions represented a legitimate and 

potentially useful investment strategy, 

the Division granted the index funds noaction relief, subject to certain 

conditions, described below, that were 

intended to protect the futures markets 

from potential ill effects. 

II. Proposed Amendment 

A. Introduction 

In light of the changing trading 

practices and conditions described 

above, the Commission is now 

considering whether to amend its Part 

150 regulations to create a new 

exemption from Federal speculative 

position limits. In addition to the abovedescribed policy of granting index-based 

hedge exemptions to swap dealers, 

which policy would remain in effect, 

the proposal would create an additional 

risk management exemption. That 

exemption would apply to positions 

held by: (1) Intermediaries, such as 

index funds, who pass price risks on to 

their customers; and (2) pension funds 

and other institutional investors seeking 

to diversify risks in portfolios by 

including an allocation to commodity 

exposure. As noted above, pension 

funds can already benefit from a hedge 

exemption indirectly, by entering into 

an OTC position with a swap dealer 

who, in turn, puts on an offsetting 

futures position in reliance on the 

existing hedge exemption policy. The 

proposed rules would allow a pension 

fund to receive an exemption directly, 

by putting on a futures position itself 

pursuant to the new risk management 

exemption provision. 

In determining whether the new risk 

management exemption proposed 

herein is appropriate, it is important to 

recall that the purpose of position 

limits, as specified in Section 4a(a) of 

the Act, is to diminish, eliminate, or 

prevent sudden or unreasonable 

fluctuations or unwarranted changes in 

the prices of commodities. Within this 

constraint, it is appropriate that the 

Commission (and the exchanges) not 

unduly restrict trading activity. A 

position limit is a means to an end, not 

an end in itself. Accordingly, to the 

extent that a type of trading activity can 

be identified that is unlikely to cause 

sudden or unreasonable fluctuations or 

unwarranted changes in prices, it is a 

good candidate to qualify for an 

exemption from position limits. 

Commodity index-based trading has 

characteristics that recommend it on 

that score: (1) It is generally passively 

managed, so that positions tend not to 

be changed based on market news or 

short-term price volatility; (2) it is 

generally unleveraged, so that financial 

considerations should not cause rapid 

liquidation of positions; and (3) it is 

inherently diversified, in that futures 

positions are normally held in many 


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66100 Federal Register / Vol. 72, No. 227 / Tuesday, November 27, 2007 / Proposed Rules 

10The long-only or short-only qualification 

would limit risk management positions to positions 

offsetting either a long index or portfolio or a short 

index or portfolio, and thus would not allow for 

spread or straddle positions. With respect to shortonly positions, it should be noted that all the 

applications for index-based trading relief received 

by the Commission to date, whether for hedge 

exemptions or no-action relief, have involved longonly futures positions. However, the proposed rules 

would also provide for an entity that might offer 

investors a ‘‘bear market index.’’ Such an index 

would require the offeror to be long opposite its 

customers. It would, therefore, need to offset that 

exposure with short futures positions. 

11For example, a long call option combined with 

a short put option is equivalent to a long futures 

contract. 

different markets, and its purpose 

typically is to diversify a portfolio 

containing assets with different risk 

profiles. 

B. Conditions for the Exemption 

To be eligible for an exemption as a 

‘‘risk management position’’ under the 

proposed amendments to Part 150, a 

futures position would need to comply 

with several conditions designed to 

protect the futures markets from sudden 

or unreasonable fluctuations or 

unwarranted changes in prices. First, 

§ 150.3(a) would be amended to add a 

requirement that all positions subject to 

the exemptive provisions must be 

‘‘established and liquidated in an 

orderly manner.’’ This requirement 

already applies to the positions referred 

to in § 150.3(a)(1), which exempts bona 

fide hedging transactions, by virtue of 

similar language appearing in the bona 

fide hedging definition (see § 1.3(z)(1)). 

However, the proposed amendment 

would clarify that the same requirement 

would apply not only to the risk 

management positions to be exempted 

under proposed new § 150.3(a)(2), but 

also to the spread or arbitrage positions 

already exempted under current 

§ 150.3(a)(3) and the positions carried in 

the separate account of an independent 

account controller already exempted 

under current § 150.3(a)(4). 

Second, the proposed rules would 

define a ‘‘risk management position’’ as 

a futures or futures equivalent position, 

held as part of a broadly diversified 

portfolio of long-only or short-only 10

futures or futures equivalent 11

positions, that is based upon either: (1) 

A fiduciary obligation to match or track 

the results of a broadly diversified index 

that includes the same commodity 

markets in fundamentally the same 

proportions as the futures or futures 

equivalent position; or (2) a portfolio 

diversification plan that has, among 

other substantial asset classes, an 

exposure to a broadly diversified index 

that includes the same commodity 

markets in fundamentally the same 

proportions as the futures or futures 

equivalent position. The first of these 

alternatives covers positions held by 

index funds, such as those that were the 

subject of the Commission No-action 

letters discussed above. The second 

alternative covers positions held 

directly by pension funds and other 

institutional investors. 

A ‘‘broadly diversified index’’ would 

be defined to limit the weighting of 

certain agricultural commodities in the 

index so that commodities subject to 

Federal speculative position limits 

would not comprise a disproportionate 

share of the index. Thus, a ‘‘broadly 

diversified index’’ would mean an index 

based on physical commodities in 

which: (1) not more than 15% of the 

index is composed of any single 

agricultural commodity named in 

§ 150.2 (for which purposes, wheat shall 

be regarded as a single commodity, so 

that positions in all varieties of wheat, 

on all exchanges, combined, may not 

exceed 15% of the index, and the 

soybean complex shall likewise be 

regarded as a single commodity, so that 

positions in soybeans, soybean oil and 

soybean meal, on all exchanges 

combined, may not exceed 15% of the 

index); and (2) not more than 50% of 

the index as a whole is composed of 

agricultural commodities named in 

§ 150.2. The Commission believes that a 

narrowly based index could be used to 

evade speculative position limits. For 

example, the grains all tend to have 

similar risk profiles—i.e, they tend to 

respond similarly to common market 

factors, such as weather. Therefore, the 

Commission is concerned that an index 

composed, for example, of 25% each of 

corn, wheat, oats and soybeans—rather 

than constituting a means of portfolio 

diversification—could operate as a 

mechanism for evading speculative 

position limits in one or more of those 

commodities. 

Third, the positions subject to the 

exemption must be passively managed. 

The proposed rules would define a 

‘‘passively managed position’’ as a 

futures or futures equivalent position 

that is part of a portfolio that tracks a 

broadly diversified index, which index 

is calculated, adjusted, and re-weighted 

pursuant to an objective, predetermined 

mathematical formula the application of 

which allows only limited discretion 

with respect to trading decisions. This 

definition contemplates a certain 

limited amount of discretion in the 

manner in which the futures position 

tracks the underlying index. For 

example, index funds generally provide 

rules or standards for periodically reweighting the index to account for price 

changes in the commodities that make 

up the index, or readjusting the 

composition of the index to account for 

changing economic or market factors. 

Such discretion would be permissible. 

However, the definition contemplates 

that the position holder’s discretion 

would not extend to frequently or 

arbitrarily changing the composition of 

the index or the weighting of the 

commodities in the index. Such actions 

would indicate that the position was 

being actively managed with a view to 

taking advantage of short-term market 

trends. The definition also contemplates 

that the position holder could exercise 

some discretion as to when to roll 

futures positions forward into the next 

delivery month without violating the 

‘‘passively managed’’ requirement 

(provided no positions were carried into 

the spot month). The Commission 

believes that limited discretion as to 

when a position must be rolled forward 

can mitigate the market impact that 

might otherwise result from large 

positions being rolled forward on a predetermined date and, consequently, 

help to avoid liquidity problems. 

Fourth, the futures trading undertaken 

pursuant to the exemption must be 

unleveraged. An unleveraged position 

would be defined as a futures or futures 

equivalent position that is part of a 

portfolio of futures or futures equivalent 

positions directly relating to an 

underlying broadly diversified index, 

the notional value of which positions 

does not exceed the sum of the value of: 

(1) Cash set aside in an identifiable 

manner, or unencumbered short-term 

U.S. Treasury obligations so set aside, 

plus any funds deposited as margin on 

such position; and (2) accrued profits on 

such position held at the futures 

commission merchant. Because the 

futures positions would be fully offset 

by cash or profits on such positions, 

financial considerations (e.g., significant 

price changes) should not cause rapid 

liquidation of positions, which can 

cause sudden or unreasonable 

fluctuations or unwarranted changes in 

prices. 

Finally, positions may not be carried 

into the spot month, a period during 

which physical commodity markets are 

particularly vulnerable to 

manipulations, squeezes and sudden or 

unreasonable fluctuations or 

unwarranted changes in prices. 

Entities intending to hold risk 

management positions pursuant to the 

exemption in § 150.3(a)(2) would be 

required to apply to the Commission 

and receive Commission approval in 

order to receive an exemption. The 

applicant would be required to provide 

the following information: 


ycherry on PROD1PC66 with PROPOSALS
Federal Register / Vol. 72, No. 227 / Tuesday, November 27, 2007 / Proposed Rules 66101 

12The Commission understands that not every 

entity that might qualify for this exemption would 

necessarily know the identities of all of the 

participants in the position. For example, a fund 

based on a commodity index may qualify for the 

exemption but the entity operating the fund may 

not know the identities of the owners of 

outstanding shares and, therefore, may not know 

when any given person had acquired a 25% or more 

interest in the position held by the fund. 

Application for a Risk Management 

Exemption as Defined in § 150.1(j) 

1. Initial application materials: 

A. For an exemption related to a 

‘‘fiduciary obligation’’. 

• A description of the underlying 

index or group of commodities, 

including the commodities, the 

weightings, the method and timing of 

re-weightings, the selection of futures 

months, and the timing and criteria for 

rolling from one futures month to 

another; 

• A description of the ‘‘fiduciary 

obligation;’’

• The actual or anticipated value of 

the underlying funds to be invested in 

commodities within the next fiscal or 

calendar year and the method for 

calculating that value, as well as the 

equivalent numbers of futures contracts 

in each of the § 150.2 markets for which 

the exemption is sought; 

• A description of the manner in 

which the funds to be invested in 

commodities will be set aside; 

• A statement certifying that the 

requirements of this exemption are met 

and will be observed at all times going 

forward and that the Commission will 

be notified promptly of any material 

changes in this information; and 

• Such other information as the 

Commission may request. 

B. For an exemption based upon a 

‘‘portfolio diversification plan’’. 

• A description of the investment 

index or group of commodities, 

including the commodities, the 

weightings, the method and timing of 

re-weightings, the selection of futures 

months, and the timing and criteria for 

rolling from one futures month to 

another; 

• A description of the entire portfolio, 

including the total size of the assets, the 

asset classes making up the portfolio, 

and a description of the allocation 

among the asset classes; 

• The actual or anticipated value of 

the underlying funds to be invested in 

commodities and the method for 

calculating that value, as well as the 

equivalent numbers of futures contracts 

in each of the § 150.2 markets for which 

the exemption is sought; 

• A description of the manner in 

which the funds to be invested in 

commodities will be set aside; 

• A statement certifying that the 

requirements of this exemption are met 

and will be observed at all times going 

forward and that the Commission will 

be notified promptly of any material 

changes in this information; and 

• Such other information as the 

Commission may request. 

2. Supplemental Material: Whenever 

the purchases or sales that a person 

wishes to qualify under this risk 

management exemption shall exceed the 

amount provided in the person’s most 

recent filing pursuant to this section, or 

the amount previously specified by the 

Commission pursuant to this section, 

such person shall file with the 

Commission a statement that updates 

the information provided in the person’s 

most recent filing and provides the 

reasons for this change. Such statement 

shall be filed at least ten business days 

in advance of the date that such person 

wishes to exceed those amounts and if 

the notice filer is not notified otherwise 

by the Commission within the 10-day 

period, the exemption will continue to 

be effective. The Commission may, 

upon call, obtain such additional 

materials from the applicant or person 

availing themselves of this exemption as 

the Commission deems necessary to 

exercise due diligence with respect to 

granting and monitoring this exemption. 

Entities holding risk management 

positions pursuant to the exemption in 

§ 150.3(a)(2) would also be required to 

immediately report to the Commission 

in the event they know, or have reason 

to know,12 that any person holds a 

greater than 25% interest in such 

position. The reason for this 

requirement is to alert the Commission 

to the possibility that an individual 

might be attempting to use the 

exemption as a means of avoiding 

otherwise applicable speculative 

position limits. 

C. Questions 

The Commission would welcome 

public comments on any aspect of the 

proposed risk management exemption 

from Federal speculative position limits. 

However, the Commission is 

particularly interested in the views of 

commenters on the following specific 

questions: 

(1) Are any of the proposed 

conditions for receiving a risk 

management exemption unnecessary 

and, if so, why? Alternatively, should 

any of the proposed conditions be 

modified and, if so, why? 

(2) Should any other conditions, in 

addition to those set out in these 

proposed rules, be imposed as a 

prerequisite for receiving a risk 

management exemption? If so, what is 

the rationale for such additional 

conditions (i.e., what potential harm 

would they address)? 

(3) Is there any type of index-based 

trading that should be covered by the 

proposed rules, but is not? If so, how 

should the proposed rules be revised to 

apply to such trading? 

(4) The proposed rules would allow 

for a risk management exemption in the 

case of short-only futures or futures 

equivalent positions used to manage 

risks in connection with a ‘‘bear market 

index.’’ Would any of the exemptive 

rules, as proposed, create potential 

problems as applied to such an index? 

For example, in applying the definition 

of ‘‘unleveraged position,’’ would 

problems be encountered in comparing 

the notional value of an unleveraged 

short futures position to the value of the 

cash, margins and accrued profits on 

such position? 

(5) Should the proposed rules impose 

any restrictions or conditions regarding 

how broad- or narrow-based an index 

should be if a position based on the 

index is to qualify for an exemption? 

For example, with respect to narrowbased indices reflecting specific 

industry or commodity sectors, should 

the Commission be concerned that a 

narrow-based index composed entirely 

of agricultural commodities—for 

example, 25% each of corn, wheat, oats 

and soybeans—could operate as a 

mechanism for evading speculative 

position limits in one or more of those 

commodities? 

(6) The proposed rules list the 

information that must be provided in an 

application for a risk management 

exemption. Are the requirements set out 

in the proposed rules appropriate? 

Should the requirements be revised and, 

if so, how? 

III. Related Matters 

A. Cost Benefit Analysis 

Section 15(a) of the Act requires the 

Commission to consider the costs and 

benefits of its action before issuing a 

new regulation under the Act. By its 

terms, section 15(a) does not require the 

Commission to quantify the costs and 

benefits of a new regulation or to 

determine whether the benefits of the 

proposed regulation outweigh its costs. 

Rather, section 15(a) requires the 

Commission to ‘‘consider the costs and 

benefits’’ of the subject rule. 

Section 15(a) further specifies that the 

costs and benefits of the proposed rule 

shall be evaluated in light of five broad 

areas of market and public concern: (1) 

Protection of market participants and 

the public; (2) efficiency, 

competitiveness, and financial integrity 

of futures markets; (3) price discovery; 


ycherry on PROD1PC66 with PROPOSALS
66102 Federal Register / Vol. 72, No. 227 / Tuesday, November 27, 2007 / Proposed Rules 

13 47 FR 18618 (April 30, 1982). 

(4) sound risk management practices; 

and (5) other public interest 

considerations. The Commission may, 

in its discretion, give greater weight to 

any one of the five enumerated areas of 

concern and may, in its discretion, 

determine that, notwithstanding its 

costs, a particular rule is necessary or 

appropriate to protect the public interest 

or to effectuate any of the provisions or 

to accomplish any of the purposes of the 

Act. 

The proposed rules would provide for 

a risk management exemption from the 

Federal speculative position limits 

applicable to certain agricultural 

commodities, thus giving entities such 

as index funds and pension funds an 

opportunity to more effectively manage 

risks for their investors through greater 

diversification of their portfolios. The 

rules would seek to protect the futures 

markets from potential ill effects of such 

risk management positions by imposing 

conditions on the exemption and 

creating an application process 

(including a requirement to file updates 

as necessary) to assure those conditions 

are met. The Commission, in proposing 

these rules, has endeavored to impose 

the minimum requirements necessary 

consistent with its mandate to protect 

the markets and the public from ill 

effects. 

The Commission specifically invites 

public comment on its application of 

the cost benefits criteria of the Act. 

Commenters are also invited to submit 

any quantifiable data that they may have 

concerning the costs and benefits of the 

proposed rules with their comment 

letter. 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’), 5 U.S.C. 601 et seq., requires 

Federal agencies, in proposing rules, to 

consider the impact of those rules on 

small businesses. The Commission 

believes that the proposed rule 

amendments to implement a new 

exemption from Federal speculative 

position limits would only affect large 

traders. The Commission has previously 

determined that large traders are not 

small entities for the purposes of the 

RFA.13 Therefore, the Chairman, 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. 

C. Paperwork Reduction Act 

When publishing proposed rules, the 

Paperwork Reduction Act of 1995 (44 

U.S.C. 3507(d)) 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 

(‘‘OMB’’) for its review. 

Collection of Information: Rules 

Establishing Risk Management 

Exemption From Federal Speculative 

Position Limits, OMB Control Number. 

The estimated burden was calculated 

as follows: 

Estimated number of respondents: 6. 

Annual responses by each 

respondent: 1. 

Total annual responses: 6. 

Estimated average hours per response: 

10. 

Annual reporting burden: 60 hours. 

List of Subjects in 17 CFR Part 150 

Agricultural commodities, Bona fide 

hedge positions, Position limits, Spread 

exemptions. 

In consideration of the foregoing, 

pursuant to the authority contained in 

the Commodity Exchange Act, the 

Commission hereby proposes to amend 

part 150 of chapter I of title 17 of the 

Code of Federal Regulations as follows: 

PART 150—LIMITS ON POSITIONS 

1. The authority citation for part 150 

is revised to read as follows: 

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

amended by the Commodity Futures 

Modernization Act of 2000, Appendix E of 

Pub. L. 106–554, 114 Stat. 2763 (2000). 

2. Section 150.1 is amended by 

adding new paragraphs (j) through (m) 

to read as follows: 

§ 150.1 Definitions. 

* * * * * 

(j) Risk management position, for the 

purposes of an exemption under 

§ 150.3(a)(2), means a futures or futures 

equivalent position, held as part of a 

broadly diversified portfolio of longonly or short-only futures or futures 

equivalent positions, that is based upon 

either: 

(1) A fiduciary obligation to match or 

track the results of a broadly diversified 

index that includes the same 

commodity markets in fundamentally 

the same proportions as the futures or 

futures equivalent position; or 

(2) A portfolio diversification plan 

that has, among other substantial asset 

classes, an exposure to a broadly 

diversified index that includes the same 

commodity markets in fundamentally 

the same proportions as the futures or 

futures equivalent position. 

(k) Broadly diversified index means 

an index based on physical 

commodities in which: 

(1) Not more than 15% of the index 

is composed of any single agricultural 

commodity named in § 150.2 (for which 

purposes, wheat shall be regarded as a 

single commodity, so that positions in 

all varieties of wheat, on all exchanges 

combined, may not exceed 15% of the 

index, and the soybean complex shall be 

regarded as a single commodity, so that 

positions in soybeans, soybean oil and 

soybean meal, on all exchanges 

combined, may not exceed 15% of the 

index); and 

(2) Not more than 50% of the index 

as a whole is composed of agricultural 

commodities named in § 150.2. 

(l) Passively managed position means 

a futures or futures equivalent position 

that is part of a portfolio that tracks a 

broadly diversified index, which index 

is calculated, adjusted, and re-weighted 

pursuant to an objective, predetermined 

mathematical formula the application of 

which allows only limited discretion 

with respect to trading decisions. 

(m) Unleveraged position means: 

(1) A futures or futures equivalent 

position that is part of a portfolio of 

futures or futures equivalent positions 

directly relating to an underlying 

broadly diversified index, the notional 

value of which positions does not 

exceed the sum of the value of: 

(i) Cash set aside in an identifiable 

manner, or unencumbered short-term 

U.S. Treasury obligations so set aside, 

plus any funds deposited as margin on 

such position; and 


ycherry on PROD1PC66 with PROPOSALS
Federal Register / Vol. 72, No. 227 / Tuesday, November 27, 2007 / Proposed Rules 66103 

(ii) Accrued profits on such position 

held at the futures commission 

merchant. 

(2) [Reserved] 

3. Section 150.3 is amended by 

revising paragraph (a) introductory text, 

adding a new paragraph (a)(2), and 

adding a new paragraph (c) to read as 

follows: 

§ 150.3 Exemptions. 

(a) Positions which may exceed limits. 

The position limits set forth in § 150.2 

of this part may be exceeded to the 

extent such positions are established 

and liquidated in an orderly manner 

and are: 

* * * * * 

(2) Risk management positions, as 

defined in § 150.1(j), that fulfill the 

following requirements: 

(i) Such risk management positions 

must comply with the following 

conditions: 

(A) The positions must be passively 

managed; 

(B) The positions must be 

unleveraged; and 

(C) The positions must not be carried 

into the spot month. 

(ii) Entities intending to hold risk 

management positions pursuant to the 

exemption in § 150.3(a)(2) must apply to 

the Commission and receive 

Commission approval. Such 

applications must include the following 

information: 

(A) In the case of an exemption based 

on a fiduciary obligation, as described 

in § 150.1(j)(1), an application must 

include: 

(1) A description of the underlying 

index or group of commodities, 

including the commodities, the 

weightings, the method and timing of 

re-weightings, the selection of futures 

months, and the timing and criteria for 

rolling from one futures month to 

another; 

(2) A description of the ‘‘fiduciary 

obligation;’’

(3) The actual or anticipated value of 

the underlying funds to be invested in 

commodities within the next fiscal or 

calendar year and the method for 

calculating that value, as well as the 

equivalent numbers of futures contracts 

in each of the § 150.2 markets for which 

the exemption is sought; 

(4) A description of the manner in 

which the funds to be invested in 

commodities will be set aside; 

(5) A statement certifying that the 

requirements of this exemption are met 

and will be observed at all times going 

forward and that the Commission will 

be notified promptly of any material 

changes in this information; and 

(6) Such other information as the 

Commission may request. 

(B) In the case of an exemption based 

on a portfolio diversification plan, as 

described in § 150.1(j)(2), an application 

must include: 

(1) A description of the investment 

index or group of commodities, 

including the commodities, the 

weightings, the method and timing of 

re-weightings, the selection of futures 

months, and the timing and criteria for 

rolling from one futures month to 

another; 

(2) A description of the entire 

portfolio, including the total size of the 

assets, the asset classes making up the 

portfolio, and a description of the 

allocation among the asset classes; 

(3) The actual or anticipated value of 

the underlying funds to be invested in 

commodities and the method for 

calculating that value, as well as the 

equivalent numbers of futures contracts 

in each of the § 150.2 markets for which 

the exemption is sought; 

(4) A description of the manner in 

which the funds to be invested in 

commodities will be set aside; 

(5) A statement certifying that the 

requirements of this exemption are met 

and will be observed at all times going 

forward and that the Commission will 

be notified promptly of any material 

changes in this information; and 

(6) Such other information as the 

Commission may request. 

(iii) Whenever the purchases or sales 

that a person wishes to qualify under 

this risk management exemption shall 

exceed the amount provided in the 

person’s most recent filing pursuant to 

this section, or the amount previously 

specified by the Commission pursuant 

to this section, such person shall file 

with the Commission a statement that 

updates the information provided in the 

person’s most recent filing and provides 

the reasons for this change. Such 

statement shall be filed at least ten 

business days in advance of the date 

that such person wishes to exceed those 

amounts and if the notice filer is not 

notified otherwise by the Commission 

within the 10-day period, the exemption 

will continue to be effective. The 

Commission may, upon call, obtain 

such additional materials from the 

applicant or person availing themselves 

of this exemption as the Commission 

deems necessary to exercise due 

diligence with respect to granting and 

monitoring this exemption. 

(iv) Entities holding risk management 

positions pursuant to the exemption in 

§ 150.3(a)(2) shall immediately report to 

the Commission in the event that they 

know, or have reason to know, that any 

person holds a greater than 25% interest 

in such position. 

* * * * * 

(c) The Commission hereby delegates, 

until such time as the Commission 

orders otherwise, to the Director of the 

Division of Market Oversight, or the 

Director’s designee, the functions 

reserved to the Commission in 

§ 150.3(a)(2) of this chapter. 

Issued by the Commission this 20th day of 

November, 2007, in Washington, DC. 

David Stawick, 

Secretary of the Commission. 

[FR Doc. E7–22992 Filed 11–26–07; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF HEALTH AND 

HUMAN SERVICES 

Food and Drug Administration 

21 CFR Part 101 

[Docket Nos. 2004N–0217, 2005P–0189, and 

2006P–0137] 

RIN No. 0910–ZA28 

Food Labeling: Nutrient Content 

Claims; Alpha-Linolenic Acid, 

Eicosapentaenoic Acid, and 

Docosahexaenoic Acid Omega-3 Fatty 

Acids 

AGENCY: Food and Drug Administration, 

HHS. 

ACTION: Notice of proposed rulemaking. 

SUMMARY: The Food and Drug 

Administration (FDA) proposes to issue 

this rule finding that certain nutrient 

content claims for foods, including 

conventional foods and dietary 

supplements, that contain omega-3 fatty 

acids, do not meet the requirements of 

the Federal Food, Drug, and Cosmetic 

Act (the act) and may not appear in food 

labeling. This rule is being proposed in 

response to three notifications 

submitted to FDA under the act. One 

notification concerning nutrient content 

claims for alpha-linolenic acid (ALA), 

docosahexaenoic acid (DHA), and 

eicosapentaenoic acid (EPA) was 

submitted collectively by Alaska 

General Seafoods, Ocean Beauty 

Seafoods, Inc., and Trans-Ocean 

Products, Inc. (the seafood processors 

notification); a second notification 

concerning nutrient content claims for 

ALA, DHA, and EPA was submitted by 

Martek Biosciences Corp. (the Martek 

notification); and a third notification 

concerning nutrient content claims for 

DHA and EPA was submitted by Ocean 

Nutrition Canada, Ltd. (the Ocean 

Nutrition notification). 

FDA has reviewed the information 

included in the three notifications and 

is proposing to prohibit the nutrient 

content claims for DHA and EPA set 


ycherry on PROD1PC66 with PROPOSALS