Vol. 81 Monday, 

No. 113 June 13, 2016 

Part V 

Commodity Futures Trading Commission 

17 CFR Parts 37, 38, and 150 

Position Limits for Derivatives: Certain Exemptions and Guidance; 

Proposed Rule 

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38458 Federal Register / Vol. 81, No. 113 / Monday, June 13, 2016 / Proposed Rules 

1 7 U.S.C. 1 et seq. 

2See 17 CFR part 150. Part 150 of the 

Commission’s regulations establishes federal 

position limits (that is, position limits established 

by the Commission, as opposed to exchange-set 

limits) on certain enumerated agricultural contracts; 

the listed commodities are referred to as 

enumerated agricultural commodities. The position 

limits on these agricultural contracts are referred to 

as ‘‘legacy’’ limits because these contracts on 

agricultural commodities have been subject to 

federal position limits for decades. See also Position 

Limits for Derivatives, 78 FR 75680 at 75723, note 

370 and accompanying text (Dec. 12, 2013) 

(‘‘December 2013 position limits proposal’’). 

3See 17 CFR 150.2. 

4See 17 CFR 150.3. 

5See 17 CFR 150.4. 

6The Commission previously had issued 

proposed and final rules in 2011 to implement the 

provisions of the Dodd-Frank Act regarding 

position limits and the bona fide hedge definition. 

Position Limits for Derivatives, 76 FR 4752 (Jan. 26, 

2011); Position Limits for Futures and Swaps, 76 FR 

71626 (Nov. 18, 2011). A September 28, 2012, order 

of the U.S. District Court for the District of 

Columbia vacated the November 18, 2011 rule, with 

the exception of the rule’s amendments to 17CFR 

150.2. International Swaps and Derivatives 

Association v. United States Commodity Futures 

Trading Commission, 887 F. Supp. 2d 259 (D.D.C. 

2012). See generally the materials and links on the 

Commission’s Web site at http://www.cftc.gov/

LawRegulation/DoddFrankAct/Rulemakings/DF_

26_PosLimits/index.htm. The Commission issued 

the December 2013 position limits proposal, among 

other reasons, to respond to the District Court’s 

decision in ISDA v. CFTC. See generally the 

materials and links on the Commission’s Web site 

at http://www.cftc.gov/LawRegulation/

DoddFrankAct/Rulemakings/

PositionLimitsforDerivatives/index.htm. 

7See CEA section 4a(a)(5), 7 U.S.C. 6a(a)(5) 

(providing that the Commission establish limits on 

economically equivalent contracts); CEA section 

4a(a)(6), 7 U.S.C. 6a(a)(6) (directing the Commission 

to establish aggregate position limits on futures, 

options, economically equivalent swaps, and 

certain foreign board of trade contracts in 

agricultural and exempt commodities (collectively, 

‘‘referenced contracts’’)). See December 2013 

position limits proposal 78 FR at 75825. Under the 

December 2013 position limits proposal, 

‘‘referenced contracts’’ would have been defined as 

futures, options, economically equivalent swaps, 

and certain foreign board of trade contracts, in 

physical commodities, and been subject to the 

proposed federal position limits. The Commission 

proposed that federal position limits would apply 

to referenced contracts, whether futures or swaps, 

COMMODITY FUTURES TRADING 

COMMISSION 

17 CFR Parts 37, 38, and 150 

RIN 3038–AD99 

Position Limits for Derivatives: Certain 

Exemptions and Guidance 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Supplemental notice of 

proposed rulemaking. 

SUMMARY: The Commodity Futures 

Trading Commission (‘‘Commission’’ or 

‘‘CFTC’’) is proposing revisions and 

additions to regulations and guidance 

proposed in 2013 concerning 

speculative position limits in response 

to comments received on that proposal. 

The Commission is proposing new 

alternative processes for designated 

contract markets (‘‘DCMs’’) and swap 

execution facilities (‘‘SEFs’’) to 

recognize certain positions in 

commodity derivative contracts as nonenumerated bona fide hedges or 

enumerated anticipatory bona fide 

hedges, as well as to exempt from 

federal position limits certain spread 

positions, in each case subject to 

Commission review. In this regard, the 

Commission proposes to amend certain 

of the regulations proposed in 2013 

regarding exemptions from federal 

position limits and exchange-set 

position limits to take into account 

these new alternative processes. In 

connection with these changes, the 

Commission proposes to further amend 

certain relevant definitions, including to 

clearly define the general definition of 

bona fide hedging for physical 

commodities under the standards in 

CEA section 4a(c). Separately, the 

Commission proposes to delay for DCMs 

and SEFs that lack access to sufficient 

swap position information the 

requirement to establish and monitor 

position limits on swaps. 

DATES: Comments must be received on 

or before July 13, 2016. 

ADDRESSES: You may submit comments, 

identified by RIN number 3038–AD99, 

by any of the following methods: 

• CFTC Web site: http://

comments.cftc.gov; 

• Mail: Secretary of the Commission, 

Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581; 

• Hand delivery/courier: Same as 

Mail, above. 

• Federal eRulemaking Portal: http:// 

www.regulations.gov. Follow 

instructions for submitting comments. 

All comments must be submitted in 

English, or if not, accompanied by an 

English translation. Comments will be 

posted as received to http://

www.cftc.gov. You should submit only 

information that you wish to make 

available publicly. If you wish the 

Commission to consider information 

that may be exempt from disclosure 

under the Freedom of Information Act, 

a petition for confidential treatment of 

the exempt information may be 

submitted according to the procedures 

established in CFTC regulations at 17 

CFR part 145. 

The Commission reserves the right, 

but shall have no obligation, to review, 

pre-screen, filter, redact, refuse or 

remove any or all of your submission 

from http://www.cftc.gov that it may 

deem to be inappropriate for 

publication, such as obscene language. 

All submissions that have been redacted 

or removed that contain comments on 

the merits of the rulemaking will be 

retained in the public comment file and 

will be considered as required under the 

Administrative Procedure Act and other 

applicable laws, and may be accessible 

under the Freedom of Information Act. 

FOR FURTHER INFORMATION CONTACT: 

Stephen Sherrod, Senior Economist, 

Division of Market Oversight, (202) 418– 

5452, ssherrod@cftc.gov; Riva Spear 

Adriance, Senior Special Counsel, 

Division of Market Oversight, (202) 418– 

5494, radriance@cftc.gov; Lee Ann 

Duffy, Assistant General Counsel, Office 

of General Counsel, 202–418–6763, 

lduffy@cftc.gov; or Steven Benton, 

Industry Economist, Division of Market 

Oversight, (202) 418–5617, sbenton@

cftc.gov; Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street NW., Washington, DC 

20581. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

The Commission has long established 

and enforced speculative position limits 

for futures and options contracts on 

certain agricultural commodities in 

accordance with the Commodity 

Exchange Act (‘‘CEA’’ or ‘‘Act’’).1 The 

part 150 federal position limits regime 2

generally includes three components: 

(1) The level of the limits, which set a 

threshold that restricts the number of 

speculative positions that a person may 

hold in the spot month, an individual 

month, and all months combined,3 (2) 

exemptions for positions that constitute 

bona fide hedging transactions and 

certain other types of transactions,4 and 

(3) rules to determine which accounts 

and positions a person must aggregate 

for the purpose of determining 

compliance with the position limit 

levels.5

In late 2013, the CFTC proposed to 

amend its part 150 regulations 

governing speculative position limits. 

These proposed amendments were 

intended to conform to the requirements 

of part 150 to particular changes to the 

CEA introduced by the Wall Street 

Transparency and Accountability Act of 

2010 (’’Dodd-Frank Act’’).6 The 

proposed amendments included the 

adoption of federal position limits for 28 

exempt and agricultural commodity 

futures and option contracts and swaps 

that are ‘‘economically equivalent’’ to 

such contracts.7 In addition, the 

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regardless of where the futures or swaps positions 

were established. See December 2013 positions 

limits proposal at 78 FR 75826 (proposed § 150.2). 

8See December 2013 position limits proposal 78 

FR at 75754–8. Consistent with DCM Core Principle 

5 and SEF Core Principle 6, the Commission 

proposed at § 150.5(a)(1) that for any commodity 

derivative contract that is subject to a speculative 

position limit under § 150.2, [a DCM] or [SEF] that 

is a trading facility shall set a speculative position 

limit no higher than the level specified in § 150.2. 

9See December 2013 position limits proposal 78 

FR at 75706–11, 75713–18. 

10See December 2013 position limits proposal 78 

FR at 75718. 

11See December 2013 position limits proposal 78 

FR at 75735–6. CEA section 4a(a)(1), 7 U.S.C. 

6a(a)(1), permits the Commission to exempt 

transactions normally known to the trade as 

‘‘spreads’’ from federal position limits. 

12CEA section 4a(a)(5) requires federal position 

limits for swaps that are ‘‘economically equivalent’’ 

to futures and options that are subject to mandatory 

position limits under CEA section 4a(a)(2). See 

December 2013 position limits proposal at 78 FR 

75681–5 (providing the Commission’s 

interpretation of the statute as mandating that the 

Commission impose limits on futures, options, and 

swaps, in agricultural and exempt commodities). 

13The Commission stated in the December 2013 

position limits proposal that it preliminarily had 

decided not to use the swaps data then reported 

under part 20 for purposes of setting the initial 

levels of the proposed single and all-monthscombined positions limits due to concerns about 

the reliability of such data. December 2013 position 

limits proposal, 78 FR at 75533. The Commission 

also stated that it might use part 20 swaps data 

should it determine such data to be reliable, in 

order to establish higher initial levels in a final rule. 

Id. at 75734. 

14See §§ 45.3, 45.4, and 45.10 of the 

Commission’s regulations, 17 CFR 45.3, 45.4, and 

45.10. See generally CEA sections 4r (reporting and 

recordkeeping for uncleared swaps) and 21 (swap 

data repositories), 7 U.S.C. 6r and 24a. 

15CEA section 2(h)(8), 7 U.S.C. 2(h)(8) (the 

‘‘trading mandate’’). 

16See CEA section 2(h) and part 50 of the 

Commission’s regulations. 7 U.S.C. 2(h) and 17 CFR 

part 50. 

17For example, under rule 37.10, a swap 

execution facility may make a swap available to 

trade, pursuant to CEA section 2(h)(8). See current 

list of swaps made available to trade at http://

www.cftc.gov/idc/groups/public/@otherif/

documents/file/swapsmadeavailablechart.pdf. 

Commission proposed to require that 

DCMs and SEFs that are trading 

facilities (collectively, ‘‘exchanges’’) 

establish exchange-set limits on such 

futures, options and swaps contracts.8

Further, the Commission proposed to (i) 

revise the definition of bona fide 

hedging position (which includes a 

general definition with requirements 

applicable to all hedges, as well as an 

enumerated list of bona fide hedges),9

(ii) revise the process for market 

participants to request recognition of 

certain types of positions as bona fide 

hedges, including anticipatory hedges 

and hedges not specifically enumerated 

in the proposed bona fide hedging 

definition; 10 and (iii) revise the 

exemptions from position limits for 

transactions normally known to the 

trade as spreads.11

II. Proposal To Supplement and Revise 

the December 2013 Position Limits 

Proposal 

The CFTC is now proposing revisions 

and additions to regulations and 

guidance proposed in 2013 concerning 

speculative position limits in response 

to comments received on that proposal. 

The Commission is proposing new 

alternative processes for DCMs and 

SEFs to recognize certain positions in 

commodity derivative contracts as nonenumerated bona fide hedges or 

enumerated anticipatory bona fide 

hedges, as well as to exempt from 

federal position limits certain spread 

positions, in each case subject to 

Commission review. In this regard, the 

Commission proposes to amend certain 

of the regulations proposed in 2013 

regarding exemptions from federal 

position limits and exchange-set 

position limits to take into account 

these new alternative processes. In 

connection with these changes, the 

Commission proposes to further amend 

certain relevant definitions, including to 

clearly define the general definition of 

bona fide hedging for physical 

commodities under the standards in 

CEA section 4a(c). Separately, the 

Commission proposes to delay for DCMs 

and SEFs that lack access to sufficient 

swap position information the 

requirement to establish and monitor 

position limits on swaps at this time. 

Because this proposal supplements 

the December 2013 position limits 

proposal, it must be read in conjunction 

with that notice of proposed 

rulemaking, such that where this 

supplemental proposal sets out a 

proposed rule text in full, as in four 

definitions which this supplement 

proposes to amend, the rule text is 

intended to replace what was proposed 

in the December 2013 position limits 

proposal. Where this supplemental 

proposal reserves a subsection proposed 

in the December 2013 position limits 

proposal, the intention is to provide 

additional time for Commission 

consideration of that subsection. For the 

avoidance of doubt, the Commission is 

still reviewing comments received on 

such reserved subsections and does not 

seek further comment on such reserved 

subsections. 

A. Proposed Guidance Regarding 

Exchange-Set Limitations on Swap 

Positions 

As noted above, in December 2013 the 

Commission proposed federal position 

limits on futures and swaps in physical 

commodities.12 Since that time, the 

Commission has worked with industry 

to improve the quality of swap position 

reporting to the Commission under part 

20.13 In light of the improved quality of 

the swap position reporting, the 

Commission intends to rely on part 20 

swap position data, given adjustments 

for obvious errors (e.g., data reported 

based on a unit of measure, such as an 

ounce, rather than a futures equivalent 

number of contracts), to establish initial 

levels of federal non-spot month limits 

on futures and swaps in a final rule. 

Moreover, the Commission notes that 

the improved quality allows the 

Commission to utilize part 20 swap 

position data when monitoring market 

participants’ compliance with such 

federal position limits on futures and 

swaps. 

However, the Commission notes that 

with respect to exchange-set limits on 

swaps, exchanges, on the other hand, 

generally do not have access to swap 

position information. Unlike futures 

contracts—which are proprietary to a 

particular DCM and typically cleared at 

a single DCO affiliated with the DCM— 

swaps in a particular commodity are not 

proprietary to any particular trading 

facility or platform. Market participants 

may execute swaps involving a 

particular commodity on or subject to 

the rules of multiple exchanges or, in 

some circumstances, over the counter 

(‘‘OTC’’). Further, under the 

Commission regulations, data with 

respect to a particular swap transaction 

may be reported to any swap data 

repository (‘‘SDR’’).14

In addition, it should be noted that 

although CEA section 2(h)(8) requires 

that swap transactions required to be 

cleared under CEA section 2(h)(7) must 

be traded on either a DCM or a SEF if 

a DCM or SEF ‘‘makes the swap 

available to trade,’’ 15 there currently is 

neither a requirement for mandatory 

clearing of a swap on a physical 

commodity,16 nor has a swap on a 

physical commodity been made 

available to trade.17 Consequently, 

swaps on physical commodities may 

use means of execution other than on a 

DCM or SEF. 

Even if an exchange had access to 

cleared swap data from a particular 

DCO, an exchange may need access to 

data from additional DCOs in order to 

have a sufficient understanding of a 

market participant’s cleared swap 

position, because a market participant 

may clear economically equivalent 

swaps on multiple DCOs. Further, DCO 

cleared swap data would not provide an 

exchange with data regarding 

economically equivalent uncleared 

swaps. While SDR data would include 

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18Comments on the December 2013 position 

limits proposal are accessible on the Commission’s 

Web site at http://comments.cftc.gov/

PublicComments/CommentList.aspx?id=1436. 19A transcript of the June 19, 2014 Roundtable on 

Position Limits is available on the Commission’s 

Web site at http://www.cftc.gov/idc/groups/public/ 

@swaps/documents/dfsubmission/dfsubmission_

061914-trans.pdf. 20 Information regarding the December 9, 2014 

and September 22, 2015 meetings of the 

Agricultural Advisory Committee, sponsored by 

Chairman Massad, is accessible on the 

Commission’s Web site at http://www.cftc.gov/

About/CFTCCommittees/AgriculturalAdvisory/aac_

meetings. Information regarding February 26, 2015 

and the July 29, 2015 meetings of the Energy & 

Environmental Markets Advisory Committee 

(‘‘EEMAC’’), sponsored by Commission Giancarlo, 

is accessible on the Commission’s Web site at 

http://www.cftc.gov/About/CFTCCommittees/

EnergyEnvironmentalMarketsAdvisory/emac_

meetings. 

21Added by the Dodd-Frank Act, section 5h(a) of 

the CEA, 7 U.S.C. 7b-3, requires SEFs to register 

with the Commission. See generally ‘‘Core 

Principles and Other Requirements for Swap 

Execution Facilities,’’ 78 FR 33476 (Aug. 5, 2013). 

Information regarding the SEF application process 

is available on the Commission’s Web site at http:// 

www.cftc.gov/IndustryOversight/

TradingOrganizations/SEF2/sefhowto. 

22 DCM Core Principle 5, Position Limitations or 

Accountability, is contained in CEA section 5(d)(5), 

7 U.S.C. 7(d)(5). SEF Core Principle 6, Position 

Limits or Accountability, is contained in CEA 

section 5h(f)(6), 7 U.S.C. 7b–3(f)(6). 

23CEA section 5h(f)(6)(B), 7 U.S.C. 7b–3(f)(6)(B) 

(SEF Core Principle 6(B)). The Commission codified 

SEF Core Principle 6(B), added by the Dodd-Frank 

Act, in § 37.600 of its regulations, 17 CFR 37.600. 

See generally Core Principles and Other 

Requirements for Swap Execution Facilities, 78 FR 

33476, 33533–4 (June 4, 2013). 24CEA section 5(d)(5)(B), 7 U.S.C. 7(d)(5)(B) 

(DCM Core Principle 5(B)). The Commission 

codified DCM Core Principle 5(B), as amended by 

the Dodd-Frank Act, in § 38.300 of its regulations, 

17 CFR 38.300. See generally Core Principles and 

Other Requirements for Designated Contract 

Markets, 77 FR 36612, 36639 (June 19, 2012). 

25Under the December 2013 position limits 

proposal, ‘‘referenced contracts’’ are defined as 

futures, options, economically equivalent swaps, 

and certain foreign board of trade contracts, in 

physical commodities, and are subject to the 

proposed federal position limits. See December 

2013 position limits proposal 78 FR at 75825. 

26See December 2013 positions limits proposal at 

78 FR 75826 (proposed § 150.2). 

27See December 2013 position limits proposal at 

78 FR 75754–8. 

28Commodity Markets Council (‘‘CMC’’), on 

February 10, 2014, (‘‘CL–CMC–59634’’), at 14–15; 

Futures Industry Association (‘‘FIA’’), on March 30, 

2015 (‘‘CL–FIA–60392’’), at 10. One commenter 

stated that SEFs should be exempt from the 

requirement to set positions limits because SEFs are 

in the early stages of development and could be 

harmed by limits that restrict liquidity. 

International Swaps and Derivatives Association, 

Inc. (‘‘ISDA’’) and Securities Industry and Financial 

Markets Association (‘‘SIFMA’’), on February 10, 

2014 (‘‘CL–ISDA/SIFMA–59611’’), at 35. 

29CL–CMC–59634 at 14–15; CL–FIA–60392 at 10. 

30Under CEA section 5h(a)(1), no person may 

operate a facility for trading swaps unless the 

facility is registered as a SEF or DCM. 7 U.S.C. 7b– 

3(a)(1). 31For example, in a submission to the 

Commission under part 40 of the Commission’s 

regulations, BGC Derivative Markets, L.P. states that 

‘‘[t]he information to administer limits or 

accountability levels cannot be readily ascertained. 

Position limits or accountability levels apply 

market-wide to a trader’s overall position in a given 

swap. To monitor this position, a SEF must have 

access to information about a trader’s overall 

position. However, a SEF only has information 

about swap transactions that take place on its own 

Facility and has no way of knowing whether a 

particular trade on its facility adds to or reduces a 

trader’s position. And because swaps may trade on 

a number of facilities or, in many cases, over-thecounter, a SEF does not know the size of the 

trader’s overall swap position and thus cannot 

ascertain whether the trader’s position relative to 

any position limit. Such information would be 

required to be supplied to a SEF from a variety of 

independent sources, including SDRs, DCOs, and 

market participants themselves. Unless coordinated 

by the Commission operating a centralized 

reporting system, such a data collection 

requirement would be duplicative as each separate 

SEF required reporting by each information 

sources.’’ BGC Derivative Markets, L.P., Rule 

Submission 2015–09 (Oct. 6, 2015), available at 

http://www.cftc.gov/filings/orgrules/

rule100615bgcsef001.pdf. 

32The Commission is aware of one SEF that may 

have access to sufficient swap position information 

by virtue of systems integration with affiliates that 

are CFTC registrants and shared personnel. This 

SEF requires that all of its listed swaps be cleared 

on an affiliated DCO, which reports to an affiliated 

SDR. 

swap data regarding both cleared and 

uncleared swaps, such data would need 

to be converted to a futures-equivalent 

position in order to measure compliance 

with an exchange-set limit set at a level 

no higher than that of the federal 

position limit. The Commission 

acknowledges that if an exchange does 

not have access to sufficient data 

regarding individual market 

participants’ open swap positions, then 

it cannot effectively monitor swap 

position limits. 

In light of the above, and based on (i) 

comments received on the December 

2013 position limits proposal; 18 (ii) 

viewpoints expressed during a 

Roundtable on Position Limits; 19 (iii) 

several Commission advisory committee 

meetings that each provided a focused 

forum for participants to discuss some 

aspects of the December 2013 position 

limits proposal; 20 and (iv) information 

obtained in the course of ongoing 

Commission review of SEF registration 

applications,21 the Commission has 

determined to revise and amend certain 

parts of the December 2013 position 

limits proposal. The Commission 

proposes to temporarily delay for 

exchanges that lack access to sufficient 

swap position information the 

requirement to establish and monitor 

position limits on swaps by: (i) Adding 

Appendix E to part 150 to provide 

guidance regarding § 150.5; and (ii) 

revising guidance on DCM Core 

Principle 5 and SEF Core Principle 6.22

The CEA requires in SEF Core 

Principle 6(B) that a SEF: (i) Set its 

exchange-set limit on swaps at a level 

no higher than that of the federal 

position limit; and (ii) monitor positions 

established on or through the SEF for 

compliance with the federal position 

limit and any exchange-set limit.23

Similarly, for any contract subject to a 

federal position limit, including a swap 

contract, DCM Core Principle 5(B) 

requires that DCMs must set a position 

limit at a level no higher than that of the 

federal position limit.24

The December 2013 position limits 

proposal specified that federal position 

limits would apply to referenced 

contracts,25 whether futures or swaps, 

regardless of where the futures or swaps 

positions are established.26 Consistent 

with DCM Core Principle 5 and SEF 

Core Principle 6, the Commission 

proposed at § 150.5(a)(1) that, for any 

commodity derivative contract that is 

subject to a speculative position limit 

under § 150.2, [a DCM] or [SEF] that is 

a trading facility shall set a speculative 

position limit no higher than the level 

specified in § 150.2.27

Three commenters on proposed 

regulation § 150.5 recommended that 

the Commission not require SEFs to 

establish position limits.28 Two noted 

that because SEF participants may use 

more than one derivatives clearing 

organization (‘‘DCO’’), a SEF may not 

know when a position has been offset.29

Further, during the ongoing SEF 

registration process,30 a number of 

persons applying to become registered 

as SEFs told the Commission that they 

lack access to information that would 

enable them to knowledgeably establish 

position limits or monitor positions.31

The Commission observes that this 

information gap would also be a 

concern for DCMs in respect of swaps, 

because DCMs lacking access to swap 

position information also would not be 

able to reliably establish position limits 

on swaps or monitor swap positions. 

The Commission acknowledges that, 

if an exchange does not have access to 

sufficient data regarding individual 

market participants’ open swap 

positions, then it cannot effectively 

monitor swap position limits. The 

Commission believes that most 

exchanges do not have access to 

sufficient swap position information to 

effectively monitor swap position 

limits.32 In this regard, the Commission 

believes that an exchange would have or 

could have access to sufficient swap 

position information to effectively 

monitor swap position limits if, for 

example: (1) It had access to daily 

information about its market 

participants’ open swap positions; or (2) 

it knows that its market participants 

regularly engage on its exchange in large 

volumes of speculative trading activity 

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Federal Register / Vol. 81, No. 113 / Monday, June 13, 2016 / Proposed Rules 38461 

33For instance, heavy trading activity at a 

particular exchange might cause that exchange to 

ask whether a market participant is building a large 

speculative position or whether the heavy trading 

activity is merely the result of a market participant 

making a market across several exchanges. 

34Nonetheless, that market participant may have 

conducted other swap transactions in the same 

commodity, away from a particular exchange, that 

reduced its swap position. 

35As noted above, although the Commission 

receives swaps position data pursuant to Part 20, 

the Commission has not made this information 

available to any exchange. 

36An exchange could theoretically obtain swap 

position data directly from market participants, for 

example, by requiring a market participant to report 

its swap positions, as a condition of trading on the 

exchange. However, the Commission thinks it is 

unlikely that a single exchange would unilaterally 

impose a swaps reporting regime on market 

participants. 

The Commission abandoned the approach of 

requiring market participants to report futures 

positions directly to the Commission many years 

ago. See Reporting Requirements for Contract 

Markets, Futures Commission Merchants, Members 

of Exchanges and Large Traders, 46 FR 59960 (Dec. 

8, 1981). Instead, the Commission and DCMs rely 

on a large trader reporting system where futures 

positions are reported by sources other than the 

position holder itself, including futures commission 

merchants, clearing members and foreign brokers. 

See generally part 19 of the Commission’s 

regulations, 17 CFR part 19. See also, for example, 

the discussion of an exchange’s large trader 

reporting system in the Division of Market 

Oversight Rule Enforcement Review of the Chicago 

Mercantile Exchange and the Chicago Board of 

Trade, July 26, 2013, at 24–7, available at http://

www.cftc.gov/idc/groups/public/@iodcms/

documents/file/rercmecbot072613.pdf. 

Further, as noted above, exchanges do not have 

authority to demand swap position data from 

derivative clearing organizations or swap data 

repositories; nor do exchanges have general 

authority to demand market participants’ swap 

position data from clearing members of DCOs or 

swap dealers (as the Commission does under part 

20). 

37Core principle M for DCOs addresses 

information sharing only for the purpose of the 

DCO’s carrying out its risk management program as 

‘‘appropriate and applicable,’’ but does not address 

information sharing for other purposes, and does 

not address information sharing with exchanges. 

CEA section 5b(c)(2)(M), 7 U.S.C. 7a–1(c)(2)(M), and 

§ 39.22, 17 CFR 39.22. The Commission has access 

to DCO information relating to trade and clearing 

details under § 39.19, 17 CFR 39.19, as is necessary 

to conduct its oversight of a DCO. However, the 

Commission has not used its general rulemaking 

authority under CEA section 8a(5), 7 U.S.C. 12a(5), 

to require DCOs to provide registered entities access 

to swap information, although the Commission 

could impose such a requirement by rule. CEA 

section 5b(c)(2)(A)(i), 7 U.S.C. 7a–1(c)(2)(A)(i). 

38An SDR has a duty to provide direct electronic 

access to the Commission, or a designee of the 

Commission who may be a registered entity (such 

as an exchange). CEA section 21(c)(4), 7 U.S.C. 

24a(c)(4). See 76 FR 54538 at 54551, note 141 and 

accompanying text (Sept. 1, 2011). However, the 

Commission has not designated any exchange as a 

designee of the Commission for that purpose. 

Further, the Commission has not used its general 

rulemaking authority under CEA section 8a(5), 7 

U.S.C. 12a(5), to require SDRs to provide registered 

entities (such as exchanges) access to swap 

information, although the Commission could 

impose such a requirement by rule. CEA section 

21(a)(3)(A)(ii), 7 U.S.C. 24a(a)(3)(A)(ii). 

39Even if such information were to be made 

available to exchanges, the swaps positions would 

need to be converted to futures-equivalent positions 

for purposes of monitoring position limits on a 

futures-equivalent basis, which would place an 

additional burden on exchanges. See December 

2013 positions limits proposal at 78 FR75825 for 

the proposed definition of futures-equivalent; see 

also the discussion, below, regarding this current 

notice’s amendments to that proposed definition. If 

at some future time, the Commission were to 

consider requiring DCOs or SDRs to provide swap 

data to exchanges, or to provide the exchanges with 

swap data collected under part 20, the Commission 

would then consider the burden that would be 

placed on the exchange by the need to convert swap 

positions into futures equivalents. 

40The part 20 swaps data is reported in futures 

equivalents, but does not include data specifying 

where (e.g., OTC or a particular exchange) 

reportable positions in swaps were established. 

41See, e.g., CEA sections 5h(b)(1)(B) and 5h(e), 7 

U.S.C. 7b–3(b)(1)(B) and 7b–3(e), respectively. 

42Once the guidance was no longer applicable, a 

DCM or a SEF would be required to file rules with 

the Commission to implement the relevant position 

limits and demonstrate compliance with Core 

Principle 5 or 6, as appropriate. The Commission 

notes that, for the same reasons regarding swap 

position data discussed above in respect of CEA 

section 5h(f)(6)(B), the proposed guidance also 

would temporarily delay the requirement for SEFs 

to comply with their statutory obligation under CEA 

section 5h(f)(6)(A). 

(it may gain that knowledge through 

surveillance of heavy trading activity), 

that would cause reasonable 

surveillance personnel at an exchange to 

inquire further about a market 

participant’s intentions 33 and total open 

swap positions. 

It is possible that an exchange could 

obtain an indication of whether a swap 

position established on or through a 

particular exchange is increasing a 

market participant’s swap position 

beyond a federal or exchange-set limit, 

if that exchange has data about some or 

all of a market participant’s open swap 

position from the prior day and 

combines it with the transaction data 

from the current day, to obtain an 

indication of the market participant’s 

current open swap position. By way of 

example, part 20 requires clearing 

organizations, clearing members and 

swap dealers to report to the 

Commission routine position reports for 

physical commodity swaps; the part 20 

swaps data identifies for the 

Commission a market participant’s 

reported open swap positions from the 

prior trading day. If part 20 swaps data 

were made available to an exchange, it 

could use it to add to any swap 

positions established on or through that 

exchange during the current trading day 

to get an indication of a potential 

position limit violation.34 The 

indication would alert the exchange to 

contact the market participant to inquire 

about that participant’s total open swap 

position. 

While this indication would not 

include the market participant’s activity 

transacted away from that particular 

exchange, the Commission believes that 

such monitoring would comply with the 

requirement in CEA section 

5h(f)(6)(B)(ii) that the SEF monitor 

positions established on or through the 

SEF for compliance with the limits set 

by the Commission and the SEF. 

However, the Commission understands 

that exchanges generally do not 

currently have access to a data source 

that identifies a market participant’s 

reported open swap positions from the 

prior trading day.35 The Commission 

does not believe that it would be 

practicable for an exchange to require 

that market participants self-report their 

total open swap positions.36 And with 

only the transaction data from a 

particular exchange, it would be 

impracticable, if not impossible, for that 

exchange to monitor and enforce 

position limits for swaps. 

Moreover, the Commission has 

neither required any DCO 37 or SDR38 to 

provide such swap data to exchanges,39

nor provided any exchange with access 

to swaps data collected under part 20 of 

the Commission’s regulations.40

In light of the foregoing, the 

Commission is proposing a delay in 

implementation of exchange-set limits 

for swaps only, and only for exchanges 

without sufficient swap position 

information. After consideration of the 

circumstances described above, and in 

an effort to accomplish the policy 

objectives of the Dodd-Frank Act 

regulatory regime, including to facilitate 

trade processing of any swap and to 

promote the trading of swaps on SEFs,41

this current proposal amends the 

guidance in the appendices to parts 37 

and 38 of the Commission’s regulations 

regarding SEF core principle 6 and DCM 

core principle 5, respectively. The 

revised guidance clarifies that an 

exchange need not demonstrate 

compliance with SEF core principle 6 or 

DCM core principle 5 as applicable to 

swaps until it has access to sufficient 

swap position information, after which 

the guidance would no longer be 

applicable.42 For clarity, this current 

proposal includes the same guidance in 

a new appendix E to proposed part 150 

in the context of the Commission’s 

proposed regulations regarding 

exchange-set position limits. 

Although the Commission is 

proposing to delay implementing the 

core principles regarding position limits 

on swaps, nothing in this current 

proposal would prevent an exchange 

from nevertheless establishing position 

limits on swaps. However, it does seem 

unlikely that an exchange would 

implement position limits before 

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43Although this current proposal would provide 

position limits relief to SEFs and to DCMs in 

regards to swaps, it would not alter the definition 

of referenced contract (including economically 

equivalent swaps) as proposed in December 2013. 

See December 2013 position limits proposal 78 FR 

at 75825. The Commission continues to review and 

consider comments received regarding the 

definition of referenced contract. 

44See, e.g., Ass’n of Irritated Residents v. EPA, 

494 F.3d 1027, 1031 (D.C. Cir. 2007) (allowing 

regulated entities to enter into consent agreements 

with EPA—without notice and comment—that 

deferred prosecution of statutory violation until 

such time as compliance would be practicable); 

Catron v. County Bd. Of Commissioners v. New 

Mexico Fish & Wildlife Serv., 75 F.3d 1429, 1435 

(10th Cir.1966) (stating that ‘‘Compliance with [the 

National Environmental Protection Act] is excused 

when there is a statutory conflict with the agency’s 

authorizing legislation that prohibits or renders 

compliance impossible.’’). Further, it is axiomatic 

that courts will avoid reading statutes to reach 

absurd or unreasonable consequences. See, e.g., 

Griffin v. Oceanic Contractors, Inc., 458 U.S. 564 

(1982). To require an exchange to monitor position 

limits on swaps, when it currently has extremely 

limited visibility into a market participant’s swap 

position, is arguably absurd and certainly appears 

unreasonable. 

45The Commission expects that any DCM or SEF 

that has access to sufficient swap position 

information will report this to the Commission in 

a comment letter that will be publicly available in 

the comment file for this current proposal on the 

Commission’s Web site. 

46The inclusion of the incidental test and the 

orderly trading requirement in the definition of 

bona fide hedging has a long history. As noted in 

the December 2013 Position Limits proposal, ‘‘In 

response to the 1974 legislation, the Commission’s 

predecessor adopted in 1975 a bona fide hedging 

definition in § 1.3(z) of its regulations stating, 

among other requirements, that transactions or 

positions would not be classified as hedging unless 

their bona fide purpose was to offset price risks 

incidental to commercial cash or spot operations, 

and such positions were established and liquidated 

in an orderly manner and in accordance with sound 

commercial practices. Shortly thereafter, the newly 

formed Commission sought comment on amending 

that definition. Given the large number of issues 

raised in comment letters, the Commission adopted 

the predecessor’s definition with minor changes as 

an interim definition of bona fide hedging 

transactions or positions, effective October 18, 

1975.’’ See December 2013 Position Limits Proposal 

at 75703. The Commission is also proposing a nonsubstantive change to subsection (1)(ii)(B) of the 

bona fide hedging definition by deleting from the 

definition proposed in the December 2013 position 

limits proposal the lead in words ‘‘such position.’’ 

47See December 2013 Position Limits Proposal at 

75706–7 (stating ‘‘Bona fide hedging position means 

any position whose purpose is to offset price risks 

incidental to commercial cash, spot, or forward 

operations, and such position is established and 

liquidated in an orderly manner in accordance with 

sound commercial practices, . . .’’). 

48See December 2013 Position Limits Proposal at 

75707. 

49 Id. 

50See, e.g., CME Group, Inc. (‘‘CME Group’’), on 

February 10, 2014 (‘‘CL–CME–59718’’) at 47. 

51See Coalition of Physical Energy Companies 

(‘‘COPE’’) on February 10, 2014 (‘‘CL–COPE– 

59662’’) at 13, Duke Energy Utilities (‘‘DEU’’) on 

February 10, 2014 (‘‘CL–DEU–59631’’) at 5–7, and 

The Commercial Energy Working Group (‘‘Working 

Group’’) CL–Working Group–59693 at 14. 

acquiring sufficient swap position 

information because of the ensuing 

difficulty of enforcing such a limit. The 

Commission believes that providing the 

proposed delay for those exchanges that 

need it both preserves flexibility for 

subsequent Commission rulemaking and 

allows for phased implementation of 

limitations on swaps by exchanges, as 

practicable.43

The Commission observes that courts 

have upheld relieving regulated entities 

of their statutory obligations where 

compliance is impossible or 

impracticable.44 The Commission 

believes that it would be impracticable, 

if not impossible, for an exchange to 

monitor and enforce position limits for 

swaps with only the transaction data 

from that particular exchange. 

Accordingly, the Commission believes 

that it is reasonable at this time to delay 

implementation of this discrete aspect 

of position limits, only with respect to 

swaps position limits, and only for 

exchanges that lack access to sufficient 

swap position information. The 

Commission believes that this approach 

would further the policy objectives of 

the Dodd-Frank Act regulatory regime, 

including the facilitation of trade 

processing of swaps and the promotion 

of trading swaps on SEFs. While this 

approach would delay the requirement 

for certain exchanges to establish and 

monitor exchange-set limits on swaps at 

this time, the Commission notes that, 

under the December 2013 position 

limits proposal, federal position limits 

would apply to swaps that are 

economically equivalent to futures 

contracts subject to federal position 

limits. 

Request for comment (‘‘RFC’’) 1. The 

Commission requests comment on all 

aspects of the proposed delay in 

implementing the requirements of SEF 

core principle 6(B) and DCM core 

principle 5(B) with respect to the setting 

and monitoring by exchanges of 

position limits for swaps. Does any 

DCM or SEF currently have access to 

sufficient data regarding individual 

market participants’ open swaps 

positions to so set and monitor swaps 

position limits other than by special 

call? If yes, please describe in detail 

how such access could be obtained.45 If 

no, how easy or difficult would it be for 

an exchange to obtain access to 

sufficient swap position information by 

means of contract or other 

arrangements? 

B. Proposal To Amend the Definition of 

Bona Fide Hedging Position 

As discussed below, the Commission 

is now proposing a general definition of 

bona fide hedging position that 

incorporates only the standards in CEA 

section 4a(c)(2), regarding physical 

commodity derivatives. Conforming the 

standards of a general definition of bona 

fide hedging position to those of the 

statute requires eliminating two 

components of the general definition of 

bona fide hedging position in current 

§ 1.3(z)(1): The incidental test and the 

orderly trading requirement.46 Thus, the 

Commission is now proposing to 

eliminate the incidental test and the 

orderly trading requirement, as 

discussed below. 

1. December 2013 Proposal 

In the December 2013 position limits 

proposal, the Commission proposed a 

new definition of ‘‘bona fide hedging 

position’’ in proposed § 150.1, to replace 

the current definition in § 1.3(z). The 

opening paragraph of the proposed 

definition is a general definition of a 

bona fide hedging position. As is the 

case in the current definition in § 1.3(z), 

that general definition contained two 

requirements for a bona fide hedging 

position that are not included in CEA 

section 4a(c)(2): An incidental test and 

an orderly trading requirement.47

The incidental test is a component of 

the December 2013 proposed bona fide 

hedging position definition requiring 

that the risks offset by a commodity 

derivative position must be incidental to 

the position holder’s commercial 

operations.48 The orderly trading 

requirement is a component of the 

December 2013 proposed bona fide 

hedging position definition requiring 

that a bona fide hedge position must be 

established and liquidated in an orderly 

manner in accordance with sound 

commercial practices.49

2. Comments on the December 2013 

Proposed Definition of Bona Fide 

Hedging Position 

Commenters generally objected to the 

inclusion in the general definition of 

bona fide hedging position of the 

incidental test and the orderly trading 

requirement. For example, one 

commenter objected to the incidental 

test, since that test is not included in 

CEA section 4a(c) with respect to 

physical commodity hedges.50

Commenters urged the Commission to 

eliminate the orderly trading 

requirement, because, in the context of 

the over-the-counter markets, the 

concept of orderly trading is not 

defined, yet the requirement would 

impose a duty on end users to monitor 

market activities to ensure they do not 

cause a significant market impact.51

Commenters noted the anti-disruptive 

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52Section 747 of the Dodd-Frank Act amended 

the CEA to expressly prohibit certain disruptive 

trading practices. Specifically, CEA section 4c(a)(5), 

7 U.S.C. 6c(a)(5), states that it is unlawful for a 

person to engage in any trading, practice, or 

conduct on or subject to the rules of a registered 

entity that (A) violates bids or offers; (B) 

demonstrates intentional or reckless disregard for 

the orderly execution of transactions during the 

closing period; or (C) is, of the character of, or is 

commonly known to the trade as, ‘spoofing’ 

(bidding or offering with the intent to cancel the bid 

or offer before execution). See also, Antidisruptive 

Practices Authority, 78 FR 31890 (May 28, 2103) 

(providing a policy statement and guidance). 

53See, e.g., FIA on February 7, 2014 (‘‘CL–FIA– 

59595’’), at 5, 33–34, the Edison Electric Institute 

and the Electric Power Supply Association (‘‘EEI– 

EPSA’’) on February 10, 2014 ‘‘CL–EEI–EPSA– 

59602’’) at 14–15, CL–ISDA/SIFMA–59611 at 4, 39, 

CL–CME–59718 at 67, and 

IntercontinentalExchange, Inc. (‘‘ICE’’) on February 

10, 2014 (‘‘CL–ICE–59669’’) at 11. 

54 40 FR 11560 (March 12, 1975). 

55See 39 FR 39731 (Nov. 11, 1974). CEA section 

4a(3) then stated that no order issued under its 

paragraph (1) shall apply to transactions or 

positions which are shown to be bona fide hedging 

transactions or positions as such terms as shall be 

defined by the Commission within one hundred 

and eighty days after the effective date of the 

Commodity Futures Trading Commission Act of 

1974 by order consistent with the purposes of this 

chapter. 7 U.S.C. 6a(3) 1974. As noted in the 

Federal Register release adopting the definition, the 

definition was proposed pursuant to section 404 of 

the Commodity Futures Trading Commission Act of 

1974 (P.L. 93–463), which directed the Secretary of 

Agriculture to promulgate regulations defining 

‘‘bona fide hedging transactions and positions.’’ 39 

FR at 39731 (Nov. 11, 1974). 

56 42 FR 42748 (August 24, 1977). In the Federal 

Register release adopting the amended definition, 

the Commission stated that it was adopting 

amendments to its general regulations to ‘‘generally 

broaden the scope of the hedging definition to 

include current commercial risk shifting practices 

in the markets now under regulation. The 

Commission has also recognized the potential for 

market disruption if certain trading practices are 

carried out during the delivery period of any future. 

The definition therefore restricts the classification 

of certain transactions and positions as bona fide 

hedging during the last five days of trading. In 

addition, the Commission has amended its 

regulations to include reporting requirements for 

some new types of bona fide hedging which will 

now be recognized.’’ 42 FR 42718 (Aug. 24, 1977). 

57See CEA section 4a(c)(2)(A)(ii). 

58See December 2013 Proposal at 75707. 

59 Id. 

60See, e.g., CMC on March 30, 2015, (‘‘CL–CMC– 

60391’’) at 2. 

61See 40 FR 11560 (March 12, 1975). 

trading prohibitions and polices would 

apply regardless of whether there is an 

orderly trading requirement.52

Commenters requested that if the 

Commission were to retain the orderly 

trading requirement, the Commission 

interpret such requirement in a manner 

consistent with the Commission’s 

disruptive trading practices 

interpretation (i.e., a standard of 

intentional or reckless conduct); 

commenters also requested that the 

Commission not apply a negligence 

standard.53

3. Proposal To Amend the Definition 

For the reasons discussed below, and 

in response to the comments received, 

the Commission is proposing to 

eliminate the incidental test and orderly 

trading requirement from the general 

definition of bona fide hedging position. 

For clarity, the Commission is herein 

publishing, in proposed § 150.1, a 

general definition of bona fide hedging 

position for physical commodity 

derivatives that incorporates only the 

standards of CEA section 4a(c), but 

notes that the definition is subject to 

further requirements not inconsistent 

with those statutory standards and the 

policy objectives of position limits. 

i. Incidental Test 

The Commission proposes to 

eliminate the incidental test. As noted 

above, the incidental test and the 

orderly trading requirement have been 

part of the rule 1.3(z)(1) definition of 

bona fide hedging since 1975.54 These 

provisions were not separately 

explained in the 1974 notice proposing 

the adoption of rule 1.3(z)(1) (the notice 

observed only that the ‘‘proposed 

definition otherwise deviates in only 

minor ways from the hedging definition 

presently contained in [CEA section 

4a(3)]’’).55 The then-current statutory 

definition of bona fide hedging position 

in CEA section 4a(3) used the concepts 

of ‘‘good faith’’ (regarding the amount of 

a commodity a person expects to raise) 

and a ‘‘reasonable hedge’’ (regarding 

hedges of inventory). 

The Commission adopted the concept 

of economically appropriate in 1977, 

after finding its definition of bona fide 

hedging inadequate due to changes in 

commercial practices and the diverse 

nature of commodities now under 

regulation, but did not address whether 

the concept of economically appropriate 

overlapped with the incidental test.56

The economically appropriate test 

requires that a bona fide hedging 

position be economically appropriate to 

the reduction of risks in the conduct 

and management of a commercial 

enterprise.57 While in the 1977 

rulemaking defining bona fide hedging 

the Commission discussed the concept 

of economically appropriate as an 

expansive standard, the incidental test 

appears to have simply been left in the 

definition as an historical carryover. In 

the December 2013 position limits 

proposal, the Commission noted that it 

believed the incidental test’s concept of 

commercial cash market activities is 

embodied in the economically 

appropriate test for physical 

commodities in CEA section 4a(c)(2).58

In light of this connection between the 

concept of commercial cash market 

activities and the economically 

appropriate test, the Commission notes 

that it included in the December 2013 

positions limits proposal the intention 

to apply the economically appropriate 

test to hedges in an excluded 

commodity.59

In both the current and December 

2013 proposed definitions of bona fide 

hedging position, the incidental test 

requires a reduction in price risk. 

Although the Commission is now 

proposing to eliminate the incidental 

test from the first paragraph of its 

proposed bona fide hedge definition, the 

Commission notes that it interprets risk, 

in the economically appropriate test, to 

mean price risk. Commenters suggested 

the Commission adopt a broader 

interpretation of risk (including, for 

example, execution and logistics risk 

and credit risk).60 However, a broader 

interpretation appears to be inconsistent 

with the policy objectives of position 

limits in CEA section 4a(a)(3)(B) 

regarding physical commodities, 

particularly: Diminishing excessive 

speculation that causes sudden or 

unreasonable fluctuations or 

unwarranted changes in the price of a 

commodity; deterring manipulation, 

squeezes, and corners; and ensuring the 

price discovery function is not 

disrupted. 

ii. Orderly Trading Requirement 

The Commission proposes to 

eliminate the orderly trading 

requirement. While that provision has 

been a part of the regulatory definition 

of bona fide hedge since 1975,61 and 

previously was found in the statutory 

definition of bona fide hedge prior to 

the 1974 amendment removing the 

statutory definition from CEA section 

4a(3), the Commission is not aware of a 

denial of recognition of a position as a 

bona fide hedge as a result of a lack of 

orderly trading on an exchange. Further, 

the Commission notes that the meaning 

of the orderly trading requirement is 

unclear in the context of the over-thecounter swap market, as well as in the 

context of permitted off-exchange 

transactions (e.g., exchange of 

derivatives for related positions). In 

addition, the Commission observes that 

disruptive trading activity by a 

commercial entity engaged in 

establishing or liquidating a hedging 

position would generally appear to be 

contrary to its economic interests. 

However, the Commission notes that an 

exchange may use its own discretion to 

condition its recognition of a bona fide 

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62See note 73 below. 

63The Commission has authority to exempt 

spread positions under CEA section 4a(a)(1), which 

provides that the Commission may exempt 

transactions normally known to the trade as 

‘‘spreads’’ from federal position limits. Under this 

current proposal, applicants may rely on an 

exchange’s grant of a spread exemption absent 

notice from such exchange or the Commission to 

the contrary. 

64Unlike exemptions for spreads, no exemption 

is needed for bona fide hedging transactions or 

positions as under CEA section 4a(c)(1), no rule, 

regulation or order issued under CEA section 4a(a) 

applies to transactions or positions shown to be 

bona fide hedging transactions or positions. 7 

U.S.C. 6a(c)(1). Accordingly, Commission 

regulation 1.3(z)((3), for example, provides that 

upon request, the Commission may recognize 

(rather than ‘‘exempt’’) certain transactions and 

positions as bona fide hedges. By notifying the 

applicant that the Commission, based on the 

information provided, recognizes that the 

applicant’s position has been shown to be a bona 

fide hedge, the Commission is basically providing 

a safe harbor from position limits in connection 

with that position for the applicant. For ease of 

administration, the Commission now proposes, 

with respect to federal position limits, to extend 

this recognition process to exchanges’ ‘‘recognition’’ 

of positions as NEBFHs or anticipatory enumerated 

bona fide hedges with respect to federal limits 

subject to subsequent Commission review. Under 

this current proposal, positions recognized by 

exchanges as NEBFHs or anticipatory enumerated 

bona fide hedges will not be subject to federal limits 

absent notice from an exchange or the Commission 

to the contrary. DCMs currently grant nonenumerated exemptions to exchange-set limits that 

are consistent with current § 1.3(z)(1), 17 CFR 

1.3(z)(3). In addition, DCMs currently grant bona 

fide exemptions to exchange-set limits for sales or 

purchases for future delivery of unsold anticipated 

production or unfilled anticipated requirements 

consistent with, and enumerated in, § 1.3(z)(2)(i)(B) 

or § 1.3(z)(2)(ii)(C), 17 CFR 1.3(z)(2) (i)(B) or 

1.3(z)(2)(ii)(C). 

65Further, under CEA section 8a(5), the 

Commission may make such rules as, in the 

judgment of the Commission, are reasonably 

necessary to effectuate any of the provisions or to 

accomplish any of the purposes of the CEA. 

66CEA section 4a(c)(2), adopted by the DoddFrank Act, directs the Commission to define 

(including to narrow the scope of) what constitutes 

a bona fide hedging position, for the purpose of 

implementing federal position limits on physical 

commodity derivatives. In response to that 

directive, in the December 2013 position limits 

proposal, the Commission proposed to add a 

definition of bona fide hedging position in § 150.1, 

to replace the definition in current § 1.3(z). See 

infra notes 104–106 and accompanying text; see 

also supra preamble Section II.B.3 (describing the 

Commission’s current proposal to further amend its 

general definition of bona fide hedging position as 

proposed in the December 2013 position limits 

proposal). 

67See infra preamble Section II.D.3 (discussing 

the proposed requirements that the exchanges: 

Make recognitions pursuant to exchange rules 

submitted to the Commission; keep related records; 

make reports to the Commission; and provide 

transparency to the public). After review, the 

Commission could, for example, revoke or confirm 

an exchange-granted exemption. See also proposed 

§ 150.9. 

68As discussed below, the proposed rules would 

require the exchanges: To issue exemptions 

pursuant to exchange rules submitted to the 

Commission; to keep records; to make reports to the 

Commission; and to provide transparency to the 

public. See infra Section II.E; see also proposed 

§ 150.10. 

69See CEA section 4a(a)(1) (stating that ‘‘[n]othing 

in this section shall be construed to prohibit the 

Commission from . . . from exempting transactions 

normally known to the trade as ‘spreads’. . .’’) 

70CEA section 4a(a)(3)(B) provides that the 

Commission shall set limits to the maximum extent 

practicable, in its discretion—to diminish, 

eliminate, or prevent excessive speculation as 

described under this section; to deter and prevent 

market manipulation, squeezes, and corners; to 

ensure sufficient market liquidity for bona fide 

hedgers; and to ensure that the price discovery 

function of the underlying market is not disrupted.’’ 

In addition, CEA section 4a(a)(7) authorizes the 

Commission to exempt any class of transaction from 

any requirement it may establish with respect to 

position limits. 

71The Commission notes that the proposed 

process for exchange exemptions of spread 

positions, in a similar manner to the proposed 

process for exchange recognition of a position as 

bona fide hedge, would require the exchange to 

apply the standards required under proposed 

§ 150.10(a)((3)(ii)) (requiring the exchange to 

determine that exempting the spread position 

would further the purposes of CEA section 

hedging position on an orderly trading 

requirement. 

The Commission notes the antidisruptive trading prohibitions of CEA 

section 4c(a)(5), as added by the DoddFrank Act, apply to trading on registered 

entities, but not to over-the-counter 

transactions, regardless of whether the 

trading is related to hedging activities. 

Specifically, the anti-disruptive trading 

prohibitions in CEA section 4c(a)(5) 

make it unlawful to engage in trading on 

a registered entity that ‘‘demonstrates 

intentional or reckless disregard for 

orderly execution of trading during the 

closing period.’’ In this regard, the 

Commission notes that it also has the 

authority, under CEA section 4c(a)(6), to 

prohibit the intentional or reckless 

disregard for the orderly execution of 

transactions on a registered entity 

outside of the closing period. 

C. Proposed Rules Related to 

Recognition of Bona Fide Hedging 

Positions and Granting of Spread 

Exemptions 

In sections D, E, and F, below, this 

current proposal discusses three sets of 

proposed Commission rules that would 

enable an exchange to submit to the 

Commission exchange rules under 

which the exchange could take action to 

recognize certain bona fide hedging 

positions and to grant certain spread 

exemptions, with regard to both 

exchange-set and federal position limits. 

In each case, the proposed Commission 

rules would establish a formal CFTC 

review process that would permit the 

Commission to revoke all such exchange 

actions. 

If the changes in this current proposal 

are adopted, exchanges would be able 

to: (i) Recognize certain non-enumerated 

bona fide hedging positions 

(‘‘NEBFHs’’), i.e., positions that are not 

enumerated by the Commission’s rules 

(pursuant to proposed § 150.9); 62 (ii) 

grant exemptions to position limits for 

certain spread positions (pursuant to 

proposed § 150.10); 63 and (iii) recognize 

certain enumerated anticipatory bona 

fide hedging positions (pursuant to 

proposed § 150.11).64

The Commission’s authority to permit 

certain exchanges to recognize positions 

as bona fide hedging positions is found, 

in part, in CEA section 4a(c)(1).65 CEA 

section 4a(c)(1) provides that no CFTC 

rule applies to ‘‘transaction or positions 

which are shown to be bona fide 

hedging transactions or positions,’’ as 

those terms are defined by Commission 

rule consistent with the purposes of the 

CEA. The Commission notes that 

‘‘shown to be’’ is passive voice, which 

could encompass either a position 

holder or an exchange being able to 

‘‘show’’ that a position is entitled to 

treatment as a bona fide hedge, and does 

not specify that the Commission must 

determine in advance whether the 

position or transaction was shown to be 

bona fide. The Commission interprets 

CEA section 4a(c)(1) to authorize the 

Commission to permit certain SROs 

(i.e., DCMs and SEFs, meeting certain 

criteria) to recognize positions as bona 

fide hedges for purposes of federal 

limits, subject to Commission review. 

When determining whether to 

recognize positions as bona fide hedges, 

an exchange would be required to apply 

the standards in the Commission’s 

general definition of bona fide hedging 

position, which incorporates the 

standards in CEA section 4a(c)(2),66 and 

the exchange’s conclusions would be 

subject to Commission review and, if 

necessary, remediation.67

In addition, the Commission would 

permit certain exchanges to exempt 

positions normally known to the trade 

as spreads, subject to a consideration of 

the four policy objectives of position 

limits found in CEA section 

4a(a)(3)(B).68 The Commission notes 

that nothing in CEA section 4a(a)(1) 

prohibits the Commission from 

exempting such spreads.69 The 

Commission interprets this provision as 

CEA statutory authority to exempt 

spreads that are consistent with the 

other policy objectives for position 

limits, such as those in CEA section 

4a(a)(3)(B).70 The Commission finds, 

pursuant to CEA section 8a(5), that 

permitting certain exchanges to 

recognize such spreads, subject to 

subsequent Commission review of such 

actions, is reasonably necessary to 

effectuate the CEA’s policy objectives.71

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4a(3)(B)), and the exchanges conclusions would be 

subject to Commission review and, if necessary, 

remediation (after review, the Commission could, 

for example, revoke or confirm an exchange-granted 

exemption). See proposed § 150.10. 

72As discussed below, the proposed rules would 

require the exchanges: To make administrative 

recognitions pursuant to exchange rules submitted 

to the Commission; to keep records; and to make 

reports to the Commission. There is no need for an 

exchange to provide transparency to the public in 

regard to the existence of a type of enumerated bona 

fide hedging position, as the enumerated bona fide 

hedge positions are already listed in the 

Commission’s proposed definition of bona fide 

hedging position. See infra Section II.F; see also 

proposed § 150.11. 

73Specifically, exchanges will be able to: (1) 

Grant exemptions from exchange-set limits for 

NEBFHs pursuant to proposed §§ 150.9, 

150.3(a)(1)(i) and § 150.5(a)(2); and (2) recognize 

NEBFHs (pursuant to proposed §§ 150.9 and 

150.3(a)(1)(i)) that will not be subject to federal 

limits absent notice from an exchange or the 

Commission to the contrary. 

74Specifically, exchanges will be able to: (1) 

Grant exemptions from exchange-set limits for 

certain spread positions pursuant to proposed 

§§ 150.10, 150.3(a)(1)(iv) and 150.5(a)(2); and (2) 

grant exemptions from federal limits for certain 

spread positions pursuant to proposed §§ 150.10 

and 150.3(a)(1)(iv). 

75Specifically, exchanges will be able to: (1) 

Grant exemptions from exchange-set limits for 

enumerated anticipatory bona fide hedges pursuant 

to proposed §§ 150.11, 150.3(a)(1)(i) and 

§ 150.5(a)(2); and (2) recognize enumerated 

anticipatory bona fide hedges (pursuant to proposed 

§§ 150.11 and 150.3(a)(1)(i)) that will not be subject 

to federal limits absent notice from an exchange or 

the Commission to the contrary. 

76The three processes are non-exclusive because 

there are alternative methods to seek recognition of 

a position as a bona fide hedge or to receive an 

exemption for a spread position, including requests 

for no-action letters under § 140.99 or exemptive 

relief under CEA section 4a(a)(7), per the December 

2013 position limits proposal. See December 2013 

position limits proposal, 78 FR at 75719–20. 

77See the discussion of § 150.6 as proposed in the 

December 2013 position limits proposal, 78 FR at 

75746–7. 

78See, e.g., proposed § 150.9(a)(3) (requiring 

exchanges that elect to process NEBFH applications 

to solicit sufficient information to allow it to 

determine why a derivative position satisfies the 

requirements of section 4a(c) of the Act), and 

proposed § 150.9(a)(4) (requiring exchanges that 

elect to process NEBFH applications to determine 

whether a derivative position for which a complete 

application has been submitted satisfies the 

requirements of section 4a(c) of the Act), and 

proposed § 150.10(a)(4)(vi) (requiring exchanges 

that elect to process spread exemptions applications 

to determine that exempting a spread position 

would further the purposes of CEA section 

4a(a)(3)(B)). See also infra discussion in Section 

II.D.3 and III.E.2 (each providing discussion of the 

standards for exchange determinations). 

79See note 126 for further information regarding 

the Commission’s rule enforcement review 

program. 

80See proposed §§ 150.9(a)(d), 150.10(a)(d), and 

150.11(a)(d). The Commission notes that its de novo 

review of exchange actions may be upon the 

Commission’s own initiative or in response to a 

request for an interpretation under § 140.99 by a 

market participant whose application for 

recognition of a position as a bona fide hedge was 

rejected by an exchange. 

81CFTC regulation 1.3(ee) defines SRO to mean 

a DCM, SEF, or registered futures association (such 

as the National Futures Association). Under the 

Commission’s regulations, SROs have certain 

delineated regulatory responsibilities, which are 

carried out under Commission oversight and which 

are subject to Commission review. See also note 126 

(describing reviews of DCMs carried out by the 

Commission). 

82 7 U.S.C. 7 and 7 U.S.C. 7b–3, respectively. See 

also note 126 below. 

83The Commission views as instructive the 

following examples of case law addressing grants of 

authority by an agency (the Securities and Exchange 

Commission, the ‘‘SEC’’) to a self-regulatory 

organization (‘‘SRO’’) (in the SEC cases the SRO 

was NASD, now FINRA), providing insight into the 

factors addressed by the court regarding oversight 

of an SRO. 

First, in 1952, the Second Circuit reviewed an 

SEC order that failed to set aside a penalty fixed by 

NASD suspending the defendant broker-dealer from 

membership. Citing Sunshine Anthracite Coal Co. 

v. Adkins, 310 U.S. 381 (1940), the Second Circuit 

found that, in light of the statutory provisions 

vesting the SEC with power to approve or 

disapprove NASD’s rules according to reasonably 

fixed statutory standards, and the fact that NASD 

disciplinary actions are subject to SEC review, there 

was ‘‘no merit in the contention that the Maloney 

Act unconstitutionally delegates power to the 

NASD.’’ R.H. Johnson v. Securities and Exchange 

Commission, 198 F. 2d 690, 695 (2d Cir. 1952). 

In 1977, the Third Circuit, in Todd & Co. v. 

Securities and Exchange Commission (‘‘Todd’’), 557 

F.2d 1008 (3rd Cir. 1977), likewise concluded that 

the Act did not unconstitutionally delegate 

legislative power to a private institution. The Todd 

court articulated critical factors that kept the 

Maloney Act within constitutional bounds. First, 

the SEC had the power, according to reasonably 

fixed statutory standards, to approve or disapprove 

NASD’s rules before they could go into effect. 

Second, all NASD judgments of rule violations or 

penalty assessments were subject to SEC review. 

Third, all NASD adjudications were subject to a de 

novo (non-deferential) standard of review by the 

SEC, which could be aided by additional evidence, 

if necessary. Id. at 1012. Based on these factors, the 

court found that ‘‘[NASD’s] rules and its 

disciplinary actions were subject to full review by 

the SEC, a wholly public body, which must base its 

decision on its own findings’’ and thus that the 

statutory scheme was constitutional. Id., at 1012– 

13. See also First Jersey Securities v. Bergen, 605 

F.2d 690 (1979), applying the same three-part test 

delineated in Todd, and then upholding a statutory 

narrowing of the Todd test. 

Further, in 1982, the Ninth Circuit considered the 

constitutionality of Congress’ delegation to NASD 

in Sorrel v. Securities and Exchange Commission, 

679 F. 2d 1323 (9th Cir. 1982). Sorrel followed R.H. 

Johnson, Todd and First Jersey in holding that 

because the SEC reviews NASD rules according to 

reasonably fixed standards, and the SEC can review 

any NASD disciplinary action, the Maloney Act 

does not impermissibly delegate power to NASD. 

Further, the Commission would 

permit certain exchanges to recognize 

certain enumerated anticipatory hedging 

positions under the Commission’s 

definition of bona fide hedging position, 

essentially as an administrative 

collection of certain information, but 

subject to Commission review. Under 

proposed § 150.11, the exchange would 

be required to follow defined 

administrative procedures that require 

the market participant to file certain 

information with the exchange, 

including the information the market 

participant would be required to file 

with the Commission under § 150.7 as 

proposed in the December 2013 position 

limits proposal; in the alternative, the 

market participant could choose to file 

that same information directly with the 

Commission under proposed § 150.7.72

Each of the exchange-administered 

processes under proposed §§ 150.9,73

150.10,74 and 150.11 75 would be subject 

to Commission review.76 The three 

proposed processes would allow market 

participants to rely on an exchange’s 

recognition of an NEBFH, spread, or 

anticipatory exemption until an 

exchange or the Commission notifies 

them to the contrary. However, the 

proposed processes would not protect 

exchanges or applicants from charges of 

violations of applicable sections of the 

CEA or other Commission regulations, 

other than position limits. For instance, 

a market participant’s compliance with 

position limits or an exemption does not 

confer any type of safe harbor or good 

faith defense to a claim that the market 

participant had engaged in an attempted 

manipulation, a perfected manipulation 

or deceptive conduct, as is the case 

under both current § 150.6 as well as 

§ 150.6 as proposed in the December 

2013 position limits proposal.77

The Commission views this current 

proposal, enabling exchanges to elect to 

administer these three processes, to be 

suitable since each process requires 

that: (i) An exchange submit 

implementing rules subject to 

Commission review, under the ordinary 

rule submission procedures of the 

Commission’s part 40 regulations; (ii) 

the standards for receiving the 

recognition or exemption be those set 

out under the statute; 78 (iii) each 

exchange’s actions under these 

processes be reviewed under the 

Commission’s rule enforcement review 

program; 79 and (iv) all exchange actions 

under such implementing rules are 

subject to Commission review.80

The Commission observes that for 

decades, exchanges have operated as 

self-regulatory organizations 

(‘‘SROs’’).81 These SROs are charged 

with carrying out regulatory functions, 

including, since 2001, complying with 

core principles, and operate subject to 

the regulatory oversight of the 

Commission pursuant to the CEA as a 

whole, and more specifically, sections 5 

and 5h.82 As SROs, exchanges do not act 

only as independent, private actors.83

When the Act is read as a whole, as the 

Commission noted in 1981, ‘‘it is 

apparent that Congress envisioned 

cooperative efforts between the selfregulatory organizations and the 

Commission. Thus, the exchanges, as 

well as the Commission, have a 

continuing responsibility in this matter 

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38466 Federal Register / Vol. 81, No. 113 / Monday, June 13, 2016 / Proposed Rules 

84Establishment of Speculative Position Limits, 

46 FR 50938, 50939 (Oct. 16, 1981). As the 

Commission noted at that time that ‘‘[s]ince many 

exchanges have already implemented their own 

speculative position limits on certain contracts, the 

new rule merely effectuates completion of a 

regulatory philosophy the industry and the 

Commission appear to share.’’ Id. at 50940. The 

Commission believes this is true for the current 

proposal. 

85See Futures Trading Act of 1982, Public Law 

97–444, 96 Stat. 2299–30 (1983). In 2010, the 

Commission noted that the 1982 legislation ‘‘also 

gave the Commission, under section 4a(5) of the 

Act, the authority to directly enforce violations of 

exchange-set, Commission-approved speculative 

position limits in addition to position limits 

established directly by the Commission through 

orders or regulations.’’ Federal Speculative Position 

Limits for Referenced Energy Contracts and 

Associated Regulations, 75 FR 4144, 4145 (Jan. 36, 

2010) (‘‘2010 Position Limits Proposal for 

Referenced Energy Contracts’’). Section 4a(5) has 

since been redesignated as section 4a(e) of the Act. 

7 U.S.C. 4a(e). 

86 2010 Position Limits for Referenced Energy 

Contracts at 4145. 

87 Id. 

88See note126 for further information regarding 

the Commission’s rule enforcement review 

program. 

89See, e.g., § 1.52 of the Commission’s 

regulations, 17 CFR 1.52 (Self-regulatory 

organization adoption and surveillance of minimum 

financial requirements); part 37, 17 CFR part 37 

(Swap Execution Facilities); part 38, 17 CFR part 38 

(Designated Contract Markets); and part 40, 17 CFR 

part 40 (Provisions Common to Registered Entities). 

90See note 116, and accompanying text (pointing 

to ICE Futures U.S. and CME Group comment 

letters noting their experience overseeing position 

limits, position accountability levels, and the 

recognition of bona fide hedges.) 

91 In connection with recognition of bona fide 

hedging positions, the Commission notes that the 

statute is silent or ambiguous with respect to the 

specific issue—whether the CFTC may authorize 

SROs to recognize positions as bona fide hedging 

positions. CEA section 4a(c) provides that no 

Commission rule establishing federal position 

limits applies to positions which are shown to be 

bona fide hedging positions, as such term shall be 

defined by the CFTC. As noted above, the ‘‘shown 

to be’’ phrase is passive voice, which could 

encompass either a position holder or an exchange 

being able to ‘‘show’’ that a position is entitled to 

treatment as a bona fide hedge, and does not specify 

that the Commission must be the party determining 

in advance whether the position or transaction was 

shown to be bona fide; the Commission interprets 

that provision to permit certain SROs (i.e., DCMs 

and SEFs, meeting certain criteria) to recognize 

positions as bona fide hedges for purposes of 

federal limits when done so within a regime where 

the Commission can review and modify or overturn 

such determinations. Under the proposal, an SRO’s 

recognition is tentative, because the Commission 

would reserve the power to review the recognition, 

subject to the reasonably fixed statutory standards 

in CEA section 4a(c)(2) (directing the CFTC to 

define the term bona fide hedging position). An 

SRO’s recognition would also be constrained by the 

SRO’s rules, which would be subject to CFTC 

review under the proposal. The SROs are parties 

that are subject to Commission authority, their rules 

are subject to Commission review and their actions 

are subject to Commission de novo review under 

the proposal—SRO rules and actions may be 

changed by the Commission at any time. 

92Under the review process set forth in proposed 

§§ 150.9(d) and 150.10(d), the Commission will give 

notice to the exchange and the applicable applicant 

that they have 10 business days to provide any 

supplemental information to the Commission. The 

review process set forth in proposed § 150.11(d) is 

simpler because the Commission does not 

anticipate that applications for recognition of 

enumerated anticipatory bona fide hedge positions 

would be based on novel facts and circumstances; 

instead the review of such an application would 

focus on whether the application met the filing 

requirements contained in proposed § 150.11(a). If 

the filing was not complete, then proposed 

§ 150.11(d) would provide an opportunity to 

supplement to the applicant and the exchange. 

During the review process, when the Commission 

considers an exchange’s disposition of an 

application, the Commission will consider not only 

the Act but the Commission’s relevant regulations 

and interpretations. That is, the Commission will 

apply the same standards during review as the 

exchange should or would have applied in 

disposing of an application. 

93The December 2013 position limits proposal 

provides that market participants can request a staff 

interpretive letter under § 140.99 from Commission 

staff or seek exemptive relief under CEA section 

4a(a)(7) from the Commission. See, e.g., 78 FR at 

75719–20. As noted above, the process of requesting 

interpretations under § 140.99 would also be 

available to market participants whose application 

for recognition of a position as a bona fide hedge 

was rejected by an exchange. See supra note 76; see 

also infra note 109 and accompanying text. 

under the Act.’’ 84 The Commission’s 

approach to its oversight of its SROs 

was subsequently ratified by Congress 

in 1982, when it gave the CFTC 

authority to enforce exchange set 

limits.85 As the Commission observed in 

2010, ‘‘since 1982, the Act’s framework 

explicitly anticipates the concurrent 

application of Commission and 

exchange-set speculative position 

limits.’’ 86 The Commission further 

noted that the ‘‘concurrent application 

of limits is particularly consistent with 

an exchange’s close knowledge of 

trading activity on that facility and the 

Commission’s greater capacity for 

monitoring trading and implementing 

remedial measures across 

interconnected commodity futures and 

option markets.’’ 87

The Commission notes that it retains 

the power to approve or disapprove the 

rules of exchanges, under standards set 

out pursuant to the CEA, and to review 

an exchange’s compliance with those 

rules. By way of example, the 

Commission notes that its Division of 

Market Oversight would conduct ‘‘rule 

enforcement reviews’’ 88 of each 

exchange’s compliance with the rules it 

files under this current proposal. Such 

reviews would include an examination 

of how effectively an exchange 

administers these three proposed 

processes, including review of 

recognitions and exemptions granted 

under the rules. Exchanges, as SROs, are 

also subject to comprehensive 

Commission regulation.89

The Commission—in adopting and 

administering a regime that permits 

certain SROs (i.e., DCMs and SEFs that 

meet certain criteria) to recognize 

positions as bona fide hedges subject to 

Commission review, modification, or 

rejection—proposes building upon the 

experience and expertise of the DCMs in 

administering their own processes for 

recognition of bona fide hedging 

positions under current § 1.3(z).90

Consistent with current market practice, 

the three proposed exchangeadministered processes will accomplish 

fact gathering regarding large positions 

for the Commission, without much 

expense of Commission resources. The 

information obtained by means of fact 

gathering during the application 

processes will be available to the 

Commission at any time upon request 

and pursuant to the recordkeeping and 

recording provisions at proposed 

§§ 150.9 (b) and (c), 150.10(b) and (c), 

and 150.11(b) and (c). The Commission 

believes that the initial disposition of 

applications through the exchangeadministered processes should establish 

a reasonable basis for a Commission 

determination that an application 

should be subsequently approved or 

denied. The Commission anticipates 

that exchanges will advise and consult 

with Commission staff regarding the 

effectiveness of these programs, once 

implemented by the exchanges, and 

their utility in advancing the policy 

objectives of the Act. 

Moreover, the Commission is not 

diluting its ability to recognize or not 

recognize bona fide hedging positions 91

or to grant or not grant spread 

exemptions. The Commission has 

reserved to itself the ability to review 

any exchange action, and to review any 

application by a market participant to 

an exchange, whether prior to or after 

disposition of such application by an 

exchange. An exchange may ask the 

Commission to consider an NEBFH 

application (proposed § 150.9(a)(8)), 

spread application (proposed 

§ 150.10(a)(8)), or enumerated 

anticipatory bona fide hedge application 

(proposed § 150.11(a)(6)). The 

Commission may also on its own 

initiative at any time—before or after 

action by an exchange—review any 

application submitted to an exchange 

for recognition of an NEBFH (proposed 

§ 150.9(d)(1)), a spread exemption 

(proposed § 150.10(d)(1)), or an 

enumerated anticipatory bona fide 

hedge (proposed § 150.11(d)(1)).92 And, 

as noted above, market participants will 

still be able to request a staff 

interpretive letter under § 140.99 from 

the Commission or seek exemptive relief 

under CEA section 4a(a)(7) from the 

Commission, as an alternative to the 

three proposed exchange-administered 

processes.93

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94 7 U.S.C. 12a(5). 

95 7 U.S.C. 6a(a)(1). The proposal also is 

reasonably necessary to accomplish the purposes of 

the Act delineated in CEA section 3(b): ‘‘to deter 

and prevent price manipulation or any other 

disruptions to market integrity. 7 U.S.C. 5(b). 

Further, the proposal is reasonably necessary to 

accomplish the purposes of the Act delineated in 

CEA section 4a(c)(1) ‘‘to permit producers, 

purchasers, sellers, middlemen, and users of a 

commodity or a product derived therefrom to hedge 

their legitimate anticipated business needs.’’ 7 

U.S.C. 6a(c)(1). 

96 46 FR 50938, 50940 (Oct. 16, 1981). 

Commission § 1.61 required all contract markets not 

subject to federal speculative position limits to 

adopt and enforce exchange-set speculative position 

limits; in 1999, as part of the Commission’s 

simplification and reorganization of its position 

limit rules, the substance of rule 1.61’s 

requirements were relocated to Part 150 of the 

Commission’s rules, ‘‘thereby incorporating within 

that Part all Commission rules relating to 

speculative position limits.’’ 64 FR 24038, 24040 

(May 5, 1999). 

97CEA section 8a(7) provides the Commission 

with authority ‘‘to alter or supplement the rules of 

a registered entity insofar as necessary or 

appropriate by rule or regulation or by order, if after 

making the appropriate request in writing to a 

registered entity that such registered entity effect on 

its own behalf specified changes in its rules and 

practices, and after appropriate notice and 

opportunity for hearing, the Commission 

determines that such registered entity has not made 

the changes so required, and that such changes are 

necessary or appropriate for the protection of 

persons producing, handling, processing, or 

consuming any commodity traded for future 

delivery on such registered entity, or the product 

or byproduct thereof, or for the protection of traders 

or to insure fair dealing in commodities traded for 

future delivery on such registered entity.’’ 7 U.S.C. 

12a(7). 

98 46 FR 50938, 50940 (Oct. 16, 1981). See also 

the Commission’s statement in 1999, that the 

Commission and the exchanges ‘‘share 

responsibility for enforcement of speculative 

position limits,’’ noting that ‘‘the Commission can 

directly take enforcement actions against violations 

of exchange-set speculative position limits as well 

as those provided under Commission rules.’’ 64 FR 

24038, note 3 and accompanying text (May 5, 1999). 

99 7 U.S.C. 7(d)(5). As explained in the December 

2013 position limits proposal, ‘‘the CFMA core 

principles regime concerning position limitations or 

accountability for exchanges had the effect of 

undercutting the mandatory rules promulgated by 

the Commission in § 150.5. Since the CFMA 

amended the CEA in 2000, the Commission has 

retained § 150.5, but only as guidance on, and 

acceptable practice for, compliance with DCM core 

principle 5.’’ December 2013 position limits 

proposal, 78 FR at 75754. 

Prior to the Commodity Futures Modernization 

Act of 2000 (‘‘CFMA’’), DCMs set position limits 

pursuant to the requirements of § 150.5, adopted on 

May 5, 1999. 17 CFR 150.5; see 64 FR 24038 (May 

5, 1999) (codifying various policies related to the 

requirement that DCMs set speculative position 

limits); see also 46 FR 50938 (Oct. 16, 1981) 

(requiring DCMs to set speculative position limits 

in active futures markets for which no exchange or 

Commission imposed limits were then in effect). 

There are only nine commodity futures contracts 

currently subject to federal position limits pursuant 

to § 150.2 of the Commission’s regulations. 17 CFR 

150.5. 

100 17 CFR 1.3(z)(1). 

101The CFTC Reauthorization Act of 2008, H.R. 

2419, sec. 13201 (May 22, 2008) (promulgating 7 

U.S.C. 2(h)(7(C)(ii)(IV) (Core Principles Applicable 

to Significant Price Discovery Contracts—Position 

Limitations or Accountability). The Dodd-Frank Act 

amended CEA section 2(h), effective July 16, 2011, 

H.R. 4173, sec. 734(a) (July 21, 2010), replacing the 

provisions governing ECMs with clearing 

requirements in regards to swaps. 

102 17 CFR part 36. It should be noted that prior 

to the Dodd-Frank Act, ECMs could require clearing 

of swaps at a particular DCO and, thus, could gain 

access to information on open positions in a 

particular swap from a single affiliated DCO. The 

Dodd-Frank Act altered the playing field, providing 

market participants with a choice as to which DCO 

they wish to use. CEA section 5h(f)(11)(B) generally 

does not permit a SEF to impose any material 

anticompetitive burden on clearing. 7 U.S.C. 7b– 

3(f)(11)(B). 

103 In 2012, ICE (which listed the only contracts 

that had been determined by the Commission to be 

SPDCs) ‘‘futurized’’ the SPDC contracts listed on its 

ECM by listing them instead on its DCM (as it noted 

at that time, its plan was to ‘‘convert 251 Energy 

Contracts to futures contracts that would be listed 

for trading on the Exchange’s electronic trading 

platform,’’ along with a request that the 

Commission issue an order transferring the swap 

open interest carried at the DCO for the ICE ECM 

OTC contracts to futures and options open interest 

carried at the DCO for ICE, the DCM. ICE 

Submission No. 12–45, August 15, 2012). 

The Commission notes that CEA 

section 8a(5) authorizes the Commission 

to make such rules as, in its judgment, 

are reasonably necessary to effectuate 

any of the provisions or to accomplish 

any of the purposes of the Act.94 The 

Commission currently views the 

proposed processes to be reasonably 

necessary to implement CEA section 

4a(a)(1), including for the purpose of 

diminishing, eliminating, or preventing 

the burden of excessive speculation.95

As pointed out by the Commission in 

1981: ‘‘Section [4a(a)(1)] represents an 

express Congressional finding that 

excessive speculation is harmful to the 

market, and a finding that speculative 

limits are an effective prophylactic 

measure. Section 8a(5), accordingly 

would authorize the Commission to 

develop regulations necessary to 

effectuate the purposes of the Act, one 

of which is expressed in section 

[4a(a)(1)]. Consistent with this 

approach, the Commission fashioned 

rule 1.61 [current rule 150.5] to assure 

that the exchanges would have an 

opportunity to employ their knowledge 

of their individual contract markets to 

propose the position limits they believe 

most appropriate.’’ 96

In addition, section 8a(7) of the Act 

provides the Commission with authority 

to alter or supplement the rules of a 

registered entity, including DCMs and 

SEFs, if the Commission determines that 

such changes are necessary or 

appropriate.97 Consequently, as the 

Commission noted in 1981, ‘‘CEA 

section 8a(7) further underscores the 

fact that Congress affirmatively 

contemplated a regulatory system 

whereby the exchanges would act in the 

first instance to adopt rules which 

would protect persons producing, 

handling, processing or consuming any 

commodity traded for future delivery. 

Secondarily, the Commission has 

express authority to mandate any 

modifications to an exchange’s rules to 

protect such persons.’’ 98

D. Exchange Recognition of Positions as 

Non-Enumerated Bona Fide Hedges 

1. Background 

DCMs have for some time set their 

own position limits on numerous 

physical commodity futures contracts 

pursuant to DCM Core Principle 5.99

DCMs have established exchange-set 

limits for futures contracts, including 

for futures contracts currently subject to 

Commission-set limits under current 

§ 150.2, as well as other futures 

contracts not subject to federal position 

limits. Pursuant to the guidance of 

current § 150.5(d), DCMs may grant 

exemptions to exchange-set position 

limits for positions that meet the 

Commission’s general definition of bona 

fide hedging position in current 

§ 1.3(z)(1).100 Current § 1.3(z)(2) 

provides a list of enumerated bona fide 

hedging positions. In addition, current 

§ 1.3(z)(3) provides a procedure for 

market participants to seek recognition 

from the Commission for NEBFHs for 

contracts subject to federal position 

limits under current § 150.2. DCMs 

generally have granted NEBFH 

exemptions pursuant to exchange rules 

that incorporate the Commission’s 

general definition of bona fide hedging 

positions in current § 1.3(z)(1). 

In contrast to the longstanding DCM 

experience monitoring position limits 

on futures contracts and granting 

exemptions to those exchange-set limits 

on futures contracts, exchanges 

generally do not currently administer 

speculative position limits on swaps. 

Previously, facilities operating under 

CEA section 2(h)(3) as exempt 

commercial markets (‘‘ECMs’’) were 

subject to CFTC regulation under 

authority granted by Congress in 2008 

(although that authority was 

subsequently superseded by the DoddFrank Act).101 Under that 2008 

authority, the Commission issued 

guidance that an ECM should establish 

spot month position limits on any swap 

contract that the Commission 

determined to be a significant price 

discovery contract (‘‘SPDC’’).102

However, since the Dodd-Frank Act, 

exchanges have ‘‘futurized’’ (or 

converted into futures contracts) those 

SPDCs.103 Thus, the Commission 

understands that exchanges generally do 

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104 7 U.S.C. 6a(c)(1). 

105CEA section 4a(c)(2) generally requires the 

Commission to define a bona fide hedging position 

as a position that: (a) Meets three tests (a position 

(1) is a substitute for activity in the physical 

marketing channel (‘‘temporary substitute test’’), (2) 

is economically appropriate to the reduction of risk, 

and (3) arises from the potential change in value of 

current or anticipated assets, liabilities or services); 

or (b) reduces the risk of a swap that was executed 

opposite a counterparty for which such swap would 

meet the three tests (‘‘pass-through swap offset 

requirement’’). 7 U.S.C. 6a(c)(2). In contrast, the 

definition of a bona fide hedge in current § 1.3(z): 

Does not include the temporary substitute test, but 

instead includes guidance that a bona fide hedging 

position should normally represent a substitute for 

transactions in the physical marketing channel; and 

does not include the pass-through swap offset 

requirement. See December 2013 positions limits 

proposal at 75708–9. 

106See December 2013 position limits proposal 

78 FR at 75706, 75823. 

107 17 CFR 1.3(z)(3) (providing authority for the 

Commission to recognize bona fide hedge positions 

other than those enumerated in § 1.3(z)(2)). 

108 17 CFR 1.47 (providing a process for persons 

to demonstrate NEBFH falls within the scope of 

§ 1.3(z)(1)). As noted in the December 2013 position 

limits proposal, ‘‘Section 1.47 of the Commission’s 

regulations was removed and reserved by the 

vacated part 151 Rulemaking. On September 28, 

2012, the District Court for the District of Columbia 

vacated the part 151 Rulemaking with the exception 

of the amendments to § 150.2. 887 F. Supp. 2d 259 

(D.D.C. 2012). Vacating the part 151 Rulemaking, 

with the exception of the amendments to § 150.2, 

means that as things stand now, it is as if the 

Commission had never adopted any part of the part 

151 Rulemaking other than the amendments to 

§ 150.2. That is, . . . § 1.47 is still in effect.’’ 

December 2013 position limits proposal, 78 FR at 

75740, note 478. The full text of current § 1.47 can 

be found at https://www.gpo.gov/fdsys/pkg/CFR2010-title17-vol1/pdf/CFR-2010-title17-vol1-sec1- 

47.pdf. See 17 CFR 1.3(z) (2010). Similarly, the full 

text of current § 1.3(z)(3) can be found at https://

www.gpo.gov/fdsys/pkg/CFR-2010-title17-vol1/pdf/

CFR-2010-title17-vol1-sec1-3.pdf. See 17 CFR 1.3(z) 

(2010). 

109 7 U.S.C. 6a(a)(7) and 17 CFR 140.99, 

respectively. 

110 December 2013 position limits proposal, 78 FR 

at 75718. 

111 Id. at 75703. 

112 Id. 

113 Id. at 75719–20. As noted above, under the 

December 2013 position limits proposal, the 

Commission could consider the facts and 

circumstances if the party either requested a staff 

interpretive letter under § 140.99 or exemptive 

relief under CEA section 4a(a)(7). See also note 76 

and accompanying text. 

114See, e.g., comment of Tom LaSala, CME 

Group, that ‘‘the exchanges would be open to a 

1.47-like process’’ where the exchanges would 

review requests for recognition of non-enumerated 

bona fide hedge positions on behalf of the 

Commission, Transcript, Roundtable on Position 

Limits, June 19, 2014, p. 125, available at http://

www.cftc.gov/PressRoom/Events/opaevent_

cftcstaff061914; Futures Industry Association (FIA), 

on July 31, 2014 (‘‘CL–FIA–59931’’), at 8 

(recommending exchange review of nonenumerated hedge applications in the first 

instance); ISDA and SIFMA on July 7, 2014 (‘‘CL– 

ISDA/SIFMA–59917’’), at 4 (suggesting that the 

Commission include in the final rulemaking a 

process for market participants to apply to 

registered exchanges for bona fide hedging 

exemptions); Natural Gas Supply Association 

(‘‘NGSA’’) on Aug. 4, 2014 (‘‘CL–NGSA–59941’’), at 

9 (requesting the Commission to consider using ICE 

and CME Group to continue to administer hedge 

exemptions); Working Group on March 30, 2015 

(‘‘CL–Working Group–60396’’), at 6 (recommending 

that DCMs be able to grant bona fide hedge 

exemptions in the energy industry either on an 

enumerated or non-enumerated basis); International 

Energy Credit Association (‘‘IECreditAssn’’) on Aug. 

4, 2014 (‘‘CL–IECreditAssn–59957’’), at 6 (stating 

that ‘‘the [IECreditAssn] is generally supportive of 

a pre-approval procedure for nonenumerated 

hedging exemptions, whereby a commercial enduser could first seek and obtain review and 

approval by a CFTC-regulated Exchange’’); ICE on 

March 30, 2015 (‘‘CL–ICE–60387’’), at 8 (noting that 

‘‘the exchanges should continue to exercise the 

authority to grant non-enumerated hedge exemption 

requests pursuant to their rules and procedures’’); 

COPE on March 30, 2015 (‘‘CL–COPE–60388’’), at 

6–8 (supporting Working Group’s suggestion that 

DCMs administer enumerated and non-enumerated 

hedge exemptions). See also Plains All-American 

Pipeline, L.P. (‘‘PAAP’’) on Aug. 4, 2014 (‘‘CL– 

PAAP–59951’’), at 3–4; BG Group Energy Merchants 

(‘‘BG Energy’’) on March 30, 2015 (‘‘CL–BG Energy– 

60383’’), at 7–8; Sempra Energy (‘‘Sempra’’) on 

March 30, 2015 (‘‘CL–SEMP–60384’’), at 5. Contra 

Occupy the SEC on Aug. 7, 2014 (‘‘CL–OSEC– 

59972’’) at 4 (maintaining that permitting exchanges 

to ‘‘self-define’’ hedging exceptions ‘‘would likely 

create an environment conducive to producing a 

‘race to the bottom’ among exchanges as they would 

have incentives to attract and retain participants 

seeking to take advantage of the loosest rules’’); 

Institute for Agriculture and Trade Policy on March 

30, 2015 (‘‘CL–IATP–60394’’) at 3 (arguing that the 

Commission should not permit the exchanges ‘‘to 

manage position limits’’). See also Transcript, 

Agricultural Advisory Committee Meeting, Sept. 22, 

2015, pp. 124–51 available at http://www.cftc.gov/ 

idc/groups/public/@newsroom/documents/file/aac_

transcript092215.pdf (discussing exchangeadministered processes for NEBFHs); Transcript, 

Energy and Environmental Markets Advisory 

Committee Meeting, Feb. 26, 2015, pp. 239–44, 

available at http://www.cftc.gov/idc/groups/public/

@aboutcftc/documents/file/

emactranscript022615.pdf (offering a general 

discussion touching on alternative processes). 

115 ICE Futures U.S., on March 30, 2015 (‘‘CL– 

ICEUS–60378’’), at 3–4. See also CL–CME–60406, at 

5 (stating that ‘‘CME Group is sympathetic to the 

fact that the Commission faces resource constraints 

that would prevent it from administering a 

workable non-enumerated hedge exemption in real 

time . . . .’’). 

116CL–ICEUS–60378 at 1. See also CL–CME– 

60406 at 5 (noting that ‘‘[E]xchanges have years of 

experience reviewing requests for hedge 

exemptions and approving or denying those 

requests based on a facts-and-circumstances 

approach.’’); statement of R. Oppenheimer on behalf 

of the Working Group, Energy and Environmental 

Markets Advisory Committee meeting, July 29, 2015 

(asserting that ‘‘The exchanges have the knowledge, 

not currently have speculative position 

limits applicable to swaps contracts. 

CEA section 4a(c) provides generally 

that federal position limits do not apply 

to positions that are shown to be bona 

fide hedging positions.104 CEA section 

4a(c)(2), adopted by the Dodd-Frank 

Act, directs the Commission to narrow 

the scope of what constitutes a bona fide 

hedging position, for the purpose of 

implementing federal position limits on 

physical commodity derivatives, within 

specific parameters.105 In response to 

that directive, the Commission proposed 

to add a definition of bona fide hedging 

position in § 150.1, to replace the 

definition in current § 1.3(z).106

The December 2013 position limits 

proposal would replace the process for 

Commission recognition of NEBFHs 

under current § 1.3(z)(3) 107 and 

§ 1.47 108 of the Commission’s 

regulations with proposed § 150.3(e), 

which would provide guidance for 

persons seeking non-enumerated 

hedging exemptions through the filing 

of a petition under section 4a(a)(7) of 

the Act or by requesting an 

interpretation under § 140.99.109 When 

discussing non-enumerated hedges in 

the December 2013 position limits 

proposal, the Commission noted that 

‘‘[u]nder the proposal for physical 

commodities, additional enumerated 

hedges could only be added to the 

definition of bona fide hedging position 

by way of notice and comment 

rulemaking,’’ and asked whether it 

should ‘‘adopt, as an alternative, an 

administrative procedure that would 

allow the Commission to add additional 

enumerated bona fide hedges without 

requiring notice and comment 

rulemaking.’’ 110 The Commission 

recognized that ‘‘there are complexities 

to analyzing the various price risks 

applicable to particular commercial 

circumstances in order to determine 

whether a hedge exemption is 

warranted.’’ 111

Historically, the Commission has 

recognized bona fide hedges where a 

demonstrated physical price risk has 

been shown.112 In addition, when 

summarizing the disposition of the 

Working Group petition requests in the 

December 2013 position limits proposal, 

the Commission observed that ‘‘context 

is essential to determining the nature of 

any price risk that has been realized and 

could support the existence of a bona 

fide hedge,’’ and ‘‘the only way to 

evaluate the nature of any price risk 

would be for the Commission to be 

provided with particulars of the 

transaction.’’ 113

2. Comments on the December 2013 

Process for Recognition of a Position as 

a Bona Fide Hedge 

Some commenters have suggested that 

the Commission permit exchanges to 

process applications for nonenumerated bona fide hedges 

(‘‘NEBFHs’’).114 For example, ICE 

Futures U.S. (‘‘ICE Futures U.S.’’) 

commented that the Commission should 

not now undertake the daily 

administration of NEBFHs when its 

resources are limited,115 and stated that 

it has extensive, direct experience 

overseeing position limits, position 

accountability levels, and the 

recognition of bona fide hedges.116 ‘‘The 

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the expertise, and the regulatory incentive to 

carefully scrutinize the exemption process, and 

they already engage in a parallel process for their 

own interest in self-regulating and ensuring 

convergence and orderly liquidation of futures 

contracts as they come to expiry.’’) 

117CL–ICEUS–60378 at 1. 

118 John Parsons, Transcript, Roundtable on 

Position Limits, June 19, 2014, at 135–6. 

119As noted above, under the Commission’s 

regulations, SROs have certain delineated 

regulatory responsibilities, which are carried out 

under Commission oversight and which are subject 

to Commission review. See also, note 126 

(describing reviews of DCMs carried out by the 

Commission). 

120See CEA section 5c(c), 7 U.S.C. 7a–2(a) 

(providing Commission with authority to review 

rules and rule amendments of registered entities, 

including DCMs). 

121As previously noted, Congress has required in 

CEA section 4a(c) that the Commission, within 

specific parameters, define what constitutes a bona 

fide hedging position for the purpose of 

implementing federal position limits on physical 

commodity derivatives, including, as previously 

stated, the inclusion in new section 4a(c)(2) of a 

directive to narrow the bona fide hedging definition 

for physical commodity positions from that 

currently in Commission regulation § 1.3(z). See 

supra notes 32 and 105 and accompanying text; see 

also December 2013 positions limits proposal at 

75705. In response to that mandate, the 

Commission proposed in its December 2013 

position limits proposal to add a definition of bona 

fide hedging position in § 150.1, to replace the 

definition in current § 1.3(z) See 78 FR at 75706, 

75823. 

For the avoidance of doubt, the Commission is 

still reviewing comments received on these 

provisions. The Commission intends to finalize the 

general definition of bona fide hedging position 

based on the standards of CEA section 4a(c), and 

may further define the bona fide hedging position 

definition consistent with those standards. 

122See generally the discussion of proposed 

§ 150.9(d) and the requirements regarding the 

review of applications by the Commission, below. 

The Commission notes that exchange participation 

is voluntary, not mandatory and that exchanges 

could elect not to administer the process. Market 

participants could still request a staff interpretive 

letter under § 140.99 or seek exemptive relief under 

CEA section 4a(a)(7), per the December 2013 

position limits proposal. The process does not 

protect exchanges or applicants from charges of 

violations of applicable sections of the CEA or other 

Commission regulations. For instance, a market 

participant’s compliance with position limits or an 

exemption thereto would not confer any type of safe 

harbor or good faith defense to a claim that he had 

engaged in an attempted manipulation, a perfected 

manipulation or deceptive conduct; see the 

discussion of § 150.6 (Ongoing application of the 

Act and Commission regulations) as proposed in 

the December 2013 position limits proposal, 78 FR 

at 75746–7. 

123See, e.g. the general discussion of the 

Commission’s review process proposed in 

§ 151.9(c), which would support the Commission’s 

surveillance program by facilitating the tracking of 

NEBFHs recognized by exchanges, keeping the 

Commission informed of the manner in which an 

exchange is administering its procedures for 

recognizing such NEBFHs. 

124CEA section 4a(c)(1), 7 U.S.C. 6a(c)(1). See 

also supra note 65. 

125Rulebooks for some DCMs can be found in the 

links to their associated documents on the 

Commission’s Web site at http://sirt.cftc.gov/SIRT/ 

SIRT.aspx?Topic=TradingOrganizations. 

126The Commission bases this view on its long 

experience overseeing DCMs and their compliance 

with the requirements of CEA section 5 and part 38 

of the Commission’s regulations, 17 CFR part 38. 

Under part 38, a DCM must comply, on an initial 

and ongoing basis, with twenty-three Core 

Principles established in section 5(d) of the CEA, 7 

U.S.C. 7(d), and part 38 of the CFTC’s regulations 

and with the implementing regulations under part 

38. The Division of Market Oversight’s Market 

Compliance Section conducts regular reviews of 

each DCM’s ongoing compliance with core 

principles through the self-regulatory programs 

operated by the exchange in order to enforce its 

rules, prevent market manipulation and customer 

and market abuses, and ensure the recording and 

safe storage of trade information. These reviews are 

known as rule enforcement reviews (‘‘RERs’’). Some 

periodic RERs examine a DCM’s market 

surveillance program for compliance with Core 

Principle 4, Monitoring of Trading, and Core 

Principle 5, Position Limitations or Accountability. 

On some occasions, these two types of RERs may 

be combined in a single RER. Market Compliance 

can also conduct horizontal RERs of the compliance 

of multiple exchanges in regard to particular core 

principles. In conducting an RER, the Division of 

Market Oversight (DMO) staff examines trading and 

compliance activities at the exchange in question 

over an extended time period selected by DMO, 

typically the twelve months immediately preceding 

the start of the review. Staff conducts extensive 

review of documents and systems used by the 

exchange in carrying out its self-regulatory 

responsibilities; interviews compliance officials and 

Continued 

rules and procedures developed and 

used by . . . [ICE Futures U.S.] to 

perform this important function were 

designed to incorporate the specific 

needs and differing practices of the 

commercial participants in each of its 

markets as those needs and practices 

have developed over time.’’ 117 These 

commenters generally espoused the 

view that the Commission should 

continue in its broad oversight role in 

the granting of hedge exemptions and 

should not begin to become involved in 

the daily administration of hedge 

exemptions. One academic suggested 

that permitting the exchanges to process 

NEBFH applications would be 

acceptable so long as the Commission 

surveils the work of the exchanges.118

3. Proposed NEBFH Recognition Process 

In light of DCM experience in granting 

NEBFH exemptions to exchange-set 

position limits for futures contracts, and 

after consideration of comments 

recommending exchange review of 

NEBFH requests, the Commission now 

proposes to permit exchanges to 

recognize NEBFHs with respect to the 

proposed federal speculative position 

limits. Under proposed § 150.9, an 

exchange, as an SRO 119 that is under 

Commission oversight and whose rules 

are subject to Commission review,120

could establish rules under which the 

exchange could recognize as NEBFHs 

positions that meet the general 

definition of bona fide hedging position 

in proposed § 150.1, which implements 

the statutory directive in CEA section 

4a(c) for the general definition of bona 

fide hedging positions in physical 

commodities.121 The exchange’s 

recognition would be subject to review 

by the Commission. Exchange 

recognition of a position as a NEBFH 

would allow the market participant to 

exceed the federal position limit to the 

extent that it relied upon the exchange’s 

recognition unless and until such time 

that the Commission notified the market 

participant to the contrary.122 The 

Commission could issue such a 

notification in accordance with the 

proposed review procedures. That is, if 

a party were to hold positions pursuant 

to a NEBFH recognition granted by the 

exchange, such positions would not be 

subject to federal position limits, unless 

or until the Commission were to 

determine that such NEBFH recognition 

is inconsistent with the CEA or CFTC 

regulations thereunder. Under this 

framework, the Commission would 

continue to exercise its authority in this 

regard by reviewing an exchange’s 

determination and verifying whether the 

facts and circumstances in respect of a 

derivative position satisfy the 

requirements of the general definition of 

bona fide hedging position proposed in 

§ 150.1.123 If the Commission 

determined that the exchange-granted 

recognition was inconsistent with 

section 4a(c) of the Act and the 

Commission’s general definition of bona 

fide hedging position in § 150.1 and so 

notified a market participant relying on 

such recognition, the market participant 

would be required to reduce the 

derivative position or otherwise come 

into compliance with position limits 

within a commercially reasonable 

amount of time. 

The Commission believes that 

permitting exchanges to so recognize 

NEBFHs is consistent with its statutory 

obligation to set and enforce position 

limits on physical commodity contracts, 

because the Commission is retaining its 

authority to determine ultimately 

whether any NEBFH so recognized is in 

fact a bona fide hedging position. The 

Commission’s authority to set position 

limits does not extend to any position 

that is shown to be a bona fide hedging 

position.124 Further, most, if not all, 

DCMs already have a framework and 

application process to recognize nonenumerated positions, for purposes of 

exchange-set limits, as within the 

meaning of the general bona fide 

hedging definition in § 1.3(z)(1).125 The 

Commission has a long history of 

overseeing the performance of the DCMs 

in granting appropriate exemptions 

under current exchange rules regarding 

exchange-set position limits 126 and 

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staff of the exchange; and prepares a detailed 

written report of findings. In nearly all cases, the 

RER report is made available to the public and 

posted on CFTC.gov. See materials regarding RERs 

of DCMs at http://www.cftc.gov/IndustryOversight/ 

TradingOrganizations/DCMs/dcmruleenf on the 

Commission’s Web site. Recent RERs conducted by 

DMO covering DCM Core Principle 5 and 

exemptions from position limits have included the 

Minneapolis Grain Exchange, Inc. (‘‘MGEX’’) (June 

5, 2015), ICE Futures U.S. (July 22, 2014), the 

Chicago Mercantile Exchange (‘‘CME’’) and the 

Chicago Board of Trade (‘‘CBOT’’) (July 26, 2013), 

and the New York Mercantile Exchange (May 19, 

2008). While DMO may sometimes identify 

deficiencies or make recommendations for 

improvements, it is the Commission’s view that it 

should be permissible for DCMs to process 

applications for exchange recognition of positions 

as NEBFHs. Consistent with the fifteen SEF core 

principles established in section 5h(f) of the CEA, 

7 U.S.C. 7b–3(f), and with the implementing 

regulations under part 37, 17 CFR part 37, the 

Commission will perform similar RERs for SEFs. 

The Commission’s preliminary view is that it 

should be permissible for SEFs to process 

applications as well, after obtaining the requisite 

experience administering exchange-set position 

limits discussed below. 

127Since the enactment of the Dodd-Frank Act, 

Commissioners, CFTC staff, and public officials 

have expressed repeatedly and publicly that 

Commission resources have not kept pace with the 

CFTC’s expanded jurisdiction and increased 

responsibilities. The Commission anticipates there 

may be hundreds of applications for NEBFHs. This 

is based on the number of exemptions currently 

processed by DCMs. For example, under the 

existing process, during the period from June 15, 

2011 to June 15, 2012, the Market Surveillance 

Department of ICE Futures U.S. received 142 

exemption applications, 121 of which related to 

bona fide hedging requests, while 21 related to 

arbitrage or cash-and-carry requests; 92 new 

exemptions were granted. Rule Enforcement review 

of ICE Futures U.S., July 22, 2014, p. 40. Also under 

the existing process, during the period from 

November 1, 2010 to October 31, 2011, the Market 

Surveillance Group from the CME Market 

Regulation Department took action on and 

approved 420 exemption applications for products 

traded on CME and CBOT, including 114 new 

exemptive applications, 295 applications for 

renewal, 10 applications for increased levels, and 

one temporary exemption on an inter-commodity 

spread. Rule Enforcement Review of the Chicago 

Mercantile Exchange and the Chicago Board of 

Trade, July 26, 2013, p. 54. These statistics are now 

a few years old, and it is possible that the number 

of applications under the processes outlined in this 

proposal will increase relative to the number of 

applications described in the RERs. The CFTC 

would need to shift substantial resources, to the 

detriment of other oversight activities, to process so 

many requests and applications and has 

determined, as described below, to permit 

exchanges to process applications initially. The 

Commission anticipates it will regularly, as 

practicable, check a sample of the exemptions 

granted, including in cases where the facts warrant 

special attention, retrospectively as described 

below, including through RERs. 

128One commenter specifically requested that the 

Commission streamline duplicative processes. 

American Gas Association (‘‘AGA’’) on March 30, 

2015 (‘‘CL–AGA–60382’’) at 12 (stating that ‘‘AGA 

. . . urges the Commission to ensure that hedge 

exemption requests and any hedge reporting do not 

require duplicative filings at both the exchanges 

and the Commission, and therefore recommends 

revising the rules to streamline the process by 

providing that an applicant need only apply to and 

report to the exchanges, while the Commission 

could receive any necessary data and applications 

by coordinating data flow between the exchanges 

and the Commission.’’). See also CL—Working 

Group—60396 (explaining that ‘‘To avoid 

employing duplicative efforts, the Commission 

should simply rely on DCMs to administer bona 

fide hedge exemptions from federal speculative 

position limits as they carry out their core duties 

to ensure orderly markets.’’) 

129 DCMs currently process applications for 

exemptions from exchange-set position limits for 

certain NEBFHs and enumerated anticipatory bona 

fide hedges, as well as for exemptions from 

exchange-set position limits for certain spread 

positions, pursuant to CFMA-era regulatory 

guidance. See note 102, above, and accompanying 

text. This practice continues because, among other 

things, the Commission has not finalized the rules 

proposed in the December 2013 position limits 

proposal. 

As noted above and as explained in the December 

2013 position limits proposal, while current § 150.5 

regarding exchange-set position limits pre-dates the 

CFMA ‘‘the CFMA core principles regime 

concerning position limitations or accountability 

for exchanges had the effect of undercutting the 

mandatory rules promulgated by the Commission in 

§ 150.5. Since the CFMA amended the CEA in 2000, 

the Commission has retained § 150.5, but only as 

guidance on, and acceptable practice for, 

compliance with DCM core principle 5.’’ December 

2013 position limits proposal 78 FR at 75754. 

The DCM application processes for bona fide 

hedge exemptions from exchange-set position limits 

generally reference or incorporate the general 

definition of bona fide hedging position contained 

in current § 1.3(z)(1), and the Commission believes 

the exchange processes for approving nonenumerated bona fide hedge applications are at 

least to some degree informed by the Commission 

process outlined in current § 1.47. 

130 If the Commission becomes concerned about 

an exchange’s general processing of NEBFH 

applications, the Commission may review such 

processes pursuant to a periodic rule enforcement 

review or a request for information pursuant to 

Commission regulation § 37.5. Separately, under 

proposed § 150.9(d), the proposal provides that the 

Commission may review a DCM’s determinations in 

the case of any specific NEBFH application. 

believes that it would be efficient and in 

the best interest of the markets, in light 

of current resource constraints,127 to 

rely on the exchanges to initially 

process applications for recognition of 

positions as NEBFHs. In addition, 

because many market participants are 

familiar with current DCM practices 

regarding bona fide hedges, permitting 

DCMs to build on current practice may 

reduce the burden on market 

participants. Moreover, the process 

outlined below should reduce 

duplicative efforts because market 

participants seeking recognition of an 

NEBFH would be able to file one 

application for relief, only to an 

exchange, rather than to both an 

exchange with respect to exchange-set 

limits and to the Commission with 

respect to federal limits.128

i. Proposed § 150.9(a)—Requirements 

For Exchange Application Process 

a. Submission of Exchange Rules Under 

Part 40 

The Commission contemplates in 

proposed § 150.9(a)(1) that exchanges 

may voluntarily elect to process NEBFH 

applications by filing new rules or rule 

amendments with the Commission 

pursuant to part 40 of the Commission’s 

regulations. The Commission 

anticipates that, consistent with current 

practice, most exchanges will selfcertify such new rules or rule 

amendments pursuant to § 40.6. The 

self-certification process should be a 

low burden for exchanges, especially for 

those that already recognize nonenumerated positions meeting the 

general definition of bona fide hedging 

position in § 1.3(z)(1).129 In the 

Commission’s view, allowing DCMs to 

continue to follow current practice, and 

extend that practice to exchange 

recognition of NEBFHs for purposes of 

the federal position limits, will permit 

the Commission to more effectively 

allocate its limited resources to 

oversight of the exchanges’ actions.130

RFC 2. Are there any facts and 

circumstances specific to DCMs that, for 

purposes of exchange limits, currently 

recognize non-enumerated positions 

meeting the general definition of bona 

fide hedging position in § 1.3(z)(1), that 

the Commission should accommodate 

in any final regulations regarding the 

processing of NEBFH applications? 

RFC 3. Are there any concerns 

regarding an exchange that elects to stop 

processing NEBFH applications? For 

example, what should be the status of a 

previously recognized NEBFH, if the 

exchange that recognized a NEBFH no 

longer provides for an annual review? 

b. Requirements for an Exchange To 

Process Applications 

Proposed § 150.9(a)(1) provides that 

exchange rules must incorporate the 

general definition of bona fide hedging 

position in § 150.1. It also provides that, 

with respect to a commodity derivative 

position for which an exchange elects to 

process NEBFH applications, (i) the 

position must be in a commodity 

derivative contract that is a referenced 

contract; (ii) the exchange must list such 

commodity derivative contract for 

trading; (iii) such commodity derivative 

contract must be actively traded on such 

exchange; (iv) such exchange must have 

established position limits for such 

commodity derivative contract; and (v) 

such exchange must have at least one 

year of experience administering 

exchange-set position limits for such 

commodity derivative contract. The 

requirement for one year of experience 

is intended as a proxy for a minimum 

level of expertise gained in monitoring 

futures or swaps trading in a particular 

physical commodity. 

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131For example, a DCM (‘‘DCM A’’) may list a 

commodity derivative contract (‘‘KX,’’ where ‘‘K’’ 

refers to contract and ‘‘X’’ refers to the commodity) 

that is a referenced contract, actively traded, and 

DCM A has the requisite experience and expertise 

in administering position limits in that one contract 

KX. DCM A can therefore recognize NEBFHs in 

contract KX. But DCM A is not limited to 

recognition of just that one contract KX–DCM A can 

also recognize any other contract that falls within 

the meaning of referenced contract for commodity 

X. So a market participant could, for example, 

apply to DCM A for recognition of a position in any 

contract that falls within the meaning of referenced 

contract for commodity X. However, that market 

participant would still need to seek separate 

recognition from each exchange where it seeks an 

exemption from that other exchange’s limit for a 

commodity derivative contract in the same 

commodity X. 

132 17 CFR 1.3(z)(2). See also, e.g., the ‘‘bona fide 

hedging position’’ definition proposed in the 

December 2013 position limits proposal, 78 FR at 

75823–24. 

133The conditional spot month limit exemption 

and the related Form 504 were discussed in the 

December 2013 position limits proposal (78 FR 

75680 at 75736–8). A copy of the proposed form 

was submitted to the Federal Register (id. at 75803– 

8) to ensure the public has the opportunity to 

comment on the information required by the 

proposed form. The Commission estimated the 

number of market participants that would be 

required to file the form in the December 2013 

position limits proposal (id. at 75783). Commenters 

are encouraged to review and comment on the 

proposed Form 504 under the context of this 

current proposal. 

134This is consistent with the Commission’s 

interpretation in the December 2013 position limits 

proposal that CEA section 4a(c)(2)(b) is a direction 

from Congress to narrow the scope of what 

constitutes a bona fide hedge in the context of index 

trading activities. ‘‘Financial products are not 

substitutes for positions taken or to be taken in a 

physical marketing channel. Thus, the offset of 

financial risks from financial products is 

inconsistent with the proposed definition of bona 

fide hedging for physical commodities.’’ December 

2013 position limits proposal, 78 FR at 75740. See 

also the discussion of the temporary substitute test 

in the December 2013 position limits proposal, 78 

FR at 75708–9. 

The Commission believes that the 

exchange NEBFH process should be 

limited only to those exchanges that 

have at least one year of experience 

overseeing exchange-set position limits 

in an actively traded referenced contract 

in a particular commodity because an 

individual exchange may not be familiar 

enough with the specific needs and 

differing practices of the commercial 

participants in those markets for which 

the exchange does not list any actively 

traded referenced contract in a 

particular commodity. Thus, if a 

referenced contract is not actively 

traded on an exchange that elects to 

process NEBFH applications for 

positions in such referenced contract, 

that exchange might not be incentivized 

to protect or manage the relevant 

commodity market, and its interests 

might not be aligned with the policy 

objectives of the Commission as 

expressed in CEA section 4a. The 

Commission expects that an individual 

exchange will describe how it will 

determine whether a particular listed 

referenced contract is actively traded in 

its rule submission, based on its 

familiarity with the specific needs and 

differing practices of the commercial 

participants in the relevant market.131

The Commission is also mindful that 

some market participants, such as 

commercial end users in some 

circumstances, may not be required to 

trade on an exchange, but may 

nevertheless desire to have a particular 

derivative position recognized as a 

NEBFH. The Commission believes that 

commercial end users should be able to 

avail themselves of an exchange’s 

NEBFH application process in lieu of 

requesting a staff interpretive letter 

under § 140.99 or seeking CEA section 

4a(a)(7) exemptive relief. This is 

because the Commission believes that 

exchanges that list particular referenced 

contracts will have enough information 

about the markets in which such 

contracts trade and will be sufficiently 

familiar with the specific needs and 

differing practices of the commercial 

participants in such markets in order to 

knowledgeably recognize NEBFHs for 

derivatives positions in commodity 

derivative contracts included within a 

particular referenced contract. The 

Commission also views this to be 

consistent with the efficient allocation 

of Commission resources. 

RFC 4. Are there circumstances in 

which the Commission should permit 

an exchange to process an NEBFH 

application for a position in a 

commodity derivative contract where 

that contract is a referenced contract 

that is not actively traded on such 

exchange or for which the exchange has 

less than one year of experience 

administering position limits? 

RFC 5. Should the Commission define 

‘‘actively traded’’ in terms of a 

minimum monthly volume of trading, 

such as an average monthly trading 

volume of 1,000 futures-equivalent 

contracts over a twelve month period? 

RFC 6. Are there any concerns if a 

market participant applies for 

recognition of a NEBFH on one 

exchange, intending to execute the 

trades comprising the recognized 

position away from that exchange (e.g., 

over the counter)? 

RFC 7. Are there concerns regarding 

the applicability of NEBFH positions in 

the spot month? Should the 

Commission, parallel to the 

requirements of current regulation 

1.3(z)(2) (i.e., the ‘‘five-day rule’’), 

provide that such positions not be 

recognized as NEBFH positions during 

the lesser of the last five days of trading 

or the time period for the spot 

month? 132

RFC 8. If the Commission permits 

NEBFH positions to be held into the 

spot month, should recognition of 

NEBFH positions be conditioned upon 

additional filings to the exchange— 

similar to the proposed Form 504 filings 

required for the proposed conditional 

spot month limit exemption? 133 As 

proposed, Form 504 would require 

additional information on the market 

participant’s cash market holdings for 

each day of the spot month period. 

Under this alternative, market 

participants would submit daily cash 

position information to the exchanges in 

a format determined by the exchange, 

which would then be required to 

forward that information to the 

Commission in a process similar to that 

proposed under § 150.9(c)(2). 

RFC 9. Alternatively, if the 

Commission permits NEBFH positions 

to be held into the spot month, should 

the Commission require market 

participants to file the Form 504 with 

the Commission? Under this alternative, 

the relevant cash market information 

would be submitted directly to the 

Commission, eliminating the need for 

the exchange to intermediate, although 

the Commission could share such a 

filing with the exchanges. The 

Commission would adjust the title of 

the Form 504 to clarify that the form 

would be used for all daily spot month 

cash position reporting purposes, not 

just the proposed requirements of the 

conditional spot month limit exemption 

in proposed § 150.3(c). 

Consistent with the restrictions 

regarding the offset of risks arising from 

a swap position in CEA section 

4a(c)(2)(B), proposed § 150.9(a)(1) 

would not permit an exchange to 

recognize an NEBFH involving a 

commodity index contract and one or 

more referenced contracts. That is, an 

exchange may not recognize an NEBFH 

where a bona fide hedge position could 

not be recognized for a pass through 

swap offset of a commodity index 

contract.134

c. Exchanges May Establish a DualTrack Application Process 

Proposed § 150.9(a)(2) permits an 

exchange to establish a less expansive 

application process for NEBFHs 

previously recognized and published on 

such exchange’s Web site than for 

NEBFHs based on novel facts and 

circumstances. This is because the 

Commission believes that some lesser 

degree of scrutiny may be adequate for 

applications involving recurring fact 

patterns, so long as the applicants are 

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135 17 CFR 1.3(z)(1). 

136 7 U.S.C. 6a(c). The Commission notes that it 

could, under the proposal, review determinations 

made by a particular exchange, for example, that 

recognizes an unusually large number of bona fide 

hedges, relative to those of other exchanges. 

137See § 1.47(b)(1), 17 CFR 1.47(b)(1), requiring a 

description of the futures positions and the 

offsetting cash positions. 

138See § 1.47(b)(4), 17 CFR 1.47(b)(4), requiring 

the maximum size of gross futures positions which 

will be acquired during the following year. 

139See §§ 1.47(b)(6), 1.48(b)(1)(i) and (2)(i), 17 

CFR 1.47(b)(6), 1.48(b)(1)(i) and 2(i), requiring three 

years of history of production or usage. 

140Although many commenters have requested 

that the Commission retain the pre-Dodd Frank Act 

standard contained in current § 1.3(z), 17 CFR 

1.3(z), there is explicit and implicit support in the 

comments on the December 2013 position limits 

proposal for pegging what applicants must 

demonstrate to the current statutory provision as 

amended by the Dodd-Frank Act. One commenter 

requested that the Commission ‘‘publicly clarify 

that hedge positions are bona fide when they satisfy 

the hedge definition codified by Congress in section 

4a(c)(2) of the Act, as added by the Dodd-Frank 

Act.’’ CME Group, on Feb. 10, 2014 (‘‘CL–CME– 

59718’’), at 46. Another commenter supported a 

‘‘process for Commission approval of a ‘nonenumerated’ hedge that . . . complies with the 

statutory definition of the term ‘bona fide hedge.’ ’’ 

NGSA on Feb. 10, 2014 (‘‘CL–NGSA–59673’’), at 2. 

CEA section 4a(c)(2) contains standards for 

positions that constitute bona fide hedges. The 

Commission expects that exchanges will consider 

the Commission’s relevant regulations and 

interpretations, when determining whether a 

position satisfies the requirements of CEA section 

4a(c)(2). However, exchanges may confront novel 

facts and circumstances with respect to a particular 

applicant’s position, dissimilar to facts and 

circumstances previously considered by the 

Commission. In these cases, an exchange may 

request assistance from the Commission; see the 

discussion of proposed § 150.9(a)(8), below. 

141See § 1.47(b)(2), 17 CFR 1.47(b)(2), requiring 

detailed information to demonstrate that the futures 

positions are economically appropriate to the 

reduction of risk in the conduct and management 

of a commercial enterprise. See also § 1.47(b)(3), 17 

CFR 1.47(b)(3), requiring, upon request, such other 

information necessary to enable the Commission to 

determine whether a particular futures position 

meets the requirements of the general definition of 

bona fide hedging. Under current application 

processes, market participants provide similar 

information to DCMs, make various representations 

required by DCMs and agree to certain terms 

imposed by DCMs with respect to exemptions 

granted. The Commission has recognized that DCMs 

already consider any information they deem 

relevant to requests for exemptions from position 

limits. See, e.g., Rule Enforcement Review of ICE 

Futures U.S., July 22, 2014, p. 41. 

142CEA section 5(d)(5)(A), 7 U.S.C. 7(d)(5)(A); 

§ 38.300, 17 CFR 38.300. The Commission 

proposed, consistent with previous Commission 

determinations, a preliminary finding that 

speculative position limits are necessary in the 

December 2013 position limits proposal. December 

2013 position limits proposal, 78 FR at 75685. 

143CEA § 5h(f)(6)(A), 7 U.S.C. 7b–3(f)(6)(A); 

§ 38.300, 17 CFR 38.300. 

similarly situated. However, the 

Commission understands that DCMs 

currently use a single-track application 

process to recognize non-enumerated 

positions, for purposes of exchange 

limits, as within the meaning of the 

general bona fide hedging definition in 

§ 1.3(z)(1).135 The Commission does not 

know whether any exchange will elect 

to establish a separate application 

process for NEBFHs based on novel 

versus non-novel facts and 

circumstances, or what the salient 

differences between the two processes 

might be, or whether a dual-track 

application process might be more 

likely to produce inaccurate results, e.g., 

inappropriate recognition of positions 

that are not bona fide hedges within the 

parameters set forth by Congress in CEA 

section 4a(c).136 In proposing to permit 

separate application processes for novel 

and non-novel NEBFHs, the 

Commission seeks to provide flexibility 

for exchanges, but will insist on fair and 

open access for market participants to 

seek recognition of compliant positions 

as NEBFHs. 

RFC 10. Would separate application 

processes for novel and non-novel 

NEBFHs be more likely to produce 

inaccurate results, e.g., inappropriate 

recognition of positions that are not 

bona fide hedges within the parameters 

set forth by Congress in section 4a(c) of 

the Act? 

d. Market Participant’s Facts and 

Circumstances 

The Commission believes that there is 

a core set of information and materials 

necessary to enable an exchange to 

determine, and the Commission to 

verify, whether the facts and 

circumstances attendant to a position 

satisfy the requirements of CEA section 

4a(c). Accordingly, the Commission 

proposes to require in § 150.9(a)(3)(i), 

(iii) and (iv) that all applicants submit 

certain factual statements and 

representations. Proposed 

§ 150.9(a)(3)(i) requires a description of 

the position in the commodity 

derivative contract for which the 

application is submitted and the 

offsetting cash positions.137 Proposed 

§ 150.9(a)(3)(iii) requires a statement 

concerning the maximum size of all 

gross positions in derivative contracts to 

be acquired during the year after the 

application is submitted.138 Proposed 

§ 150.9(a)(3)(iv) requires detailed 

information regarding the applicant’s 

activity in the cash markets for the 

commodity underlying the position for 

which the application is submitted 

during the past three years.139 These 

proposed application requirements are 

similar to existing requirements for 

recognition under current § 1.48 of a 

NEBFH. 

The Commission also proposes to 

require in § 150.9(a)(3)(ii) and (v) that 

all applicants submit detailed 

information to demonstrate why the 

position satisfies the requirements of 

CEA section 4a(c) 140 and any other 

information necessary to enable the 

exchange to determine, and the 

Commission to verify, whether it is 

appropriate to recognize such a position 

as an NEBFH.141 The Commission 

anticipates that such detailed 

information may include both a factual 

and legal analysis indicating why 

recognition is justified for such 

applicant’s position. The Commission 

expects that if the materials submitted 

in response to proposed § 150.9(a)(3)(ii) 

are relatively comprehensive, requests 

for additional information pursuant to 

proposed § 150.9(a)(3)(v) will be 

relatively infrequent. Nevertheless, the 

Commission believes that it is important 

to include the requirement in proposed 

§ 150.9(a)(3)(v) that applicants submit 

any other information necessary to 

enable the exchange to determine, and 

the Commission to verify, that it is 

appropriate to recognize a position as a 

non-enumerated bona fide hedge so that 

DCMs can protect and manage their 

markets. 

Under the proposal, the Commission 

would permit an exchange to recognize 

a smaller than requested position for 

purposes of exchange-set limits. For 

instance, an exchange might recognize a 

smaller than requested position that 

otherwise satisfies the requirements of 

CEA section 4a(c) if the exchange 

determines that recognizing a larger 

position would be disruptive to the 

exchange’s markets. This is consistent 

with current exchange practice. This is 

also consistent with DCM and SEF core 

principles. DCM core principle 5(A) 

provides that, ‘‘[t]o reduce the potential 

threat of market manipulation or 

congestion (especially during trading 

during the delivery month), the board of 

trade shall adopt for each contract of the 

board of trade, as is necessary and 

appropriate, position limitations or 

position accountability for 

speculators.’’ 142 SEF core principle 6(A) 

contains a similar provision.143

By requiring in proposed § 150.9(a)(3) 

that all applicants submit a core set of 

information and materials, the 

Commission anticipates that all 

exchanges will develop similar NEBFH 

application processes. However, the 

Commission intends that exchanges 

have sufficient discretion to 

accommodate the needs of their market 

participants. The Commission also 

intends to promote fair and open access 

for market participants to obtain 

recognition of compliant derivative 

positions as NEBFHs. 

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144See, e.g., statement of Ron Oppenheimer on 

behalf of the Working Group (supporting an annual 

NEBFH application), statement of Erik Haas, 

Director, Market Regulation, ICE Futures U.S., 

(describing the DCM’s annual exemption review 

process), and statement of Tom LaSala, Chief 

Regulatory Officer, CME Group, (envisioning 

market participants applying for NEBFHs on a 

yearly basis), transcript of the EEMAC open 

meeting, July 29, 2015, at 40, 53, and 58, available 

at http://www.cftc.gov/idc/groups/public/@

aboutcftc/documents/file/

emactranscript072915.pdf. 

145See, e.g., statement of Ron Oppenheimer on 

behalf of the Working Group (noting that exchanges 

retain the ability to revoke an exemption if market 

circumstances warrant), transcript of the EEMAC 

open meeting, July 29, 2015, at 57, available at 

http://www.cftc.gov/idc/groups/public/@aboutcftc/

documents/file/emactranscript072915.pdf. 

146As noted above, the current proposal does not 

impair the ability of any market participant to 

request an interpretation under § 140.99 for 

recognition of a position as a bona fide hedge if an 

exchange rejects their recognition application or 

revokes recognition previously issued. See supra 

note 78 and accompanying text. 

147See supra notes 121–123 and accompanying 

text; see also the discussion of proposed § 150.9(d), 

review of applications by the Commission, below. 

Exchange recognition of a position as a NEBFH 

would allow the market participant to exceed the 

federal position limit until such time that the 

Commission notified the market participant to the 

contrary, pursuant to the proposed review 

procedure that the exchange action was dismissed. 

That is, if a party were to hold positions pursuant 

to a NEBFH recognition granted by the exchange, 

such positions would not be subject to federal 

position limits, unless or until the Commission 

were to determine that such NEBFH recognition is 

inconsistent with the CEA or CFTC regulations 

thereunder. Under this framework, the Commission 

would continue to exercise its authority in this 

regard by reviewing an exchange’s determination 

and verifying whether the facts and circumstances 

in respect of a derivative position satisfy the 

requirements of the Commission’s general 

definition of bona fide hedging position in § 150.1. 

If the Commission determines that the exchangegranted recognition is inconsistent with section 

4a(c) of the Act and the Commission’s general 

definition of bona fide hedging position in § 150.1, 

a market participant would be required to reduce 

the derivative position or otherwise come into 

compliance with position limits within a 

commercially reasonable amount of time. 148 7 U.S.C. 6a(3)(B). 

RFC 11. Is the proposed core set of 

information required of market 

participants adequate for an exchange to 

review applications for NEBFHs? 

e. Application Process Timeline 

Proposed § 150.9(a)(4) sets forth 

certain timing requirements that an 

exchange must include in its rules for 

the NEBFH application process. A 

person intending to rely on an 

exchange’s recognition of a position as 

a NEBFH would be required to submit 

an application in advance and to 

reapply at least on an annual basis. This 

is consistent with commenters’ views 

and DCMs’ current annual exemption 

review process.144 Proposed 

§ 150.9(a)(4) would require an exchange 

to notify an applicant in a timely 

manner whether the position was 

recognized as a NEBFH or rejected, 

including the reasons for any 

rejection.145 On the other hand, and 

consistent with the status quo, proposed 

§ 150.9(a)(4) would allow the exchange 

to revoke, at any time, any recognition 

previously issued pursuant to proposed 

§ 150.9 if the exchange determines the 

recognition is no longer in accord with 

section 4a(c) of the Act.146

The Commission does not propose to 

prescribe time-limited periods (e.g., a 

specific number of days) for submission 

or review of NEBFH applications. The 

Commission proposes only to require 

that an applicant must have received 

recognition for a NEBFH position before 

such applicant exceeds any limit then in 

effect, and that the exchange administer 

the process, and the various steps in the 

process, in a timely manner. This means 

that an exchange must, in a timely 

manner, notify an applicant if a 

submission is incomplete, determine 

whether a position is an NEBFH, and 

notify an applicant whether a position 

will be recognized, or the application 

rejected. The Commission anticipates 

that rules of an exchange may 

nevertheless set deadlines for various 

parts of the application process. The 

Commission does not believe that 

reasonable deadlines or minimum 

review periods are inconsistent with the 

general principle of timely 

administration of the application 

process. An exchange could also 

establish different deadlines for a dualtrack application process. The 

Commission believes that the individual 

exchanges themselves are in the best 

position to evaluate how quickly each 

can administer the application process, 

in order best to accommodate the needs 

of market participants. In addition to 

review of an exchange’s timeline when 

it submits its rules for its application 

process under part 40, the Commission 

would review the exchange’s timeliness 

in the context of a rule enforcement 

review. 

RFC 12. The Commission invites 

comment regarding the discretion 

proposed for exchanges to process 

NEBFH applications in a timely manner. 

f. NEBFH Deemed Recognized Upon 

Exchange Recognition 

Proposed § 150.9(a)(5) makes it clear 

that the position will be deemed to be 

recognized as a NEBFH when an 

exchange recognizes it; proposed 

§ 150.9(d) provides the process through 

which the exchange’s recognition would 

be subject to review by the 

Commission.147 As noted above, DCMs 

currently exercise discretion with regard 

to exchange-set limits to approve 

exemptions meeting the general 

definition of bona fide hedge. The 

Commission works cooperatively with 

DCMs to enforce compliance with 

exchange-set speculative position limits. 

The Commission believes a 

continuation of this cooperative process, 

and an extension to the proposed 

federal position limits, would be 

consistent with the policy objectives in 

CEA section 4a(3)(B).148

g. Market Participant Reporting 

Requirements 

Proposed § 150.9(a)(6) requires 

exchanges that elect to process NEBFH 

applications to promulgate reporting 

rules for applicants who own, hold or 

control positions recognized as 

NEBFHs. The Commission expects that 

the exchanges will promulgate 

enhanced reporting rules in order to 

obtain sufficient information to conduct 

an adequate surveillance program to 

detect and potentially deter excessively 

large positions that may disrupt the 

price discovery process. At a minimum, 

these rules should require applicants to 

report when an NEBFH position has 

been established, and to update and 

maintain the accuracy of such reports. 

These rules should also elicit 

information from applicants that will 

assist exchanges in complying with 

proposed § 150.9(c) regarding exchange 

reports to the Commission. 

RFC 13. Should the Commission 

provide further guidance regarding the 

types of information that exchanges 

should seek to elicit from reporting 

rules with respect to NEBFH positions? 

h. Transparency to Market Participants 

Proposed § 150.9(a)(7) requires an 

exchange to publish on its Web site, no 

less frequently than quarterly, a 

description of each new type of 

derivative position that it recognizes as 

a NEBFH. The Commission envisions 

that each description would be an 

executive summary. The description 

must include a summary describing the 

type of derivative position and an 

explanation of why it qualifies as a 

NEBFH. The Commission believes that 

the exchanges are in the best position 

when quickly crafting these descriptions 

to accommodate an applicant’s desire 

for trading anonymity while promoting 

fair and open access for market 

participants to information regarding 

which positions might be recognized as 

NEBFHs. As discussed below, the 

Commission proposes to spot check 

these summaries pursuant to proposed 

§ 150.9(e). 

RFC 14. Should the Commission 

prescribe that exchanges publish any 

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149 If the exchange determines to request under 

proposed § 150.9(a)(8) that the Commission 

consider the application, the exchange must, under 

proposed § 150.9(a)(4)(v)(C), notify an applicant in 

a timely manner that the exchange has requested 

that the Commission review the application. This 

provision provides the exchanges with the ability 

to request Commission review early in the review 

process, rather than requiring the exchanges to 

process the request, make a determination and only 

then begin the process of Commission review 

provided for under proposed § 150.9(d). The 

Commission notes that although most of its reviews 

would occur after the exchange makes its 

determination, the Commission could, as provided 

for in proposed § 150.9(d)(1), initiate its review, in 

its discretion, at any time. 

150Novel facts and circumstances may present 

particularly complex issues that could benefit from 

extended consideration, given the Commission’s 

current resource constraints. 

151 17 CFR 1.47. 

152Requirements regarding the keeping and 

inspection of all books and records required to be 

kept by the Act or the Commission’s regulations are 

found at § 1.31, 17 CFR 1.31. DCMs and SEFs are 

already required to maintain records of their 

business activities in accordance with the 

requirements of § 1.31 and 17 CFR 38.951. 

153Proposed § 150.9(b) is analogous to the 

requirement in § 1.31 for records to be kept 

regarding any swap or related cash forward 

transaction until the termination, maturity, 

expiration, transfer, assignment, or novation date of 

such transaction and for a period of five years after 

such date. 17 CFR 1.31(a)(1). Other Commission 

requirements for swap record retention take a 

similar approach: DCMs must retain required 

records with respect to each swap throughout the 

life of the swap and for a period of at least five years 

following the final termination of the swap, 17 CFR 

45.2(c), and the records that exchanges are required 

to retain shall be readily accessible throughout the 

life of the swap and for two years following the final 

termination of the swap, 17 CFR 45.2(e)(1). 

154 In addition, the Commission expects that 

records required to be maintained by an exchange 

pursuant to this section would be readily accessible 

during the pendency of any application, and for two 

years following any disposition that did not 

recognize a derivative position as a bona fide hedge. 

155 In the December 2013 position limits proposal, 

persons claiming exemptions under proposed 

§ 150.3 must still ‘‘maintain complete books and 

records concerning all details of their related cash, 

forward, futures, options and swap positions and 

transactions. Furthermore, such persons must make 

such books and records available to the 

Commission upon request under proposed 

§ 150.3(h), which would preserve the ‘special call’ 

rule set forth in current 17 CFR 150.3(b).’’ 78 FR 

75741 (footnote omitted). 

156An exchange could determine to recognize all, 

or a portion, of the commodity derivative position 

in respect of which an application for recognition 

has been submitted, as an NEBFH, provided that 

such determination is made in accordance with the 

requirements of proposed § 150.9 and is consistent 

with the Act and the Commission’s regulations. 

157As proposed in the December 2013 position 

limits proposal, § 150.5(a)(2)(iii) provides, inter 

alia, that for any commodity derivative contract that 

is subject to a speculative position limit under 

§ 150.2, an exchange may limit bona fide hedging 

positions which the exchange determines are not in 

accord with sound commercial practices, or which 

exceed an amount that may be established and 

liquidated in an orderly fashion. Such proposal 

largely mirrors the second half of current § 150.5(d), 

although updated to specify DCMs instead of 

‘‘contract markets’’ as well as to include SEFs. 

158An exchange could determine to recognize all, 

or a portion, of the commodity derivative position 

in respect of which an application for recognition 

has been submitted, as an NEBFH, for different 

contract months or different types of limits (e.g., a 

separate limit level for the spot month). 

specific information regarding 

recognized NEBFHs based on novel 

facts and circumstances? 

RFC 15. Should the Commission 

require exchanges to publish summary 

statistics, such as the number of 

recognized NEBFHs based on non-novel 

facts and circumstances? 

i. Requests for Commission 

Consideration 

An exchange may elect to request the 

Commission review an NEBFH 

application that raises novel or complex 

issues under proposed § 150.9(a)(8), 

using the process set forth in proposed 

§ 150.9(d), discussed below.149 If an 

exchange makes a request pursuant to 

proposed § 150.9(a)(8), the Commission, 

as would be the case for an exchange, 

would not be bound by a time 

limitation. This is because the 

Commission proposes only that NEBFH 

applications be processed in a timely 

manner.150 Essentially, this proposed 

provision largely preserves the 

Commission’s review process under 

current § 1.47,151 except that a market 

participant first seeks recognition of a 

NEBFH from an exchange. 

RFC 16. Does the proposed flexibility 

for exchanges to request Commission 

review provide market participants with 

a sufficient process for review of a 

potential NEBFH? 

ii. Proposed § 150.9(b)—Recordkeeping 

Requirements 

Proposed § 150.9(b) outlines 

recordkeeping requirements for 

exchanges that elect to process nonenumerated bona fide hedge 

applications under proposed § 150.9(a). 

Exchanges must maintain complete 

books and records of all activities 

relating to the processing and 

disposition of applications in a manner 

consistent with the Commission’s 

existing general regulations regarding 

recordkeeping,152 with certain minor 

conforming changes. In consideration of 

the fact that DCMs currently recognize 

NEBFHs for periods of up to a year and 

that the proposal would require annual 

updates, the Commission proposes that 

exchanges keep books and records until 

the termination, maturity, or expiration 

date of any recognition of a NEBFH and 

for a period of five years after such date. 

Five years should provide an adequate 

time period for Commission reviews, 

whether that be a review of an 

exchange’s rule enforcement or a review 

of a market participant’s 

representations. 

Exchanges would be required to store 

and produce records pursuant to current 

§ 1.31 of the Commission’s regulations, 

and would be subject to requests for 

information pursuant to other 

applicable Commission regulations 

including, for example, § 38.5. 

Consistent with current § 1.31,153 the 

Commission expects that these records 

would be readily accessible until the 

termination, maturity, or expiration date 

of the recognition and during the first 

two years of the subsequent five year 

period.154 The Commission does not 

intend in proposed § 150.9(b)(1) to 

create any new obligation for an 

exchange to record conversations with 

applicants, which includes their 

representatives; however, the 

Commission does expect that an 

exchange would preserve any written or 

electronic notes of verbal interactions 

with such parties. 

Finally, the Commission emphasizes 

that parties who avail themselves of 

exemptions under proposed § 150.3(a), 

as revised herein, are subject to the 

recordkeeping requirements of 

§ 150.3(g), as well as requests from the 

Commission for additional information 

under § 150.3(h), each as proposed in 

the December 2013 position limits 

proposal. The Commission may request 

additional information, for example, in 

connection with review of an 

application.155

iii. Proposed § 150.9(c)—Exchange 

Reporting 

The Commission proposes, in 

§ 150.9(c)(1), to require an exchange that 

elects to process NEBFH applications to 

submit a weekly report to the 

Commission. The proposed report 

would provide information regarding 

each commodity derivative position 

recognized by the exchange as an 

NEBFH during the course of the week. 

Information provided in the report 

would include the identity of the 

applicant seeking such recognition, the 

maximum size of the derivative position 

that is recognized by the exchange as an 

NEBFH,156 and, to the extent that the 

exchange determines to limit the size of 

such bona fide hedge position under the 

exchange’s own speculative position 

limits program, the size of any limit 

established by the exchange.157 The 

Commission envisions that the 

proposed report would specify the 

maximum size and/or size limitations 

by contract month and/or type of limit 

(e.g. spot month, single month, or allmonths-combined), as applicable.158

The proposed report would also provide 

information regarding any revocation of, 

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159The Commission believes that the exchange’s 

assignment of a unique identifier to each of the nonenumerated bona fide hedge applications that the 

exchange receives, and, separately, the exchange’s 

assignment of a unique identifier to each type of 

commodity derivative position that the exchange 

recognizes as an NEBFH, would assist the 

Commission’s tracking process. Accordingly, the 

Commission suggests that, as a ‘‘best practice,’’ the 

exchange’s procedures for processing NEBFH 

applications contemplate the assignment of such 

unique identifiers. Pursuant to proposed 

§ 150.9(c)(1)(i), an exchange that assigns such 

unique identifiers would be required to include the 

identifiers in the exchange’s weekly report to the 

Commission. 

160Proposed § 150.9(a)(6) would require an 

exchange to have in place rules requiring an 

applicant to report to the exchange when the 

applicant owns, holds or controls a commodity 

derivative position that the exchange has 

recognized as an NEBFH, and for the applicant to 

report its offsetting cash positions. Pursuant to 

proposed § 150.9(a)(6), such rules must require an 

applicant to update and maintain the accuracy of 

any such report to the exchange. Accordingly, a 

exchange’s submission to the Commission pursuant 

to proposed § 150.9(c)(2) would be expected to 

include any updates, corrections or other 

modifications made by an applicant to a report 

previously submitted to the exchange. 

161The Commission proposes, in § 150.9(f)(1)(ii), 

to delegate to the Director of the Commission’s 

Division of Market Oversight, or such other 

employee or employees as the Director may 

designate from time to time, the authority to 

provide instructions regarding the submission to 

the Commission of information required to be 

reported by an exchange pursuant to proposed 

§ 150.9(c). 

162Proposed § 150.9(c)(2) addresses the 

submission by the exchange of applicant reports to 

the Commission. The timeframe within which an 

applicant would be required to report to the 

exchange that the applicant owns or controls a 

commodity derivative position that the exchange 

has recognized as an NEBFH, would be established 

by the exchange in its rules, as appropriate and in 

accordance with proposed § 150.9(a)(6). An 

exchange could decide to require such a report from 

an applicant more frequently than monthly. 

163The Commission proposes to delegate to the 

Director of the Commission’s Division of Market 

Oversight, or such other employee or employees as 

the Director may designate from time to time, the 

authority to provide instructions for such 

submissions in proposed § 150.9(f)(1)(ii). 

164The Commission proposes, in § 150.9(f)(1)(ii), 

to delegate to the Director of the Commission’s 

Division of Market Oversight, or such other 

employee or employees as the Director may 

designate from time to time, the authority to specify 

on the Forms and Submissions page at www.cftc.gov 

the manner for submitting to the Commission 

information required to be reported by an exchange 

pursuant to proposed § 150.9(c), and to determine 

the format, coding structure and electronic data 

transmission procedures for submitting such 

information. 

165Proposed § 150.9(c)(2) would require reports 

submitted to an exchange pursuant to proposed 

§ 150.9(a)(6), from applicants owning or controlling 

commodity derivative positions that the exchange 

has recognized as NEBFHs, to be submitted to the 

Commission no less frequently than monthly. For 

purposes of proposed § 150.9(c)(2), the timeframe 

set forth in proposed § 150.9(c)(3)(iii) would be 

calculated from the date of a exchange’s submission 

to the Commission, and not from the date of an 

applicant’s report to the exchange. 

or modification to the terms and 

conditions of, a prior determination by 

the exchange to recognize a commodity 

derivative position as an NEBFH. In 

addition, the report would include any 

summary of a type of recognized NEBFH 

that was, during the course of the week, 

published or revised on the exchange’s 

Web site pursuant to proposed 

§ 150.9(a)(7). 

The proposed weekly report would 

support the Commission’s surveillance 

program by facilitating the tracking of 

NEBFHs recognized by exchanges,159

keeping the Commission informed of 

the manner in which an exchange is 

administering its procedures for 

recognizing such NEBFHs. For example, 

the report would make available to the 

Commission, on a regular basis, the 

summaries of types of recognized 

NEBFHs that an exchange posts to its 

Web site pursuant to proposed 

§ 150.9(a)(7). This would facilitate any 

review by the Commission of such 

summaries, pursuant to proposed 

§ 150.9(e), and would help to ensure, if 

the Commission determines that 

revisions to a summary are necessary, 

that such revisions are carried out in a 

timely manner by the exchange. 

In certain instances, information 

included in the proposed weekly report 

may prompt the Commission to request 

records required to be maintained by an 

exchange pursuant to proposed 

§ 150.9(b). For example, it is proposed 

that, for each derivative position 

recognized by the exchange as an 

NEBFH, or any revocation or 

modification of such recognition, the 

report would include a concise 

summary of the applicant’s activity in 

the cash markets for the commodity 

underlying the position. It is the 

Commission’s expectation that this 

summary would focus on the facts and 

circumstances upon which an exchange 

based its determination to recognize a 

commodity derivative position as an 

NEBFH, or to revoke or modify such 

recognition. In light of the information 

provided in the summary, or any other 

information included in the proposed 

weekly report regarding the position, 

the Commission may decide that it is 

appropriate to request the exchange’s 

complete record of the application for 

recognition of the position as an 

NEBFH—in order to determine, for 

example, whether the application 

presents novel or complex issues that 

merit additional analysis pursuant to 

proposed § 150.9(d)(2), or to evaluate 

whether the disposition of the 

application by the exchange was 

consistent with section 4a(c) of the Act 

and the general definition of bona fide 

hedging position in § 150.1. 

Proposed § 150.9(c)(2) would require 

an exchange to submit to the 

Commission any report made to the 

exchange by an applicant, pursuant to 

proposed § 150.9(a)(6), notifying the 

exchange that the applicant owns or 

controls a commodity derivative 

position that the exchange has 

recognized as an NEBFH.160 Unless the 

Commission instructs otherwise,161 the 

exchange would be required to submit 

such applicant reports to the 

Commission no less frequently than 

monthly.162 The exchange’s submission 

of these reports would provide the 

Commission with notice that an 

applicant has taken a commodity 

derivative position that the exchange 

has recognized as an NEBFH, and would 

also show the applicant’s offsetting 

positions in the cash markets. Requiring 

an exchange to submit these applicant 

reports to the Commission would 

therefore support the Commission’s 

surveillance program, by facilitating the 

tracking of NEBFHs recognized by the 

exchange, and helping the Commission 

to ensure that an applicant’s activities 

conform to the terms of recognition that 

the exchange has established. 

Proposed § 150.9(c)(3)(i) and (ii) 

would require an exchange, unless 

instructed otherwise by the 

Commission,163 to submit weekly 

reports under proposed § 150.9(c)(1), 

and applicant reports under proposed 

§ 150.9(c)(2). Proposed § 150.9(c)(3)(i) 

and (ii) contemplate that, in order to 

facilitate the processing of such reports, 

and the analysis of the information 

contained therein, the Commission will 

establish reporting and transmission 

standards, and may require reports to be 

submitted to the Commission using an 

electronic data format, coding structure 

and electronic data transmission 

procedures approved in writing by the 

Commission, as specified on the Forms 

and Submissions page at 

www.cftc.gov.164 Proposed 

§ 150.9(c)(3)(iii) would require such 

reports to be submitted to the 

Commission no later than 9:00 a.m. 

Eastern time on the third business day 

following the report date, unless the 

exchange is otherwise instructed by the 

Commission.165

RFC 17. The Commission requests 

comment on all aspects of the proposed 

reporting requirements. 

iv. Proposed § 150.9(d)—Review of 

Applications by the Commission 

One participant at the June 19, 2014 

Roundtable on Position Limits 

commented that if the Commission were 

to permit exchanges to administer a 

process for NEBFHs, the Commission 

should continue to do ‘‘a certain amount 

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166 John Parsons, Roundtable on Position Limits, 

June 19, 2014, transcript at p. 135. 

167See supra note 66 and accompanying text. As 

noted above, under the proposal, the SRO’s 

recognition is tentative, because the Commission 

would reserve the power to review the recognition, 

subject to the reasonably fixed statutory standards 

in CEA section 4a(c)(2) (directing the CFTC to 

define the term bona fide hedging position) that are 

incorporated into the Commission’s proposed 

general definition of bona fide hedging position in 

§ 150.1. The SRO’s recognition would also be 

constrained by the SRO’s rules, which would be 

subject to CFTC review under the proposal. The 

SROs are parties subject to Commission authority, 

their rules are subject to Commission review and 

their actions are subject to Commission de novo 

review under the proposal—SRO rules and actions 

may be changed by the Commission at any time. In 

addition, it should be noted that the exchange is 

required to make its determination consistent with 

both CEA section 4a(c) and the Commission’s 

general definition of bona fide hedging position in 

§ 150.1. Further, the Commission notes that CEA 

section 4a(c)(1) requires a position to be shown to 

be bona fide as defined by the Commission. 

168 In the December 2013 position limits proposal, 

when discussing the provision of a commercially 

reasonable time period as necessary to exit the 

market in an orderly manner, the Commission 

stated that, generally, it ‘‘believes such time period 

would be less than one business day.’’ 78 FR 75680 

at 75713. 

169 7 U.S.C. 6a(a)(1) (authorizing the Commission 

to exempt transactions normally known to the trade 

as ‘‘spreads’’). DCMs currently process applications 

for exemptions from exchange-set position limits 

for certain spread positions pursuant to CFMA-era 

regulatory parameters. See note 101 for further 

background. 

It should be noted that, in current § 150.3(a)(3), 

the Commission exempts spread positions 

‘‘between single months of a futures contract and/ 

or, on a futures-equivalent basis, options thereon, 

outside of the spread month, in the same crop 

year,’’ subject to certain limitations. 17 CFR 

150.3(a)(3). 

170 7 U.S.C. 6a(a)(3)(B) and 7 U.S.C. 6a(c)(2)(B), 

respectively. 

171CEA section 4a(a)(3)(B) also directs the 

Commission, in establishing position limits, to 

diminish, eliminate, or prevent excessive 

speculation; to deter and prevent market 

manipulation, squeezes, and corners; and to ensure 

that the price discovery function of the underlying 

market is not disrupted. 

172 7 U.S.C. 6a(c)(2)(A). As explained above in 

note 66, CEA section 4a(c)(2) generally requires the 

Commission to define a bona fide hedging position 

as a position that in CEA section 4a(c)(2)(A): Meets 

three tests (a position (1) is a substitute for activity 

in the physical marketing channel, (2) is 

economically appropriate to the reduction of risk, 

and (3) arises from the potential change in value of 

current or anticipated assets, liabilities or services); 

or, in CEA section 4a(c)(2)(B), reduces the risk of 

a swap that was executed opposite a counterparty 

for which such swap would meet the three tests. 

of de novo analysis and review.’’ 166 The 

Commission agrees. Proposed § 150.9(d) 

provides for Commission review of 

applications to ensure that the processes 

administered by the exchange, as well 

as the results of such processes, are 

consistent with the requirements of CEA 

section 4a(c) of the Act and the 

Commission’s regulations 

thereunder.167 The Commission 

proposes to review records required to 

be maintained by an exchange pursuant 

to proposed § 150.9(b); however, the 

Commission may request additional 

information under proposed 

§ 150.9(d)(1)(ii) if, for example, the 

Commission finds additional 

information is needed for its own 

review. 

The Commission could decide to 

review a pending application prior to 

disposition by an exchange, but 

anticipates that it will most likely 

review applications after some action 

has already been taken by an exchange. 

The Commission’s proposal in 

§ 150.9(d)(2) and (3) requires the 

Commission to notify the exchange and 

the applicable applicant that they have 

10 business days to provide any 

supplemental information. This 

approach provides the exchanges and 

the particular market participant with 

an opportunity to respond to any issues 

raised by the Commission. 

During the period of any Commission 

review of an application, an applicant 

could continue to rely upon any 

recognition previously granted by the 

exchange. If the Commission determines 

that remediation is necessary, the 

Commission would provide for a 

commercially reasonable amount of 

time for the market participant to 

comply with limits after announcement 

of the Commission’s decision under 

proposed § 150.9(d)(4). In determining a 

commercially reasonable amount of 

time, the Commission may consider 

factors such as current market 

conditions and the protection of price 

discovery in the market.168

RFC 18. The Commission requests 

comments on all aspects of the proposed 

review process. 

v. Proposed § 150.9(e)—Commission 

Review of Summaries 

While the Commission proposes to 

rely on the expertise of the exchanges to 

summarize and post executive 

summaries of NEBFHs to their 

respective Web sites under proposed 

§ 150.9(a)(7), it also proposes, in 

§ 150.9(e), to review such executive 

summaries to ensure they provide 

adequate disclosure to market 

participants of the potential availability 

of relief from speculative position 

limits. The Commission believes that an 

adequate disclosure would include 

generic facts and circumstances 

sufficient to alert similarly situated 

market participants to the possibility of 

receiving recognition of a NEBFH. Such 

market participants may use this 

information to help evaluate whether to 

apply for recognition of a NEBFH. Thus, 

adequate disclosure should help ensure 

fair and open access to the application 

process. Due to resource constraints, the 

Commission may not be able to preclear each summary, so the Commission 

proposes to spot check executive 

summaries after the fact. 

E. Process for Exemption From Position 

Limits for Certain Spread Positions 

1. Background 

The Commission proposes to permit 

exchanges, by rule, to exempt from 

federal position limits certain spread 

transactions, as authorized by CEA 

section 4a(a)(1),169 and in light of the 

provisions of CEA section 4a(a)(3)(B) 

and CEA section 4a(c)(2)(B).170 In 

particular, CEA section 4a(a)(1) provides 

the Commission with authority to 

exempt from position limits transactions 

normally known to the trade as 

‘‘spreads’’ or ‘‘straddles’’ or ‘‘arbitrage’’ 

or to fix limits for such transactions or 

positions different from limits fixed for 

other transactions or positions. The 

Dodd-Frank Act amended the CEA by 

adding section 4a(a)(3)(B), which now 

directs the Commission, in establishing 

position limits, to ensure, to the 

maximum extent practicable and in its 

discretion, ‘‘sufficient market liquidity 

for bona fide hedgers.’’ 171 In addition, 

the Dodd-Frank Act amendments to the 

CEA in section 4a(c)(2)(B) limited the 

definition of a bona fide hedge to only 

those positions (in addition to those 

included under CEA section 

4a(c)(2)(A)) 172 resulting from a swap 

that was executed opposite a 

counterparty for which the transaction 

would qualify as a bona fide hedging 

transaction, in the event the party to the 

swap is not itself using the swap as a 

bona fide hedging transaction. In this 

regard, the Commission interprets this 

statutory definition to preclude spread 

exemptions for a swap position that was 

executed opposite a counterparty for 

which the transaction would not qualify 

as a bona fide hedging transaction. 

Prior to the passage of the Dodd-Frank 

Act, the Commission exercised its 

exemptive authority pertaining to 

spread transactions in promulgating 

current § 150.3. Current § 150.3 provides 

that the position limits set in § 150.2 

may be exceeded to the extent such 

positions are spread or arbitrage 

positions between single months of a 

futures contract and/or, on a futuresequivalent basis, options thereon, 

outside of the spot month, in the same 

crop year; provided, however, that such 

spread or arbitrage positions, when 

combined with any other net positions 

in the single month, do not exceed the 

all-months limit set forth in § 150.2. In 

addition, the Commission has permitted 

DCMs, in setting their own position 

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173Current § 150.5 applies as non-exclusive 

guidance and acceptable practices for compliance 

with DCM core principle 5. See December 2013 

position limits proposal, 78 FR at 75750–2. 

174 December 2013 position limits proposal, 78 FR 

at 75736. 

175See, e.g., CL–CMC–59634 at 15; Olam 

International Ltd. on February 10, 2014 (‘‘CL– 

Olam–59658’’) at 7; CME Group on February 10, 

2014 (‘‘CL–CME –59718’’) at 69–71; Citadel LLC on 

February 10, 2014 (‘‘CL–Citadel–59717’’) at 8, 9; 

Armajaro Asset Management (‘‘Amajaro’’) on 

February 10, 2014 (‘‘CL–Armajaro–59729’’) at 2; ICE 

Futures U.S. on February 10, 2014 (‘‘CL–ICEUS– 

59645’’) at 8–10. 

176See CL–CMC–59634 at 15; CL–Olam–59658 at 

7; CL–CME–59718 at 71; CL–Armajaro–59729 at 2; 

CL–ICEUS–59645 at 8–10. 

177See CL–Olam–59658 at 7; CL–CME–59718 at 

71; CL–ICEUS–59645 at 10. 

178See note 63, regarding Commission authority 

to recognize spreads under CEA section 4a(a)(1). 

Any action of the exchange to recognize a spread, 

pursuant to rules filed with the Commission, would 

be subject to review and revocation by the 

Commission. 

limits under the terms of current 

§ 150.5(a), to exempt spread, straddle or 

arbitrage positions or to fix limits that 

apply to such positions which are 

different from limits fixed for other 

positions.173

The December 2013 position limits 

proposal deleted the exemption in 

current § 150.3(a)(3) for spread or 

arbitrage positions between single 

months of a futures contract or options 

thereon, outside the spot month; the 

Commission instead proposed to 

maintain the current practice in § 150.2 

of setting single-month limits at the 

same levels as all-months limits, 

rendering the ‘‘spread’’ exemption 

unnecessary.174 In particular, the spread 

exemption set forth in current 

§ 150.3(a)(3) permits a spread trader to 

exceed single month limits only to the 

extent of the all months limit. Since 

§ 150.2 as proposed in the December 

2013 position limits proposal sets single 

month limits at the same level as all 

months limits, the existing spread 

exemption no longer provides useful 

relief. 

Further, the December 2013 position 

limits proposal would codify guidance 

in proposed § 150.5(a)(2)(ii) to allow an 

exchange to grant exemptions from 

exchange-set position limits for 

intramarket and intermarket spread 

positions (as those terms are defined in 

§ 150.1 as proposed in the December 

2013 position limits proposal) involving 

commodity derivative contracts subject 

to the federal limits. To be eligible for 

exemption under § 150.5(a)(2)(ii) as 

proposed in the December 2013 position 

limits proposal, intermarket and 

intramarket spread positions would 

have to be outside of the spot month for 

physical delivery contracts, and 

intramarket spread positions could not 

exceed the federal all-months limit 

when combined with any other net 

positions in the single month. As 

proposed in the December 2013 position 

limits proposal, § 150.5(a)(2)(iii) would 

require traders to apply to the exchange 

for any exemption, including spread 

exemptions, from its speculative 

position limit rules. 

Several commenters have requested 

that the Commission provide a spread 

exemption to federal position limits.175

Of these commenters, most urged the 

Commission to recognize spread 

exemptions in the spot month as well as 

non-spot months.176 Several of these 

commenters noted that the 

Commission’s proposal would permit 

exchanges to grant spread exemptions 

for exchange-set limits in commodity 

derivative contracts subject to Federal 

limits, and recommended that the 

Commission establish a process for 

granting such spread exemptions for 

purposes of Federal limits.177

In response to these comments, the 

Commission now proposes to permit 

exchanges to process and grant 

applications for spread exemptions from 

federal position limits. Most, if not all, 

DCMs already have rules in place to 

process and grant applications for 

spread exemptions from exchange-set 

position limits pursuant to Part 38 of the 

Commission’s regulations (in particular, 

current §§ 38.300 and 38.301) and 

current § 150.5. As noted above, the 

Commission has a long history of 

overseeing the performance of the DCMs 

in granting appropriate spread 

exemptions under current exchange 

rules regarding exchange-set position 

limits and believes that it would be 

efficient, and in the best interest of the 

markets, in light of current resource 

constraints, to rely on the exchanges to 

process applications for spread 

exemptions from federal position limits. 

In addition, the Commission observes 

because many market participants may 

be familiar with current DCM practices 

regarding spread exemptions, permitting 

DCMs to build on current practice may 

lower the burden on market participants 

and reduce duplicative filings at the 

exchanges and the Commission. As 

noted, this plan would permit 

exchanges to provide market 

participants with spread exemptions, 

pursuant to exchange rules submitted to 

the Commission; however, the 

Commission would retain the authority 

to review—and, if necessary, reverse— 

the exchanges’ actions. 

RFC 19. Would permitting exchanges 

to process applications for spread 

exemptions from federal limits, subject 

to Commission review, provide for an 

efficient implementation of the 

Commission’s statutory authority to 

exempt such spread positions? 

2. Spread Exemption Proposal 

i. Proposed § 150.10(a)—Requirements 

for Application Process 

The Commission contemplates in 

proposed § 150.10(a)(1) that exchanges 

may voluntarily elect to process spread 

exemption applications, by filing new 

rules or rule amendments with the 

Commission pursuant to part 40 of the 

Commission’s regulations.178 The 

proposed process under § 150.10(a) is 

substantially similar to that described 

above for proposed § 150.9(a). For 

example, proposed § 150.10(a)(1) 

provides that, with respect to a 

commodity derivative position for 

which an exchange elects to process 

spread exemption applications, (i) the 

exchange must list for trading at least 

one component of the spread or must 

list for trading at least one contract that 

is a referenced contract included in at 

least one component of the spread; and 

(ii) any such exchange contract must be 

actively traded and subject to position 

limits for at least one year on that 

exchange. As noted with respect to the 

process outlined above for proposed 

§ 150.9(a), the Commission believes it is 

appropriate that an exchange may 

process spread exemptions only if it has 

at least one year of experience 

overseeing exchange-set position limits 

in an actively traded referenced contract 

that is in the same commodity as that of 

at least one component of the spread. 

The Commission believes that an 

exchange may not be familiar enough 

with the specific needs and differing 

practices of the participants in those 

markets for which an individual 

exchange does not list any actively 

traded referenced contract in a 

particular commodity. If a component of 

a spread is not actively traded on an 

exchange that elects to process spread 

exemption applications, such exchange 

might not be incentivized to protect or 

manage the relevant commodity market, 

and the interests of such exchange 

might not be aligned with the policy 

objectives of the Commission as 

expressed in CEA section 4a(a)(3)(B). 

The Commission expects that an 

individual exchange will describe how 

it will determine whether a particular 

component of a spread is actively traded 

in its rule submission, based on its 

familiarity with the specific needs and 

differing practices of the participants in 

the relevant market. 

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179This proposal is consistent with the 

Commission’s interpretation in the December 2013 

position limits proposal that CEA section 4a(c)(2)(b) 

is a mandate from Congress to narrow the scope of 

what constitutes a bona fide hedge in the context 

of index trading activities. ‘‘Financial products are 

not substitutes for positions taken or to be taken in 

a physical marketing channel. Thus, the offset of 

financial risks from financial products is 

inconsistent with the proposed definition of bona 

fide hedging for physical commodities.’’ December 

2013 position limits proposal, 78 FR at 75740. See 

also the discussion of the temporary substitute test, 

id. at 75708–9. 

180See CL–CME–59718 at 71. 

181CEA section 4a(a)(3)(B)(iii); 7 U.S.C. 

6a(a)(3)(B)(iii). See also the discussion of proposed 

§ 150.10(a)(3)(ii), below. 

182See proposed § 150.10(a)(3)(ii). 

183See proposed § 150.10(a)(4)(vi). 

184The Commission could, for example, revoke or 

confirm exchange-granted exemptions. 

185See also supra notes 56 and 132 and 

accompanying text. 

186The conditional spot month limit exemption 

and the related Form 504 were discussed in the 

December 2013 position limits proposal (78 FR 

75680 at 75736–8). A copy of the proposed form 

was submitted to the Federal Register (id. at 75803– 

8) to ensure the public had the opportunity to 

comment on the information required by the 

proposed form. The Commission estimated the 

number of market participants that would be 

required to file the form in the December 2013 

position limits proposal (id. at 75783). Commenters 

are encouraged to review and comment on 

proposed Form 504 in the context of this current 

proposal. 

Consistent with the restrictions 

regarding the offset of risks arising from 

a swap position in CEA section 

4a(c)(2)(B), proposed § 150.10(a)(1) 

would not permit an exchange to 

recognize a spread between a 

commodity index contract and one or 

more referenced contracts. That is, an 

exchange may not grant a spread 

exemption where a bona fide hedge 

position could not be recognized for a 

pass through swap offset of a 

commodity index contract.179

The Commission notes that for intercommodity spreads in which different 

components of the spread are traded on 

different exchanges, the exemption 

granted by one exchange would be 

recognized by the Commission as an 

exemption from federal limits for the 

applicable referenced contract(s), but 

would not bind the exchange(s) that list 

the other components of the spread to 

recognize the exemption for purposes of 

that other exchange(s)’ position limits. 

In such cases, a trader seeking such 

inter-commodity spread exemptions 

would need to apply separately for a 

spread exemption from each exchangeset position limit. 

Proposed § 150.10(a)(2) specifies the 

type of spreads that an exchange may 

exempt from position limits, including 

calendar spreads; quality differential 

spreads; processing spreads (such as 

energy ‘‘crack’’ or soybean ‘‘crush’’ 

spreads); and product or by-product 

differential spreads. This list is not 

exhaustive, but reflects common types 

of spread activity that may enhance 

liquidity in commodity derivative 

markets, thereby facilitating the ability 

of bona-fide hedgers to put on and offset 

positions in those markets. For example, 

trading activity in many commodity 

derivative markets is concentrated in 

the nearby contract month, but a hedger 

may need to offset risk in deferred 

months where derivative trading 

activity may be less active. A calendar 

spread trader could provide such 

liquidity without exposing himself or 

herself to the price risk inherent in an 

outright position in a deferred month. 

Processing spreads can serve a similar 

function. For example, a soybean 

processor may seek to hedge his or her 

processing costs by entering into a 

‘‘crush’’ spread, i.e., going long 

soybeans and short soybean meal and 

oil. A speculator could facilitate the 

hedger’s ability to do such a transaction 

by entering into a ‘‘reverse crush’’ 

spread (i.e., going short soybeans and 

long soybean meal and oil). Quality 

differential spreads, and product or byproduct differential spreads, may serve 

similar liquidity-enhancing functions 

when spreading a position in an actively 

traded commodity derivatives market 

such as CBOT Wheat against a position 

in another actively traded market, such 

as MGEX Wheat. 

The Commission anticipates that a 

spread exemption request might include 

spreads that are ‘‘legged in,’’ that is, 

carried out in two steps, or alternatively 

are ‘‘combination trades,’’ that is, all 

components of the spread are executed 

simultaneously. 

This proposal would not limit the 

granting of spread exemptions to 

positions outside the spot month, unlike 

the existing spread exemption 

provisions in current § 150.3(a)(3), or in 

§ 150.5(a)(2)(ii) as proposed in the 

December 2013 position limits proposal. 

The proposal herein responds to 

specific requests of commenters to 

permit spread exemptions in the spot 

month. For example, the CME 

recommended ‘‘the Commission 

reaffirm in DCMs the discretion to apply 

their knowledge of individual 

commodity markets and their 

judgement, as to whether allowing 

intermarket spread exemptions in the 

spot month for physical-delivery 

contracts is appropriate.’’ 180

The Commission proposes to revise 

the December 2013 position limits 

proposal in the manner described above 

because, as noted in the examples 

above, permitting spread exemptions in 

the spot month would further one of the 

four policy objectives set forth in 

section 4a(a)(3)(b) of the Act: To ensure 

sufficient market liquidity for bona fide 

hedgers.181 This policy objective is 

incorporated into the proposal in its 

requirements that: (i) The applicant 

provide detailed information 

demonstrating why the spread position 

should be exempted from position 

limits, including how the exemption 

would further the purposes of CEA 

section 4a(a)(3)(B); 182 and (ii) the 

exchange determines whether the 

spread position (for which a market 

participant was seeking an exemption) 

would further the purposes of CEA 

section 4a(a)(3)(B).183 Moreover, the 

Commission retains the ability to review 

the exchange rules as well as to review 

how an exchange enforces those 

rules.184

The Commission, however, remains 

concerned, among other things, about 

protecting the price discovery process in 

the core referenced futures contracts, 

particularly as those contracts approach 

expiration. Accordingly, as an 

alternative, the Commission is also 

considering whether to prohibit an 

exchange from granting spread 

exemptions that would be applicable 

during the lesser of the last five days of 

trading or the time period for the spot 

month. 

RFC 20: Are there concerns regarding 

the applicability of spread exemptions 

in the spot month that the Commission 

should consider? Should the 

Commission, parallel to the 

requirements of current § 1.3(z)(2), 

provide that such spread positions not 

be exempted during the lesser of the last 

five days of trading or the time period 

for the spot month? 185

RFC 21: If the Commission permits 

exchanges to grant spread positions 

applicable in the spot month, should 

recognition of NEBFH positions be 

conditioned upon additional filings 

similar to the proposed Form 504 that 

is required for the proposed conditional 

spot month limit exemption? 186

Proposed Form 504 would require 

additional information on the market 

participant’s cash market holdings for 

each day of the spot month period. 

Under this alternative, market 

participants would submit daily cash 

position information to an exchange in 

a format determined by the exchange, 

which would then be required to 

forward that information to the 

Commission in a process similar to that 

proposed under § 150.10(c)(2). 

RFC 22: Alternatively, if the 

Commission permits exchanges to grant 

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187See also infra note 192 and accompanying text 

(describing the DCM’s responsibility under its 

application process to make this determination in 

a timely manner). 

188See ICE Futures U.S. Rule 6.29(e). 

189Carrying charges include insurance, storage 

fees, and financing costs, as well as other costs such 

as aging discounts that are specific to individual 

commodities. The ICE Futures U.S. rules require an 

applicant to provide: (i) Its cost of carry; (ii) the 

minimum spread at which the applicant will enter 

into a straddle position and which would result in 

an profit for the applicant; and (iii) the quantity of 

stocks in exchange-licensed warehouses that it 

already owns. The applicant’s entire long position 

carried into the notice period must have been put 

on as a spread at a differential that covers the 

applicant’s cost of carry. See Rule Enforcement 

Review of ICE Futures U.S., July 22, 2014 (‘‘ICE 

Futures U.S. Rule Enforcement Review’’), at 44–45, 

available at http://www.cftc.gov/IndustryOversight/

TradingOrganizations/DCMs/dcmruleenf. 

190 ICE Futures U.S. Rule 6.29(e) (at the time of 

the target period of the ICE Futures U.S. Rule 

Enforcement Review (June 15, 2011 to June 15, 

2012), the cash-and-carry provision currently found 

in ICE Futures U.S. Rule 6.29(e) was found in ICE 

Futures U.S. Rule 6.27(e)). Further, under the 

exchange’s rules, additional conditions may also 

apply. 

191 ICE Futures U.S. Rule Enforcement Review, at 

45. 

spread exemptions applicable in the 

spot month, should the Commission 

require market participants to file 

proposed Form 504 with the 

Commission? Under this alternative, the 

relevant cash market information would 

be submitted directly to the 

Commission, eliminating the need for 

the exchange to intermediate. The 

Commission would adjust the title of 

proposed Form 504 to clarify that the 

form would be used for all daily spot 

month cash position reporting purposes, 

not just the proposed requirements of 

the conditional spot month limit 

exemption in proposed § 150.3(c). 

Proposed 150.10(a)(3) sets forth a core 

set of information and materials that all 

applicants must submit to enable an 

exchange to determine, and the 

Commission to verify, whether the facts 

and circumstances attendant to a 

position further the policy objectives of 

CEA section 4a(a)(3)(B). In particular, 

the applicant must demonstrate, and the 

exchange must determine, that 

exempting the spread position from 

position limits would, to the maximum 

extent practicable, ensure sufficient 

market liquidity for bona fide hedgers, 

but not unduly reduce the effectiveness 

of position limits to diminish, eliminate 

or prevent excessive speculation; deter 

and prevent market manipulation, 

squeezes, and corners; and ensure that 

the price discovery function of the 

underlying market is not disrupted.187

One DCM, ICE Futures U.S., currently 

grants certain types of spread 

exemptions that the Commission is 

concerned may not be consistent with 

these policy objectives.188 ICE Futures 

U.S. allows ‘‘cash-and-carry’’ spread 

exemptions to exchange-set limits, 

which permit a market participant to 

hold a long position greater than the 

speculative limit in the spot month and 

an equivalent short position in the 

following month in order to guarantee a 

return that, at minimum, covers its 

carrying charges, i.e., the cost of 

financing, insuring, and storing the 

physical inventory until the next 

expiration.189 Market participants are 

able to take physical delivery in the 

nearby month and redeliver the same 

product in a deferred month, often at a 

profit. The Commission notes that while 

market participants are permitted to redeliver the physical commodity, they 

are under no obligation to do so. 

ICE Futures U.S.’s rules condition the 

cash-and-carry spread exemption upon 

the applicant’s agreement that ‘‘before 

the price of the nearby contract month 

rises to a premium to the second (2nd) 

contract month, it will liquidate all long 

positions in the nearby contract 

month.’’ 190 The Commission 

understands that ICE Futures U.S. 

requires traders to provide information 

about their expected cost of carry, 

which is used by the exchange to 

determine the levels by which the trader 

has to reduce the position. Those exit 

points are then communicated to the 

applicant when the exchange responds 

to the trader’s hedge exemption request. 

The Commission is considering 

whether to impose on the exchange a 

requirement to ensure exit points in 

cash-and-carry spread exemptions are 

appropriate to facilitate an orderly 

liquidation in the expiring futures 

contract. The Commission is concerned 

that a large demand for delivery on cash 

and carry positions may distort the price 

of the expiring futures price upwards. 

This may particularly be a concern in 

those commodity markets where the 

cash spot price is discovered in the 

expiring futures contract. 

In a recent Rule Enforcement Review, 

ICE Futures U.S. opined that such 

exemptions are ‘‘beneficial for the 

market, particularly when there are 

plentiful warehouse stocks, which 

typically is the only time when the 

opportunity exists to utilize the 

exemption,’’ maintaining that the 

exchange’s rules and procedures are 

effective in ensuring orderly 

liquidations.191 The Commission 

remains concerned, however, about 

these exemptions and their impact on 

the spot month price. The Commission 

is still reviewing the effectiveness of the 

exchange’s cash-and-carry spread 

exemptions and the procedure by which 

they are granted. 

As an alternative to providing 

exchanges with discretion to consider 

granting cash-and-carry spread 

exemptions, the Commission is 

considering prohibiting cash-and-carry 

spread exemptions to position limits. In 

this regard, the Commission does not 

grant such exemptions to current federal 

position limits. As another alternative, 

the Commission is considering 

permitting exchanges to grant cash-andcarry spread exemptions, but would 

require suitable safeguards be placed on 

such exemptions. For example, the 

Commission could require cash-andcarry spread exemptions be conditioned 

on a market participant reducing 

positions below speculative limit levels 

in a timely manner once current market 

prices no longer permit entry into a full 

carry transaction, rather than the less 

stringent condition of ICE Futures U.S. 

that a trader reduce positions ‘‘before 

the price of the nearby contract month 

rises to a premium to the second (2nd) 

contract month.’’ 

RFC 23: Do cash-and-carry spread 

exemptions further the policy objectives 

of the Act, as outlined in proposed 

§ 150.10(a)(3)? Why or why not? Do cash 

and carry spread exemptions facilitate 

an orderly liquidation? Do these 

exemptions impede convergence or 

distort the price of the expiring futures 

contract? 

RFC 24: If cash-and-carry spread 

exemptions are allowed, what 

conditions should be placed on the 

exemptions? For example, on what basis 

should a trader be required to exit 

futures positions above position limit 

levels? Should such exemptions be 

conditioned, for example, to require a 

market participant to reduce the 

positions below speculative limit levels 

in a timely manner once current market 

prices no longer permit entry into a full 

carry transaction? Are there other types 

of spread exemptions that may not 

further the policy objectives of CEA 

section 4a and, thus, should be 

prohibited or conditioned? 

RFC 25: With cash-and-carry spread 

exemptions still under review by the 

Commission, should the proposed rules 

allow such exemptions to be granted 

under proposed § 150.10? Why or why 

not? 

RFC 26: If the proposed rules do not 

prohibit such exemptions, an exchange 

could determine that cash-and-carry 

spread exemptions—or another type of 

spread exemption—further the policy 

objectives in proposed § 150.10(a)(3) 

and so begin to grant such exemptions 

from federal position limits. If, after 

finishing its review, the Commission 

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192For example, proposed 150.9(a)(4) provides 

that: (i) A person intending to rely on a exchange’s 

exemption from position limits would be required 

to submit an application in advance and to reapply 

at least on an annual basis; (ii) the exchange would 

be required to notify an applicant in a timely 

manner whether the position was exempted, and 

reasons for any rejection; and (iii) the exchange 

would be able to revoke, at any time, any 

recognition previously issued pursuant to proposed 

§ 150.9 if the exchange determined the recognition 

was no longer in accord with section 4a(c) of the 

Act. 

193See supra note 171 and accompanying text. 

194See the discussion of the NEBFH application 

process in Sections II(C)(3)(ii)–(v) of the 

Supplementary Information above. 

195As proposed in the December 2013 position 

limits proposal, § 150.7 provides a process for 

recognition as bona fide hedge positions for: 

Unfilled anticipated requirements, unsold 

anticipated production, anticipated royalties, 

anticipated service contract payments or receipts, or 

anticipatory cross-commodity hedges under the 

provisions of paragraphs (3)(iii), (4)(i), (4)(iii), 4(iv) 

or (5), respectively, of the definition of bona fide 

hedging position in § 150.1. These types of 

anticipatory positions do not implicate commodity 

index contracts, in contrast to the positions 

discussed in notes 134 and 180 and the 

accompanying text. 

196 17 CFR 1.48 (providing a process for persons 

to demonstrate NEBFH falls within the scope of 

§ 1.3(z)(1)). As noted in the December 2013 position 

limits proposal, ‘‘On September 28, 2012, the 

District Court for the District of Columbia vacated 

the part 151 Rulemaking with the exception of the 

amendments to § 150.2. 887 F. Supp. 2d 259 (D.D.C. 

2012). Vacating the part 151 Rulemaking, with the 

exception of the amendments to § 150.2, means that 

as things stand now, it is as if the Commission had 

never adopted any part of the part 151 Rulemaking 

other than the amendments to § 150.2.’’ December 

2013 position limits proposal, 78 FR at 75740, note 

478. 

Current § 1.48 can be found at https://www.gpo.

gov/fdsys/browse/collectionCfr.action?collection

Code=CFR&searchPath=Title+17%2FChapter

+I%2FPart+1%2FSubjgrp&oldPath=Title+

17%2FChapter+I%2FPart+1&isCollapsed=true&

selectedYearFrom=2010&ycord=594. 

197See December 2013 position limits proposal, 

78 FR at 75746. 

198CL–AGA–60382 at 13. 

disagrees with the exchange’s 

determination, is the proposed process 

in § 150.10(d) for reviewing exemptions 

sufficient to address any concerns 

raised? 

Under the proposal, an exchange’s 

rules would require an applicant to 

submit to the exchange a core set of 

information and materials that would 

include, at a minimum: (i) A description 

of the spread position for which the 

application is submitted, including 

details on all components of the spread; 

(ii) detailed information to demonstrate 

why the spread position should be 

exempted from position limits, 

including how the exemption would 

further the purposes of CEA section 

4a(a)(3)(B); and (iii) a statement 

concerning the maximum size of all 

gross positions in derivative contracts to 

be acquired by the applicant during the 

year after the application is submitted. 

Further, an exchange would not be 

permitted to grant a spread exemption 

request that would be contrary to the 

requirements for a pass-through swap 

offset position in CEA section 

4a(c)(2)(B), which the Commission 

interprets to preclude spread 

exemptions for a swap position that was 

executed opposite a counterparty for 

which the transaction would not qualify 

as a bona fide hedging transaction. The 

requirement that an applicant specify a 

maximum size of all gross positions to 

be acquired will enable an exchange to 

more effectively set a cap on a market 

participant’s spread position. Such a 

cap could reasonably take into account 

the specific liquidity needs of the 

marketplace and the ability of the 

spread position to be put on and offset 

in an orderly fashion and without 

causing market disruptions. The 

Commission expects that an exchange 

would be particularly attentive to the 

size of any component of a spread 

position it permits to be held in the spot 

month in light of its obligation to 

consider, in granting such spread 

exemptions, the goals of deterring and 

preventing market manipulation, 

squeezes, and corners. 

RFC 27: Does the application process 

solicit sufficient information for an 

exchange to consider whether a spread 

exemption would, to the maximum 

extent practicable, further the policy 

objectives of CEA section 4a(a)(3)(B)? 

For example, how would an exchange 

determine whether an applicant for a 

spread exemption may provide 

liquidity, such that the goal of ensuring 

sufficient market liquidity for bona-fide 

hedgers would be furthered by the 

spread exemption? 

RFC 28: How would exchanges 

oversee or monitor exemptions that 

have been granted, and, if the exchange 

determines it necessary, revoke the 

exemption? 

Proposed § 150.10(a)(4) sets forth 

certain timing requirements that an 

exchange must include in its rules for 

the spread application process. While 

these timing requirements are similar to 

those under proposed § 150.9(a)(4),192

the exchange under proposed 

§ 150.10(a)(4) must also determine in a 

timely manner whether the facts and 

circumstances attendant to a position 

further the policy objectives of CEA 

section 4a(a)(3)(B).193 Finally, the 

spread exemption application processes 

proposed in § 150.10(a)(5), (6), (7), and 

(8) are all substantially similar to those 

proposed under § 150.9(a)(5), (6), (7), 

and (8). 

ii. Recordkeeping and Reporting 

Requirements, and Review of 

Applications and Summaries by 

Commission 

The proposed processes under 

§ 150.10(b) Recordkeeping, § 150.10(c) 

Reports to the Commission; § 150.10(d) 

Review of Applications by the 

Commission; § 150.10(e) Review of 

Summaries by the Commission; and 

§ 150.10(f) Delegation of Authority to 

the Director of the Division of Market 

Oversight are substantially similar to the 

corresponding provisions in § 150.9(b) 

through (f), as described above.194

Hence, the Commission does not repeat 

the discussion here. 

RFC 29: Is it appropriate to have the 

same processes under § 150.10(b) 

through (f) for spread exemptions as 

proposed for NEBFHs outlined under 

§ 150.09(b) through (f)? If no, explain 

why and how those processes should 

differ. 

F. Recognition of Positions as 

Enumerated Anticipatory Bona Fide 

Hedges 

1. Background 

In the December 2013 position limits 

proposal, the Commission proposed 

§ 150.7, requirements for anticipatory 

bona fide hedging position 

exemptions,195 to replace current 

§ 1.48,196 which provides requirements 

for classification of certain anticipatory 

bona fide hedge positions under current 

§ 1.3(z)(2) (i)(B) or (ii)(C) of the 

Commission’s regulations. As proposed 

in the December 2013 position limits 

proposal, § 150.7 would require market 

participants to file statements with the 

Commission regarding certain 

anticipatory hedges, which would 

become effective absent Commission 

action or inquiry ten days after 

submission.197 The Commission now 

proposes to supplement the process 

proposed in the December 2013 position 

limits proposal by allowing exchanges, 

as an alternative, to review requests for 

recognition of such enumerated 

anticipatory bona fide hedging 

exemptions pursuant to exchange rules 

submitted to the Commission. 

In response to the December 2013 

position limits proposal, the 

Commission has received comments 

that suggested that the exchanges would 

be better equipped to recognize nonenumerated hedge positions and 

anticipatory hedging positions. 

For example, one commenter noted 

that the exchanges have a long history 

of enforcing position limits and are in 

a much better position than the 

Commission to judge the applicant’s 

hedging needs and to set an appropriate 

level for the hedge.198 According to 

another commenter, providing the 

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199PAAP on February 10, 2014 (‘‘CL–PAAP– 

59664’’) at 3. 

200BG Energy on February 10, 2014 (‘‘CL–BG 

Energy–59656’’) at 11. 

201EDF Trading on March 30, 2015 (‘‘CL–EDF– 

60398’’) at 3–4. 

202CL–EDF–60398 at 5. 

203As noted above, the December 2013 position 

limits proposal provided a process, under § 150.7, 

for recognition as bona fide hedging positions for 

unfilled anticipated requirements, unsold 

anticipated production, anticipated royalties, 

anticipated service contract payments or receipts, or 

anticipatory cross-commodity hedges under the 

provisions of paragraphs (3)(iii), (4)(i), (4)(iii), 4(iv) 

or (5), respectively, of the definition of bona fide 

hedging position in § 150.1. See supra note 196 and 

accompanying text. 

204See December 2013 position limits proposal, 

78 FR at 75746. 

exchanges with the ability to grant 

hedge exemptions for federal limits in 

conjunction with the grant of an 

exchange hedge exemption would create 

consistency and efficiency, and take 

advantage of the expertise gained by 

exchanges in granting hedge exemptions 

from position limits over many years.199

A third asserted that the proposed 

requirement to file Form 704 is ‘‘unduly 

burdensome and commercially 

impracticable,’’ and requests that the 

Commission ‘‘allow the exchanges to 

continue to grant annual hedge 

exemptions, which do not include 

onerous reporting requirements.’’ 200 A 

fourth commenter requested that the 

Commission consider incorporating the 

proposed position limits regime into the 

existing framework managed by the 

exchanges, stating that market 

participants and exchanges alike are 

comfortable and have a unique 

familiarity with the current futuresexchange-set position limits and 

aggregation processes, and have 

developed an effective working 

relationship.201 This commenter also 

stated its belief that the current 

framework regarding hedge exemptions 

provides commercial market 

participants with the efficacy and the 

timeliness needed to ensure they are 

able to hedge their risks.202

2. Enumerated Anticipatory Bona Fide 

Hedge Exemption Proposal 

While the Commission continues to 

consider comments regarding proposed 

§ 150.7, it is expected that a number of 

anticipatory bona fide hedging positions 

will be enumerated in the final rule, as 

proposed.203 In this current proposal, 

the Commission proposes that 

exchanges, pursuant to exchange rules 

submitted to the Commission, could 

review requests for recognition of such 

enumerated anticipatory bona fide 

hedging exemptions, as an alternative to 

the process set forth in the December 

2013 position limits proposal that 

required market participants to file a 

statement with the Commission.204

Similar to the current DCM rule 

framework and application process 

noted above for the recognition of 

NEBFH positions for purposes of 

exchange limits, most, if not all, DCMs 

already have some sort of framework 

and application process allowing market 

participants to request exemptions from 

exchange position limits for anticipatory 

bona fide hedge positions. 

Proposed § 150.11 would permit 

exchanges to recognize certain 

anticipatory bona fide hedge positions, 

such as unfilled anticipated 

requirements, unsold anticipated 

production, anticipated royalties, 

anticipated service contract payments or 

receipts, or anticipatory crosscommodity hedges. Under proposed 

§ 150.11, market participants could 

continue to work with exchanges to 

request the exemption. In addition, 

proposed § 150.11 would allow 

exchanges to adopt a shorter timeline 

for processing the exemption 

applications than under § 150.7 as 

proposed in the December 2013 position 

limits proposal. Under proposed 

§ 150.11, an exchange could potentially 

recognize a position as a bona fide 

hedge in fewer than ten days after filing. 

In contrast, § 150.7 as proposed in the 

December 2013 position limits proposal, 

would provide the Commission with a 

full ten days after receipt of a filing to 

reject the position as a bona fide hedge 

before a filing would become effective. 

The process under proposed 

§ 150.11(a) is like the process under 

proposed § 150.9(a) described above. 

For example, an exchange with at least 

one year of experience and expertise 

administering position limits could 

elect to adopt rules to recognize 

commodity derivative positions as 

enumerated anticipatory bona fide 

hedges. However, it is different from the 

process under proposed § 150.9(a) in 

that the Commission does not propose 

to permit separate processes for 

applications based on novel versus nonnovel facts and circumstances. The 

Commission determined to define 

certain anticipatory positions as 

enumerated bona fide hedges when it 

adopted current § 1.3(z)(2). The 

December 2013 position limits proposal 

does not change this determination. 

Consequently, the Commission does not 

anticipate that applications for 

recognition of enumerated anticipatory 

bona fide hedge positions would be 

based on novel facts and circumstances. 

For the same reason, proposed 

§ 150.11(a) does not require exchanges 

to post summaries of any enumerated 

anticipatory bona fide hedge positions. 

Other simplifications follow from this 

difference. 

In addition, the application process 

established by exchanges under 

proposed § 150.11(a) addresses the 

information exchanges should elicit in 

the application process by citing to the 

information required under § 150.7(d) as 

proposed in the December 2013 position 

limits proposal. Moreover, the reporting 

requirements for applicants under 

proposed § 150.11(a)(5) differ from the 

reporting requirements under proposed 

§ 150.9(a)(6). Under proposed 

§ 150.11(a)(5), applicants would be 

required to file a report with the 

Commission pursuant to § 150.7 as 

proposed in the December 2013 position 

limits proposal and a copy with the 

exchange. Proposed § 150.9(a)(6), on the 

other hand, requires the applicant to file 

reports with the exchange recognizing 

the position, and additionally requires 

under proposed § 150.9(c)(2) that the 

exchange would provide such 

information to the Commission on a 

monthly basis. 

RFC 30: The Commission requests 

comments on all aspects of proposed 

§ 150.11, including whether the 

Commission should consider any other 

factors in addition to those listed in 

proposed § 150.11(a)(1)(i), (ii), (iii), (iv) 

and (v). 

Finally, in order to correct some 

errors, the Commission is proposing 

technical edits to § 150.7 as it was 

proposed in the December 2013 position 

limits proposal. The reference to 

paragraph (f) in the last sentence in 

§ 150.7(b) as proposed in the December 

2013 position limits proposal should 

instead be a reference to paragraph (h). 

And the introductory language to 

§ 150.7(h) as proposed in the December 

2013 position limits proposal, ‘‘Sales or 

purchases of commodity derivative 

contracts considered to be bona fide 

hedging positions under paragraphs 

3(iii)(A) or 4(i) of the bona fide hedging 

position definition in § 150.1 . . .’’ 

should instead read as ‘‘. . . under 

paragraphs 3(iii)(A), 4(i), 4(iii) or 4(iv) of 

the bona fide hedging position 

definition in § 150.1, or any crosscommodity hedges thereof, . . . .’’ 

G. Delegation of Authority 

The Commission proposes to delegate 

certain of its authorities under proposed 

§ 150.9, § 150.10 and § 150.11 to the 

Director of the Commission’s Division of 

Market Oversight, or such other 

employee or employees as the Director 

may designate from time to time. 

Proposed § 150.9(f)(1)(ii), 

§ 150.10(f)(1)(ii) and § 150.11(e)(1)(ii) 

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205As noted above, in the regulatory text below 

where the CFTC sets out the proposed changes to 

the CFR, the Commission has designated certain 

appendices and subsections, such as appendices (A) 

through (D), § 150.3(a)(ii),§ 150.3(a)(iii), and 

§ 150.5(a)(3) through (6), among others, as 

‘‘[Reserved].’’ For the avoidance of doubt, the 

Commission is still reviewing comments received 

on such reserved provisions and does not seek 

further comment on such reserved provisions. See 

supra preamble Section II. 

206Under current § 150.5(a), a DCM may exempt 

from exchange-set speculative position limits any 

position normally known to the trade as a spread, 

straddle, or arbitrage position. 

would delegate the Commission’s 

authority to the Division of Market 

Oversight (‘‘DMO’’) to provide 

instructions regarding the submission of 

information required to be reported to 

the Commission by an exchange, and to 

specify the manner and determine the 

format, coding structure, and electronic 

data transmission procedures for 

submitting such information. Proposed 

§ 150.9(f)(1)(v) and § 150.10(f)(1)(v) 

would delegate the Commission’s 

review authority under proposed 

§ 150.9(e) and § 150.10(e), respectively, 

to DMO with respect to summaries of 

types of recognized non-enumerated 

bona fide hedges, and types of spread 

exemptions, that are required to be 

posted on an exchange’s Web site 

pursuant to proposed § 150.9(a)(7) and 

§ 150.10(a)(7), respectively. 

Proposed § 150.9(f)(1)(i), 

§ 150.10(f)(1)(i) and § 150.11(e)(1)(i) 

would delegate the Commission’s 

authority to DMO to agree to or reject a 

request by an exchange to consider an 

application for recognition of an NEBFH 

or enumerated anticipatory bona fide 

hedge, or an application for a spread 

exemption. Proposed § 150.9(f)(1)(iii), 

§ 150.10(f)(1)(iii) and § 150.11(e)(1)(iii) 

would delegate the Commission’s 

authority to review any application for 

recognition of an NEBFH or enumerated 

anticipatory bona fide hedge, or 

application for a spread exemption, and 

all records required to be maintained by 

an exchange in connection with such 

application. Proposed § 150.9(f)(1)(iii), 

§ 150.10(f)(1)(iii) and § 150.11(e)(1)(iii) 

would also delegate the Commission’s 

authority to request such records, and to 

request additional information in 

connection with such application from 

the exchange or from the applicant. 

Proposed § 150.9(f)(1)(iv) and 

§ 150.10(f)(1)(iv) would delegate the 

Commission’s authority, under 

proposed § 150.9(d)(2) and 

§ 150.10(d)(2), respectively, to 

determine that an application for 

recognition of an NEBFH, or an 

application for a spread exemption, 

requires additional analysis or review, 

and to provide notice to the exchange 

and the particular applicant that they 

have 10 days to supplement such 

application. 

The Commission does not propose to 

delegate its authority under proposed 

§ 150.9(d)(3) or § 150.10(d)(3) to make a 

final determination as to the exchange’s 

disposition. The Commission believes 

that if an exchange’s disposition raises 

concerns regarding consistency with the 

Act or presents novel or complex issues, 

then the Commission should make the 

final determination, after taking into 

consideration any supplemental 

information provided by the exchange 

or the applicant. 

However, the Commission proposes, 

in § 150.11(e)(iv), to delegate its 

authority to determine, under proposed 

§ 150.11(d)(2), that it is not appropriate 

to recognize a commodity derivative 

position as an enumerated anticipatory 

bona fide hedge, or that the disposition 

by an exchange of an application for 

such recognition is inconsistent with 

the filing requirements of proposed 

§ 150.11(a)(2). The delegation would 

also provide DMO with the authority, 

after any such determination was made, 

to grant the applicant a reasonable 

amount of time to liquidate its 

commodity derivative position or 

otherwise come into compliance. This 

proposed combined delegation takes 

into account that applications processed 

by an exchange under proposed § 150.11 

would be for positions that should 

satisfy the requirements for enumerated 

hedges set forth in the Commission’s 

rules, and should therefore be less likely 

to raise novel issues of interpretation, or 

novel issues with respect to consistency 

with the filing requirements of proposed 

§ 150.11(a)(2), than applications 

processed under proposed § 150.9 or 

§ 150.10. Such delegation is consistent 

with the Commission’s longstanding 

delegation to DMO of its authority to 

review applications for recognition of 

enumerated bona fide hedges under 

current § 1.48, as well as consistent with 

the more streamlined approach to 

Commission review of enumerated 

anticipatory bona fide hedge 

applications in proposed § 150.7. 

RFC 31: The Commission invites 

comments on its proposed delegation of 

authority in § 150.11(e)(iv), and on all 

other aspects of its proposed delegation 

of authority in § 150.9(f), § 150.10(f) and 

§ 150.11(e). 

H. Related Changes to § 150.3 and 

§ 150.5—Exemptions and Exchange-Set 

Speculative Position Limits 

In the December 2013 position limits 

proposal, the Commission proposed to 

replace both current § 150.3, which 

establishes exemptions from federal 

position limits, and current § 150.5(a), 

which provides guidance to DCMs for 

exchange-set position limits. The 

changes to § 150.3 as proposed in the 

December 2013 position limits proposal 

would have provided for recognition of 

enumerated bona fide hedge positions, 

but would not have exempted any 

spread positions from federal limits. For 

any commodity derivative contracts 

subject to federal position limits, 

§ 150.5(a)(2) as proposed in the 

December 2013 position limits proposal 

would have established requirements 

under which exchanges could recognize 

exemptions from exchange-set position 

limits, including hedge exemptions and 

spread exemptions. Because the 

Commission is now proposing to permit 

exchanges to recognize NEBFH 

positions under proposed § 150.9, to 

grant spread exemptions from federal 

limits under proposed § 150.10, and to 

recognize certain enumerated 

anticipatory bona fide hedge positions 

under proposed § 150.11, the 

Commission proposes corresponding 

changes to § 150.3 205 and § 150.5(a)(2). 

Further, in the December 2013 

position limits proposal, the 

Commission proposed § 150.5(b) to 

establish requirements and acceptable 

practices for commodity derivative 

contracts not subject to federal position 

limits. The Commission now proposes 

to revise § 150.5(b)(5) as proposed in the 

December 2013 position limits proposal 

to permit exchanges to recognize 

NEBFHs, as well as spreads, to conform 

to the instant proposal. The Commission 

notes that it is no longer proposing to 

prohibit recognizing spreads during the 

spot month, although such exemptions 

would not have been permitted under 

§§ 150.5(a)(2) or (b)(5) as proposed in 

the December 2013 position limits 

proposal. Instead, this current proposal 

would, in part, maintain the status quo: 

Exchanges that currently recognize 

spreads in the spot month under current 

§ 150.5(a) will be able to continue to do 

so.206 However, exchanges would be 

responsible for determining whether 

recognizing spreads, including spreads 

in the spot month, would further the 

policy objectives in section 4a(3) of the 

Act. 

I. Changes to the Definitions of FuturesEquivalent, Intermarket Spread 

Position, and Intramarket Spread 

Position 

1. Changes to the Definition of ‘‘FuturesEquivalent’’ 

In the December 2013 position limits 

proposal, the Commission proposed to 

broaden the definition of the term 

‘‘futures-equivalent’’ found in current 

§ 150.1(f) of the Commission’s 

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207 17 CFR 150.1(f) currently defines ‘‘futuresequivalent’’ only for an option contract, adjusting 

the open position in options by the previous day’s 

risk factor, as calculated at the close of trading by 

the exchange. 

208The December 2013 position limits proposal 

defines ‘‘futures-equivalent’’ for: (1) An option 

contact, adjusting the position size by an 

economically reasonable and analytically supported 

risk factor, computed as of the previous day’s close 

or the current day’s close or contemporaneously 

during the trading day; and (2) a swap, converting 

the position size to an economically equivalent 

amount of an open position in a core referenced 

futures contract. See December 2013 position limits 

proposal, 78 FR at 75698–9. 

209Amendments to CEA section 4a(1) authorize 

the Commission to extend position limits beyond 

futures and option contracts to swaps traded on an 

exchange and swaps not traded on an exchange that 

perform or affect a significant price discovery 

function with respect to regulated entities. 7 U.S.C. 

6a(a)(1). In addition, under new CEA sections 

4a(a)(2) and 4a(a)(5), speculative position limits 

apply to agricultural and exempt commodity swaps 

that are ‘‘economically equivalent’’ to DCM futures 

and option contracts. 7 U.S.C. 6a(a)(2) and (5). 

210Under current § 150.2, for purposes of 

compliance with federal position limits, positions 

in regular sized and mini-sized contracts are 

aggregated. The Commission’s practice of 

aggregating futures contracts, when a DCM lists for 

trading two or more futures contracts with 

substantially identical terms, is to scale down a 

position in the mini-sized contract, by multiplying 

the position in the mini-sized contract by the ratio 

of the unit of trading in the mini-sized contract to 

that of the regular sized contract. See paragraph 

(b)(2)(D) of app. C to part 38 of the Commission’s 

regulations for guidance regarding the contract size 

or trading unit for a futures or futures option 

contract. 

211For an example of a futures-equivalent 

conversion of a swaption, see example 6, WTI 

swaptions, app. A to part 20 of the Commission’s 

regulations. 

212See Table 11 in the December 2013 position 

limits proposal, 78 FR at 75731–3. 

213 In the December 2013 position limits proposal, 

the Commission proposed to define an ‘‘intermarket 

spread position’’ as ‘‘a long position in a 

commodity derivative contract in a particular 

commodity at a particular designated contract 

market or swap execution facility and a short 

position in another commodity derivative contract 

in that same commodity away from that particular 

designated contract market or swap execution 

facility.’’ The Commission also proposed to define 

an ‘‘intramarket spread position’’ as ‘‘a long 

position in a commodity derivative contract in a 

particular commodity and a short position in 

another commodity contract in the same 

commodity on the same designated contract market 

or swap execution facility.’’ See December 2013 

position limits proposal, 78 FR at 75699–700. 

regulations,207 and to expand upon 

clarifications included in the current 

definition relating to adjustments and 

computation times.208 The Dodd-Frank 

Act amendments to CEA section 4a,209

in part, direct the Commission to apply 

aggregate federal position limits to 

physical commodity futures contracts 

and to swaps contracts that are 

economically equivalent to such 

physical commodity futures contracts 

on which the Commission has 

established limits. In order to aggregate 

positions in futures, options and swaps 

contracts, it is necessary to adjust the 

position sizes, since such contracts may 

have varying units of trading (e.g., the 

amount of a commodity underlying a 

particular swap contract could be larger 

than the amount of a commodity 

underlying a core referenced futures 

contract). The Commission proposed to 

adjust position sizes to an equivalent 

position based on the size of the unit of 

trading of the core referenced futures 

contract. The December 2013 position 

limits proposal would extend the 

current definition of ‘‘futures 

equivalent’’ in current § 150.1(f), that is 

applicable only to an option contract, to 

both options and swaps. 

The Commission now proposes two 

further clarifications to the definition of 

the term ‘‘futures-equivalent.’’ First, the 

Commission proposes to address 

circumstances in which a referenced 

contract for which futures equivalents 

must be calculated is itself a futures 

contract. This may occur, for example, 

when the referenced contract is a 

futures contract that is a mini-sized 

version of the core referenced futures 

contract (e.g., the mini-corn and the 

corn futures contracts).210 The 

Commission proposes to clarify in 

proposed § 150.1 that the term ‘‘futuresequivalent’’ includes a futures contract 

which has been converted to an 

economically equivalent amount of an 

open position in a core referenced 

futures contract. This clarification 

mirrors the expanded definition of 

‘‘futures-equivalent’’ in the December 

2013 position limits proposal, as it 

would pertain to swaps. 

Second, the Commission proposes to 

clarify the definition of the term 

‘‘futures-equivalent’’ to provide that, for 

purposes of calculating futures 

equivalents, an option contract must 

also be converted to an economically 

equivalent amount of an open position 

in a core referenced futures contract. 

This clarification addresses situations, 

for example, where the unit of trading 

underlying an option contract (that is, 

the notional quantity underlying an 

option contract) may differ from the unit 

of trading underlying a core referenced 

futures contract.211

These clarifications are consistent 

with the methodology the Commission 

used to provide its analysis of unique 

persons over percentages of the 

proposed position limit levels in the 

December 2013 position limits 

proposal.212

2. Changes to the Definitions of 

‘‘Intermarket Spread Position’’ and 

‘‘Intramarket Spread Position’’ 

In the December 2013 position limits 

proposal, the Commission proposed to 

add to current § 150.1 new definitions of 

the terms ‘‘intermarket spread position’’ 

and ‘‘intramarket spread position.’’ 213

In connection with its proposal to 

permit exchanges to process 

applications for exemptions from 

federal position limits for certain spread 

positions, the Commission now 

proposes to expand the definitions of 

these terms as proposed in the 

December 2013 position limits proposal. 

The Commission now proposes to 

define an ‘‘intermarket spread position’’ 

to mean ‘‘a long (short) position in one 

or more commodity derivative contracts 

in a particular commodity, or its 

products or its by-products, at a 

particular designated contract market, 

and a short (long) position in one or 

more commodity derivative contracts in 

that same, or similar, commodity, or its 

products or its by-products, away from 

that particular designated contract 

market.’’ Similarly, the Commission 

now proposes to define an ‘‘intramarket 

spread position’’ to mean ‘‘a long 

position in one or more commodity 

derivative contracts in a particular 

commodity, or its products or its byproducts, and a short position in one or 

more commodity derivative contracts in 

the same, or similar, commodity, or its 

products or its by-products, on the same 

designated contract market.’’ 

The expanded definitions that the 

Commission now proposes would take 

into account that a market participant 

may take positions in multiple 

commodity derivative contracts to 

establish an intermarket spread position 

or an intramarket spread position. The 

expanded definitions would also take 

into account that such spread positions 

may be established by taking positions 

in derivative contracts in the same 

commodity, in similar commodities, or 

in the products or by-products of the 

same or similar commodities. By way of 

example, the expanded definitions 

would include a short position in a 

crude oil derivative contract and long 

positions in a gasoline derivative 

contract and a diesel fuel derivative 

contract (collectively, a reverse crack 

spread). 

RFC 32: The Commission invites 

comment on all aspects of its proposed 

expanded definitions of ‘‘intermarket 

spread position’’ and ‘‘intramarket 

spread position.’’ 

III. Related Matters 

A. Cost-Benefit Considerations 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its actions before 

promulgating a regulation under the 

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214 78 FR 75680–842. 

215See chart listing current regulations, December 

2013 position limits proposal at 75712. 

216As stated in Section IIA, the Commission 

foresees various possibilities in remediating this 

current inability to monitor position limits in realtime in the future. 

217See December 2013 Position Limits Proposal 

at 75706–7. 

218 17 CFR 1.3(z). 

CEA or issuing certain orders. Section 

15(a) further specifies that the costs and 

benefits 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; (4) sound risk 

management practices; and (5) other 

public interest considerations. The 

Commission considers the costs and 

benefits resulting from its discretionary 

determinations with respect to the 

Section 15(a) factors. 

In December 2013, the Commission 

proposed, among other things, to 

establish speculative position limits for 

28 contracts, to revise the process 

recognizing certain market participant 

positions as bona fide hedges, and to 

revise exemptions for spreads.214 The 

December 2013 position limits proposal 

invited the public to comment on the 

Commission’s consideration of the costs 

and benefits of the proposals, identify 

and assess any costs and benefits not 

discussed therein, as well as, provide 

possible alternative proposals. 

As discussed in Sections I and II of 

this release, the Commission now 

proposes: (a) To delay implementing the 

requirements of SEF core principle 6(B) 

and DCM core principle 5(B) with 

respect to the setting and monitoring of 

position limits for swaps; (b) to revise 

the process for recognizing certain 

positions as non-enumerated bona fide 

hedges; (c) to revise the process for 

exempting spreads, as well as 

expanding the types of spreads that may 

be exempted from position limits; and 

(d) to add a recognition process for 

enumerated anticipatory bona fide 

hedges. This release, in large part, is a 

response to comments to the December 

2013 position limits proposal. As 

discussed earlier, commenters urged the 

Commission to rely on the exchanges’ 

long-standing experience in overseeing 

position limits, recognizing bona fide 

hedges, and reviewing spreads. 

This supplemental proposal adds new 

provisions to and otherwise modifies 

some of the proposed rules identified 

and discussed in the December 2013 

position limits proposal. The baseline 

against which the Commission 

considers the benefits and costs of this 

supplemental proposal is the same as 

that employed in the December 2013 

position limits proposal: The statutory 

requirements of the CEA and the 

Commission regulations now in effect— 

in particular the Commission’s Part 150 

regulations and rules 1.47 and 1.48.215

1. Guidance for DCM Core 

Principle5(B), SEF Core Principle 6(B), 

and Part 150 

As explained in Section IIA above, the 

Commission received comments in 

response to the December 2013 position 

limits proposal that most exchanges do 

not have the ability to effectively 

monitor all swap positions held by a 

market participant across exchanges. 

The Commission now proposes to 

amend its guidance regarding DCM core 

principle 5(B) and SEF core principle 

6(B), and add Appendix E to Part 150. 

The proposed amendments would have 

the effect of delaying the 

implementation of exchanges’ obligation 

to adopt swap position limits until there 

is sufficient access to swap position 

information regarding market 

participants’ swap positions. 

ii. Baseline 

The baselines for these changes are 

DCM Core Principle 5, SEF Core 

Principle 6, and Part 150. 

iii. Benefits and Costs 

Section 15(a) of the CEA requires the 

Commission to consider the costs and 

benefits of its discretionary actions with 

respect to rules and orders. Though 

guidance, the Commission is also 

considering the costs and benefits of 

changes to the proposed amendments to 

the appendices to parts 37, 38, and 150 

of the Commission’s regulations. As 

discussed in Section IIA, the 

Commission appreciates that the 

proposed amendments to guidance will 

delay implementation of exchanges’ 

obligation to monitor and enforce 

federal position limits for swaps. As a 

result, this delay will likely confer 

benefits and will likely reduce costs. For 

instance, exchanges and market 

participants will benefit from not 

investing in technology and personnel 

to assess position limits. Instead, both 

exchanges and market participants will 

be able to allocate such resources to 

other functions, like surveillance and 

product innovation, within the 

businesses. In terms of costs, the 

Commission believes that there might be 

a cost to the market associated with this 

delay because excessive positions 

cannot be monitored in real-time by 

exchanges.216

iv. Request for Comment 

RFC 33: The Commission requests 

comment on its consideration of the 

benefits and costs associated with the 

proposed amendments to guidance. Are 

there additional costs and benefits that 

the Commission should consider? Has 

the Commission misidentified any costs 

or benefits? Commenters are encouraged 

to include both quantitative and 

qualitative assessments of benefits as 

well as data, or other information of 

support for such assessments. Are there 

additional alternatives that the 

Commission has not identified? If so, 

please describe these additional 

alternatives and provide a discussion of 

the associated qualitative and 

quantitative costs and benefits. 

2. Section 150.1—Definitions 

a. Bona Fide Hedging Position 

i. Summary of Changes 

As discussed earlier, the Commission 

proposed in December 2013 a new 

definition of bona fide hedging position 

in proposed § 150.1, to replace the 

current definition in § 1.3(z). The 

December 2013 position limits proposal 

proposed a general definition of bona 

fide hedging position that contained two 

requirements for a bona fide hedging 

position: An incidental test and an 

orderly trading requirement.217 The 

Commission is now proposing the 

following changes to proposed § 150.1. 

First, the Commission is proposing to 

strike the opening paragraph to the 

definition of bona fide hedging position 

in proposed § 150.1. By removing the 

opening paragraph, the Commission has 

eliminated the incidental test and 

orderly trading requirement from the 

general definition of bona fide hedging 

position. Second, the Commission is 

proposing to add sub-part 

150.1(2)(i)(D)(2) to the definition of 

bona fide hedging position. The 

proposed addition reiterates the 

Commission’s authority to permit 

exchanges to recognize bona fide 

positions and those positions are subject 

to CEA section 4a(c) standards as well 

as Commission review. 

ii. Baseline 

The baseline for this change is the 

definition for ‘‘bona fide hedging 

transactions and positions for excluded 

commodities,’’ set forth in current 

§ 1.3(z).218

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219 December 2013 position limits proposal at 

75761–64. 

220Futures contracts and futures equivalents are 

tools by which market participants can lock-in price 

risk. They are limited in that regard. Other 

derivatives contracts, however, enable market 

participants to hedge other types of risk, beyond 

price risks, because contract terms and conditions 

can be tailored to the specific risks. 

221The costs and benefits of these alternatives 

were discussed in the December 2013 position 

limits proposal at 75761–64. 

222 December 2013 position limits proposal at 

75761. 

iii. Benefits and Costs 

In the December 2013 position limits 

proposal, the Commission discussed the 

benefits and costs associated with the 

proposed amendments to the definition 

of bona fide hedging position.219 In this 

proposal, the Commission proposes 

changes that were not discussed in the 

December 2013 position limits proposal. 

The changes to the definition of bona 

fide hedging position discussed herein 

provide substantive benefits and costs. 

In terms of benefits, the Commission 

has made the definition of bona fide 

hedging position conform more closely 

to the CEA’s statutory language by 

eliminating the incidental test. As 

explained in Section IIB3(ii), the 

Commission considers the incidental 

test superfluous because the idea of 

commercial cash market activities is 

covered in the economically appropriate 

test. Therefore, by discarding the 

incidental test, market participants 

benefit from greater regulatory certainty 

and less redundancy. 

By deleting the orderly trading 

requirement from the definition of bona 

fide hedging position, the Commission 

seeks to eliminate a source of potential 

confusion for exchanges and market 

participants. The Commission sets forth 

a definition that is consistent with the 

CEA. More directly, CEA 4c(a)(5) 

separately states that intentional or 

reckless disregard for orderly trading 

execution is unlawful. Thus, market 

participants benefit from having a 

definition that lessens or eliminates the 

confusion between having two different 

standards, that is, an orderly-trading 

requirement and an intentional or 

reckless disregard standard. 

The addition of proposed sub-part 

150.1(2)(i)(D)(2) to the definition of 

bona fide hedging position represents a 

non-substantive modification. The 

actual benefits and costs associated with 

this proposed sub-part arise from 

recognitions under proposed § 150.9(a). 

iv. Request for Comment 

RFC 34: The Commission requests 

comment on its consideration of the 

benefits and costs associated with the 

proposed revisions to the definition of 

‘‘bona fide hedging position.’’ Are there 

additional costs and benefits that the 

Commission should consider? Has the 

Commission misidentified any costs or 

benefits? Commenters are encouraged to 

include both quantitative and 

qualitative assessments of benefits as 

well as data and other information of 

support for such assessments. 

RFC 35: Futures contracts function to 

hedge price risk because they lock-in 

prices and quantities at designated 

points in time. Futures contracts, 

thereby, create price certainty for market 

participants.220 Thus, the Commission 

believes that bona fide hedging 

positions need to ultimately result in 

hedging against some form of price risk 

as discussed in Section IIB3(i), above. Is 

the Commission reasonable in 

concluding that by eliminating the 

incidental test market participants will 

benefit from regulatory certainty and 

reduced compliance costs because they 

need only focus on price risk or other 

risks that can be transformed into price 

risk? 

RFC 36: It is challenging to interpret 

the orderly-trading requirement in the 

context of the over-the-counter swaps 

market and permitted off-exchange 

transactions as discussed in Section 

IIB3(ii), above. Given this challenge, is 

it reasonable for the Commission to 

conclude that by eliminating the 

orderly-trading requirement, market 

participants benefit from avoiding the 

compliances costs of an unclear 

requirement? 

RFC 37: The Commission recognizes 

that there exist alternatives to the 

proposed definition of ‘‘bona fide 

hedging position.’’ These alternatives 

include: (i) Maintaining the status quo 

in current § 1.3(z), or (ii) pursuing the 

changes in the December 2013 position 

limits proposal.221 Are there additional 

alternatives that the Commission has 

not identified? If so, please describe 

these additional alternatives and 

provide a discussion of the associated 

qualitative and quantitative costs and 

benefits. 

b. Futures Equivalent 

i. Summary of Changes 

In the December 2013 position limits 

proposal, the Commission proposed to 

expand the definition of ‘‘futuresequivalent’’ from the narrow scope of an 

option contract. The term ‘‘futuresequivalent,’’ as proposed in the 

December 2013 position limits proposal, 

would include certain options contracts 

and swaps, converted to economically 

equivalent amounts. The Commission 

now proposes two further revisions to 

the definition of ‘‘futures-equivalent.’’ 

First, the Commission proposes to 

clarify that the term ‘‘futuresequivalent’’ includes a futures contract 

which has been converted to an 

economically equivalent amount of an 

open position in a core referenced 

futures contract. Second, the 

Commission proposes to clarify that, for 

purposes of calculating futures 

equivalents, an option contract must 

also be converted into an economicallyequivalent amount of an open position 

in a core referenced futures contract. 

ii. Baseline 

The baseline for this change to the 

definition of ‘‘futures equivalent’’ is the 

current § 150.1(f) definition of ‘‘futuresequivalent’’. 

iii. Benefits and Costs 

As explained in the December 2013 

position limits proposal, the 

Commission’s view is that nonsubstantive changes to the definitional 

provisions of § 150.1 do not have any 

benefit or cost implications. With the 

exception of the term ‘‘bona fide 

hedging position,’’ any benefits or costs 

attributable to substantive definitional 

changes and additions to § 150.1 as 

proposed in the December 2013 position 

limits proposal were considered in the 

discussion of the rule in which such 

new or amended term was proposed to 

be operational.222

The Commission also explained in 

2013 that the definition of ‘‘futuresequivalent’’ in current § 150.1(f) was too 

narrow in light of the Dodd-Frank Act 

amendments to CEA section 4a. To 

conform to the statutory changes and to 

fit within the broader position limits 

regime, the Commission proposed a 

more descriptive definition of ‘‘futuresequivalent’’ in the December 2013 

position limits proposal. Upon further 

review, the Commission is now 

proposing to add more explanatory text 

to the ‘‘futures-equivalent’’ definition so 

that it comports better with the statutory 

changes. The proposed revisions reflect 

more clearly the Commission’s intent as 

discussed in the December 2013 

position limits proposal. Thus, the 

Commission believes that there are no 

cost or benefit implications to these 

further clarifications. 

iv. Request for Comment 

RFC 38: Are there any benefits or 

costs associated with the proposed 

revisions to the definition of ‘‘futures 

equivalent’’? If yes, commenters are 

encouraged to include both quantitative 

and qualitative assessments of these 

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223See 17 CFR 150.3 (list of exemptions that may 

exceed position limits set forth in § 150.2). 

costs and benefits, as well as data or 

other information to support such 

assessments. 

RFC 39: The Commission recognizes 

that one possible alternative to the 

clarifications made to the ‘‘futuresequivalent’’ definition is to retain the 

definition of ‘‘futures-equivalent’’ as 

proposed in the December 2013 position 

limits proposal. Additional alternatives 

may exist as well. The Commission 

requests comment on whether an 

alternative to what is proposed would 

result in a superior cost-benefit profile, 

with support for any such position 

provided. 

c. Intermarket Spread Position and 

Intramarket Spread Position 

i. Summary of Changes 

Current part 150 does not contain 

definitions for the terms ‘‘intermarket 

spread position’’ or ‘‘intramarket spread 

position.’’ In the December 2013 

position limits proposal, the 

Commission proposed definitions for 

both terms. The Commission now 

proposes to expand the scope of these 

two definitions. The expanded 

definitions would now include 

positions in multiple commodity 

derivative contracts so that market 

participants can establish an 

intermarket spread position or an 

intramarket spread position that would 

be taken into account under the 

proposed position limits regime and 

exemption processes. The expanded 

definitions also would cover spread 

positions established by taking positions 

in derivative contracts in the same 

commodity, in similar commodities, or 

in the products or by-products of the 

same or similar commodities. 

ii. Baseline 

Current § 150.1 does not include 

definitions for the terms ‘‘intermarket 

spread position’’ and ‘‘intramarket 

spread position.’’ Therefore, the 

baseline is a market where 

‘‘intermarket’’ and ‘‘intramarket’’ spread 

positions are not explicitly exempted 

from federal position limits. 

iii. Benefits and Costs 

The proposed changes to ‘‘intermarket 

spread position’’ and ‘‘intermarket 

spread positions’’ broaden the scope of 

the two terms in comparison to the 

definitions proposed in the December 

2013 position limits proposal. In the 

Commission’s view, the proposed 

changes are only operative in proposed 

§§ 150.3, 150.5 and 150.10, which 

address exemptions from position limits 

for certain spread positions. The two 

definitions operate in conjunction with 

proposed § 150.10, which sets forth a 

proposed process for exchanges to 

administer spread exemptions, because 

the proposed definitions and proposed 

§ 150.10, together, will enable market 

participants to obtain relief from 

position limits for these types of 

spreads, among others. 

iv. Request for Comment 

RFC 40: Are there benefits or costs 

associated with the definitions of 

‘‘intermarket spread position’’ and 

‘‘intramarket spread position’’? If yes, 

commenters are specifically encouraged 

to include both quantitative and 

qualitative assessments of these costs 

and benefits, as well as data or other 

information to support such 

assessments. 

RFC 41: The Commission recognizes 

that one possible alternative to the 

proposed definitions of ‘‘intermarket 

spread position’’ and ‘‘intramarket 

spread position’’ is to retain the 

definitions proposed in the December 

2013 position limits proposal. 

Additional alternatives may exist as 

well. The Commission requests 

comment on whether an alternative to 

what is proposed would result in a 

superior cost-benefit profile, with 

support for any such alternative 

provided. 

3. Section 150.3—Exemptions 

a. Rule Summary 

CEA Section 4a(a)(7) authorizes the 

Commission to exempt, conditionally or 

unconditionally, any person, swap, 

futures contract, or option—as well as 

any class of the same—from the position 

limits requirements that the 

Commission establishes. In the 

December 2013 position limits proposal, 

the Commission proposed revisions to 

current § 150.3(a) 223 The 2013 revisions 

would have provided for Commission 

recognition of enumerated bona fide 

hedge positions, and provided guidance 

about seeking relief from the 

Commission for non-enumerated 

positions, but would not have exempted 

any spread positions from federal limits. 

In this supplemental proposal, the 

Commission is proposing in 

§ 150.3(a)(1) that commodity derivative 

positions recognized by exchanges as 

NEBFHs under proposed § 150.9 or 

enumerated anticipatory bona fide 

hedge positions under proposed 

§ 150.11, and certain exempt spread 

positions under § 150.10, may exceed 

federal position limits established under 

§ 150.2 as proposed in the December 

2013 position limits proposal. Proposed 

§ 150.3(a)(1) should not be read alone 

but in conjunction with proposed 

§§ 150.9, 150.10, and 150.11. 

As discussed above in more detail, the 

Commission has proposed to delay the 

requirement that exchanges set position 

limits on swaps because, among other 

reasons, of the impracticability of 

exchanges being able to enforce swap 

position limits. As a result, the 

Commission believes that it would be 

unlikely that exchanges would establish 

exchange-set limits and, thus, market 

participants would not have a need for 

exemptions to exchange-set limits for 

swaps. 

b. Baseline 

The baseline is the same as it was in 

the December 2013 position limits 

proposal: Current § 150.3 of the 

Commission’s regulations. 

c. Benefits and Costs 

The costs and benefits associated with 

the changes to proposed § 150.3 will be 

considered in the sections that discuss 

proposed §§ 150.9, 150.10, and 150.11. 

4. Section 150.5—Exemptions From 

Exchange-Set Limits 

a. Rule Summary 

In the December 2013 position limits 

proposal, the Commission proposed to 

replace current § 150.5(a), which 

provides guidance to exchanges for 

exchange-set limits. For any commodity 

derivative contracts subject to federal 

position limits, § 150.5(a)(2) as proposed 

in the December 2013 position limits 

proposal, would have established 

requirements under which exchanges 

could recognize exemptions from 

exchange-set position limits, including 

hedge exemptions and spread 

exemptions. Because the Commission is 

now proposing to permit exchanges to 

recognize NEBFH positions under 

proposed § 150.9, to grant spread 

exemptions from federal limits under 

proposed § 150.10, and to recognize 

certain enumerated anticipatory bona 

fide hedge positions under proposed 

§ 150.11, the Commission proposes 

related changes to § 150.5(a)(2). For 

commodity derivative contracts not 

subject to federal position limits, the 

Commission now proposes to revise 

§ 150.5(b)(5), as proposed in the 

December 2013 position limits proposal, 

to permit exchanges to recognize 

NEBFHs, as well as spreads. The 

Commission notes that it is no longer 

proposing to prohibit recognizing 

spreads during the spot month, although 

such exemptions would not have been 

permitted under §§ 150.5(a)(2) or (b)(5), 

as proposed in the December 2013 

position limits proposal. 

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b. Baseline 

The baseline is the same as it was in 

the December 2013 position limits 

proposal: The current reasonable 

discretion afforded to exchanges to 

exempt market participant from their 

exchange-set position limits. 

c. Benefits and Costs 

The costs and benefits associated with 

the changes to proposed § 150.5 will be 

discussed in the sections that discuss 

proposed §§ 150.9, 150.10, and 150.11. 

5. Section 150.9—Exchange Recognition 

of NEBFHs 

In response to comments to the 

December 2013 position limits proposal, 

the Commission now proposes to permit 

exchanges to elect to administer a 

process to recognize certain commodity 

derivative positions as NEBFHs under 

proposed § 150.9. Subject to certain 

conditions set forth in proposed 

§ 150.3(a)(1), positions recognized as 

NEBFHs by exchanges pursuant to the 

proposed § 150.9 application process 

would be exempt from federal position 

limits. Proposed § 150.9 works in 

concert with the following three 

proposed rules: 

• Proposed § 150.3(a)(1)(i), with the 

effect that recognized NEBFH positions 

may exceed federal position limits; 

• proposed § 150.5(a)(2), with the 

effect that recognized NEBFH positions 

may exceed exchange-set position limits 

for contracts subject to federal position 

limits; and 

• proposed § 150.5(b)(5), with the 

effect that recognized NEBFH positions 

may exceed exchange-set position limits 

for contracts not subject to federal 

position limits. 

a. Rule Summary 

The proposed NEBFH process has six 

sub-parts: (a) Through (f). The first three 

sub-parts—§ 150.9(a), (b), and (c)— 

require exchanges that elect to have an 

NEBFH process and market participants 

that seek relief under the NEBFH 

process to carry out certain duties and 

obligations. The latter three sub-parts— 

§ 150.9(d), (e), and (f)—delineate the 

Commission’s role and obligations in 

reviewing NEBFH recognition requests. 

i. § 150.9(a)—Exchange-Administered 

NEBFH Application Process 

In sub-part (a) of proposed § 150.9, the 

Commission identifies the process and 

information required for an exchange to 

assess whether it should grant a market 

participant’s request that its derivative 

position(s) be recognized as an NEBFH. 

As an initial step under proposed 

§ 150.9(a)(1), exchanges that voluntarily 

elect to process NEBFH applications are 

required to notify the Commission of 

their intention to do so by filing new 

rules or rule amendments with the 

Commission under part 40 of the 

Commission’s regulations. In proposed 

§ 150.9(a)(2), the Commission offers 

guidelines for exchanges to establish 

adaptable application processes by 

permitting different processes for 

‘‘novel’’ versus ‘‘substantially similar’’ 

applications for NEBFH recognitions. 

Proposed § 150.9(a)(3) describes in 

general terms the type of information 

that exchanges should collect from 

applicants. Proposed § 150.9(a)(4) 

obliges applicants and exchanges to act 

timely in their submissions and 

notifications, respectively, and that 

exchanges retain revocation authority. 

Proposed § 150.9(a)(5) provides that the 

position will be deemed recognized as 

an NEBFH when an exchange 

recognizes it. Proposed § 150.9(a)(6) 

instructs exchanges to have rules 

requiring applicants that receive NEBFH 

recognitions to report those positions 

and offsetting cash positions. Proposed 

§ 150.9(a)(7) requires an exchange to 

publish on their Web site descriptions 

of unique types of derivative positions 

recognized as NEBFHs based on novel 

facts and circumstances. 

ii. § 150.9(b)—NEBFH Recordkeeping 

Requirements 

Under proposed § 150.9(b), exchanges 

would be required to maintain complete 

books and records of all activities 

relating to the processing and 

disposition of NEBFH applications. As 

explained in proposed § 150.9(b)(1) 

through (b)(2), the Commission instructs 

exchanges to retain applicantsubmission materials, exchange notes, 

and determination documents. 

Moreover, consistent with current 

§ 1.31, the Commission expects that 

these records would be readily 

accessible until the termination, 

maturity, or expiration date of the bona 

fide hedge recognition and during the 

first two years of the subsequent, fiveyear retention period. 

iii. § 150.9(c)—NEBFH Reporting 

Requirements 

The Commission proposes weekly 

and monthly reporting obligations by 

exchanges for positions recognized as 

NEBFHs. Both reports also will be 

subject to the Commission’s proposed 

formatting requirements as explained in 

proposed § 150.9(c)(3). In addition to 

submitting reports to the Commission, 

proposed § 150.9(c)(1)(ii) provides that 

exchanges post NEBFH summaries on 

their Web sites. 

iv. § 150.9(d) and (e)—Commission 

Review 

The Commission proposes that under 

certain circumstances market 

participants and exchanges must 

respond to Commission requests. 

b. Baseline 

For the NEBFH process, the baseline 

for NEBFH subject to federal position 

limits is current § 1.47. For NEBFH 

exemptions to exchange-set position 

limits, the baseline is the current 

exchange regulations and practices as 

well as the Commission’s guidance to 

exchanges in current § 150.5(d), which 

provides, generally, that an exchange 

may recognize bona fide hedging 

positions in accordance with the general 

definition of bona fide hedging position 

in current § 1.3(z)(1). 

c. Benefits 

The Commission recognizes that there 

are positions that reduce price risks 

incidental to commercial operations. 

For that reason, among others, such 

positions that are considered to be bona 

fide hedging positions under CEA 

Section 4a(c) are not subject to position 

limits. Market participants have several 

options regarding bona fide hedging 

positions. A market participant could 

conclude that a commodity derivative 

position comports with the definition of 

bona fide hedging position under 

§ 150.1, as proposed in the December 

2013 position limits proposal. Also as 

discussed in the December 2013 

position limits proposal, market 

participants may request a staff 

interpretive letter under § 140.99 or seek 

exemptive relief under CEA section 

4(a)(7). The Commission proposes in 

this supplemental proposal another 

option for participants to hold 

commodity derivative positions that 

exceed speculative limits: They may file 

an application with an exchange for 

recognition of an NEBFH under 

proposed § 150.9. 

While all of the aforementioned 

options are viable, proposed § 150.9 in 

this supplemental proposal outlines a 

framework similar to existing exchange 

practices that recognize non-enumerated 

bona fide hedge exemptions to 

exchange-set limits. These practices are 

familiar to many market participants. As 

a consequence, there are sizeable 

benefits to the proposed § 150.9 process 

that are not easily quantifiable. The 

benefits are heavily dependent on the 

individual characteristics of the 

applicant, its use of commodity 

derivatives, its commercial needs, and 

market idiosyncrasies. Because of these 

varying characteristics, a qualitative 

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224See note 108 (for text of 17 CFR 1.47 and 

discussion). For a discussion on the history of 

exemptions, see December 2013 position limits 

proposal at 75703–06. 

discussion is more appropriate, and 

therefore, discussed herein. 

Under proposed § 150.9, the 

Commission will be able to leverage 

exchanges’ existing practices and 

expertise in administering exemptions. 

Thus, proposed § 150.9 should reduce 

the need to invent new procedures to 

recognize NEBFHs. For example, many 

exchanges already evaluate hedging 

strategies in connection with setting and 

enforcing exchange-set position limits; 

thus, many exchanges should be able 

readily to identify bona fide hedges.224

Exchanges also may be familiar with the 

applicant-market participant’s needs 

and practices so there would be an 

advanced understanding for why certain 

trading strategies are pursued. 

Furthermore, by having the availability 

of the exchange’s analysis and a macroview of the markets, which includes the 

Commission’s access to regulatory swap 

data, the Commission would likely be 

better informed should it become 

necessary for the Commission to review 

a determination under proposed 

§ 150.9(d), and determine whether a 

commodity derivative position should 

be recognized as an NEBFH. This may 

benefit market participants, in the form 

of administrative efficiency, because the 

Commission would be able to initiate its 

review based on materials already 

submitted by the applicant under 

proposed § 150.9, as well as the analysis 

by the exchanges. 

For applicants seeking recognition of 

an NEBFH, proposed § 150.9 should 

reduce duplicative efforts because 

applicants would be saved the expense 

of applying to both an exchange for 

relief from exchange-set position limits 

and to the Commission for relief from 

federal limits. Because many exchanges 

already possess similar application 

processes and market participants are 

probably somewhat accustomed to the 

exchanges’ existing application 

processes, administrative certainty 

should be increased in the form of 

reduced application-production time by 

market participants and reduced 

response time by exchanges. 

Another probable benefit of proposed 

§ 150.9 is the creation and retention of 

records that may be used as reference 

material in the future for similar bona 

fide hedge recognition requests either by 

relevant exchanges or the Commission. 

Over time, retained records will help 

the Commission to ensure that an 

exchange’s determinations are internally 

consistent and consistent with the Act 

and the Commission’s regulations 

thereunder. There is also the additional 

benefit that records would be accessible 

if they are needed for a potential 

enforcement action. 

An exchange’s submission of reports 

under proposed § 150.9(c) would 

provide the Commission with notice 

that an applicant has taken a commodity 

derivative position that the exchange 

has recognized as an NEBFH, and also 

would show the applicant’s offsetting 

positions in the cash markets. This is 

beneficial to the public because such 

reports would support the 

Commission’s surveillance program. 

Reports would facilitate the tracking of 

NEBFHs recognized by the exchanges, 

and would assist the Commission in 

ensuring that a market participant’s 

activities conform to the exchange’s 

terms of recognition and to the Act. The 

web-posting of summaries also would 

benefit market participants in general by 

providing transparency and open access 

to the NEBFH recognition process. In 

addition, reporting and posting gives 

market participants seeking recognition 

of an NEBFH an understanding of the 

types of commodity derivative positions 

an exchange may recognize as an 

NEBFH, thereby providing greater 

administrative and legal certainty. 

d. Costs 

To a large extent, exchanges and 

market participants have incurred 

already many of the compliance costs 

associated with proposed § 150.9 

because most, if not all, exchanges 

currently administer similar processes 

for recognizing NEBFHs. Nevertheless, 

the Commission has detailed a number 

of the readily-quantifiable costs for 

exchanges and market participants 

associated with processing NEBFH 

recognitions under proposed § 150.9 in 

Tables A1 to G1, below. The 

Commission estimates that six entities 

would elect to process NEBFH 

applications and file new rules or rule 

amendments pursuant to part 40 of the 

Commission’s regulations. Even though 

the number of applicants and associated 

applications will likely vary based on 

the referenced contract, the Commission 

forecasts the number of applicants based 

on the Commission’s past experience. 

The costs are broken down in the tables 

below. In short, most of the quantified 

costs are related to the time, effort, and 

materials that will be spent on 

producing, processing, reviewing, 

granting, and retaining applications for 

NEBFH recognitions. 

There are, however, other costs that 

are not easily quantified. These are 

qualitative costs that are related to the 

specific attributes and needs of 

individual market participants that are 

hedging. Given that qualitative costs are 

highly-specific, the Commission 

believes that market participants would 

choose to incur § 150.9-related costs 

only if doing so is less costly than 

complying with position limits and not 

executing the desired hedge position. 

Thus, by providing market participants 

with an option to apply for relief from 

speculative position limits under 

proposed § 150.9, the Commission 

believes it is offering market 

participants a way to ease overall 

compliance costs because it is 

reasonable to assume that entities would 

seek recognition of NEBFHs only if the 

outcome of doing so justifies the costs. 

The Commission also believes that 

market participants would consider how 

the costs of applying for recognition of 

an NEBFH under proposed § 150.9 

would compare to the costs of 

requesting a staff interpretive letter 

under § 140.99, or seeking exemptive 

relief under CEA section 4a(a)(7). 

Likewise, exchanges must consider 

qualitative costs in their decision to 

create an NEBFH application process or 

revise an existing program. 

The Commission acknowledges that 

there may also be other costs to market 

participants if the Commission disagrees 

with an exchange’s decision to 

recognize an NEBFH under proposed 

§ 150.9 or under an independent 

Commission request or review under 

proposed § 150.9(d) or (e). These costs 

would include time and effort spent by 

market participants associated with a 

Commission review. In addition, market 

participants would lose amounts that 

the Commission can neither predict nor 

quantify if it became necessary to 

unwind trades or reduce positions were 

the Commission to conclude that an 

exchange’s disposition of an NEBFH 

application is inconsistent with section 

4a(c) of the Act and the general 

definition of bona fide hedging position 

in § 150. 

The Commission recognizes that costs 

may result if the Commission disagrees 

with an exchange’s disposition of an 

NEBFH application under proposed 

§ 150.9, the Commission, however, 

believes such situations would be 

limited based on the history of 

exchanges approving similar 

applications for exemptions to 

exchange-set limits. Exchanges have 

strong incentives to protect market 

participants from the harms that 

position limits are intended to prevent, 

such as manipulation, corners, and 

squeezes. In addition, an exchange that 

recognizes a market participant’s 

NEBFH that enables the participant to 

exceed position limits must then deter 

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the same market participant from 

trading in a manner that causes adverse 

price impacts on the market. For 

example, this might mean that as part of 

recognizing a NEBFH, the exchange 

directs the market participant to execute 

no more than ten contracts per day over 

a five-day period rather than executing 

50 contracts in one trading day. This 

approach may be necessary for the 

exchange to ensure sufficient market 

liquidity because the exchange believes 

that the particular contract market 

cannot absorb the execution of 50 

contracts by one market participant in 

one day without an inordinately large 

price impact. If the exchange fails to 

deter (or instruct), other market 

participants will likely face greater costs 

in the form of transactions fees and 

other trading-implementation costs, 

which includes foregone trading 

opportunities because market prices 

moved against the trader and prevented 

the trader from executing at the desired 

prices. In other words, the exchange’s 

mismanagement of the market 

participant that took advantage of the 

NEBFH would cause the other market 

participants’ costs to implement trades 

to increase. Such an outcome would 

likely discredit the exchange and the 

proposed § 150.9 program, as well as 

reduce the exchange’s overall trading 

commissions. The Commission believes 

that the exchanges have little incentive 

to engage in such behavior because of 

reputational risk and economic 

incentives. 

i. Costs To Create or Amend Exchange 

Rules for NEBFH Application Programs 

The Commission believes that 

exchanges electing to process NEBFH 

applications under proposed § 150.9(a) 

are likely to already administer similar 

processes and would need to file with 

the Commission amendments to existing 

exchange rules rather than create new 

rules. The exchanges would only have 

to file amendments once. As discussed 

in the Paperwork Reduction Act 

discussion below, the Commission 

forecasts an average annual filing cost of 

$610 per exchange that files new rules 

or modifications per proposed process 

that an exchange adopts. 

TABLE A1 

Proposed regulation/file or amend rules Total average 

labor hours 

Total 

average labor 

costs per hour 

Total 

average annual 

cost per 

exchange 

§ 150.9(a)(1) ............................................................................................................................. 5 $122 $610 

[5 × $122] 

ii. Costs To Review Applications Under 

Proposed Processes 

An exchange that elects to process 

applications also will incur costs related 

to the review and disposition of such 

applications pursuant to proposed 

§ 150.9(a). For example, exchanges will 

need to expend resources on reviewing 

and analyzing the facts and 

circumstances of each application to 

determine whether the application 

meets the standards established by the 

Commission. Exchanges also will need 

to expend effort in notifying applicants 

of the exchanges’ disposition of 

recognition or exemption requests. The 

Commission believes that exchanges 

electing to process NEBFH applications 

under proposed § 150.9(a) are likely to 

have processes for the review and 

disposition of such applications 

currently in place. As such, an 

e3.xchange’s cost to comply with the 

proposed rules are likely to be 

incrementally less costly than having to 

create process from inception because 

the exchange would already have staff, 

policies, and procedures established to 

accomplish its duties under the 

proposed rules. Thus, the Commission 

has forecast that the average annual cost 

for each exchange to process 

applications for NEBFH recognitions is 

$122,850. 

TABLE B1 

Proposed regulation/review applications 

Total 

average 

applications 

processed per 

exchange 

Total average 

labor hours 

per application 

Average 

total hours 

for total 

applications 

reviewed per 

exchange 

Total average 

labor costs 

per hour 

Total average 

annual cost 

per 

exchange 

§ 150.9(a)(2) ......................................................................... 185 5 925 

[185 × 5] 

$122 $112,850 

[$122 × 925] 

iii. Costs To Post Summaries for NEBFH 

Recognitions 

Exchanges that elect to process the 

applications under proposed § 150.9 

will incur costs to publish on their Web 

sites summaries of the unique types of 

NEBFH positions. The Commission has 

estimated an average annual cost of 

$18,300 for the web-posting of NEBFH 

summaries. 

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225Assuming that exchanges administer 

exemptions to exchange-set limits, these costs are 

incrementally higher. 

TABLE C1 

Proposed regulation/web-posting 

Total average 

summaries per 

exchange 

Total average 

labor hours 

per application 

Average total 

hours for total 

applications 

reviewed per 

exchange 

Total average 

labor costs per 

hour 

Total average 

annual cost 

per exchange 

§ 150.9(a) ............................................................................. 30 5 150 

[30 × 5] 

$122 18,300 

[150 × $122] 

iv. Costs To Market Participants Who 

Would Seek NEBFH Relief From 

Position Limits 

Under proposed § 150.9(a)(3), market 

participants must submit applications 

that provide sufficient information to 

allow the exchanges to determine, and 

the Commission to verify, whether it is 

appropriate to recognize such position 

as an NEBFH. These applications would 

be updated annually. Proposed 

§ 150.9(a)(6) would require applicants to 

file a report with the exchanges when an 

applicant owns, holds, or controls a 

derivative position that has been 

recognized as an NEBFH. The 

Commission estimates that each market 

participant seeking relief from position 

limits under proposed § 150.9 would 

likely incur approximately $2,440 

annually in application costs.225

TABLE D1 

Proposed regulation/market participants 

seeking relief from position limits 

Number of 

market 

participants 

Total average 

applications 

per market 

participant 

Total average 

labor hours 

per 

application 

Average total 

hours for each 

application 

filed 

per exchange 

Total average 

labor costs per 

hour 

Total average 

annual cost 

per market 

participant 

§ 150.9(a)(3), (6) ...................................... 222 5 4 20 

[4 × 5] 

$122 $2,440 

[20 × $122] 

v. Costs for NEBFH Recordkeeping 

The Commission believes that 

exchanges that currently process 

applications for spread exemptions and 

bona fide hedging positions maintain 

records of such applications as required 

pursuant to other Commission 

regulations, including § 1.31. The 

Commission, however, also believes that 

the proposed rules may confer 

additional recordkeeping obligations on 

exchanges that elect to process 

applications for NEBFHs. The 

Commission estimates that each 

exchange electing to administer the 

proposed NEBFH process would likely 

incur approximately $3,660 annually to 

retain records for each proposed 

process. 

TABLE E1 

Proposed regulation/recordkeeping Number of 

DCMs 

Total 

average labor 

hours for 

recordkeeping 

Total 

average labor 

costs per hour 

Total average 

annual 

recordkeeping 

cost per 

exchange 

§ 150.9(b) ......................................................................................................... 6 30 $122 $3,660 

[30 × $122] 

vi. Costs for Weekly and Monthly 

NEBFH Reporting to the Commission 

The Commission anticipates that 

exchanges that elect to process NEBFH 

applications will be required to file two 

types of reports. The Commission is 

aware that five exchanges currently 

submit reports each month, on a 

voluntary basis, which provide 

information regarding exchangeprocessed exemptions of all types. The 

Commission believes that the content of 

such reports is similar to the 

information required of the reports in 

proposed rule § 150.9(c), but the 

frequency of such required reports 

would increase under the proposed rule. 

The Commission estimates an average 

cost of approximately $19,032 per 

exchange for weekly reports under 

proposed § 150.9(c). 

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226 78 FR at 75711–73. 

227For cost-benefit discussion on spread 

exemptions, see December 2013 position limits 

proposal at 75774–76. 

TABLE F1 

Proposed regulation/weekly reporting 

Estimated 

number of 

DCMs 

Estimated 

number of 

hours per 

response 

Average 

reports 

annually by 

each 

exchange 

Total average 

labor costs per 

hour 

Total average 

annual 

reporting 

cost per 

exchange 

§ 150.9(c) ............................................................................. 6 3 52 $122 $19,032 

[3 × 52 × 

$122] 

For the monthly report, the 

Commission anticipates a minor cost for 

exchanges because the proposed rules 

would require exchanges essentially to 

forward to the Commission notices 

received from applicants who own, 

hold, or control the positions that have 

been recognized or exempted. The 

Commission estimates an average cost of 

approximately $2,928 per exchange for 

monthly reports under proposed 

§ 150.9(c). 

TABLE G1 

Proposed regulation/monthly reporting 

Estimated 

number of 

DCMs 

Estimated 

number of 

hours per 

response 

Average 

reports 

annually by 

each 

exchange 

Total average 

labor costs per 

hour 

Total average 

annual 

reporting 

average cost 

per exchange 

§ 150.9(c) ............................................................................. 6 2 12 $122 $2,928 

[2 × 12 × 

$122] 

vii. Costs Related to Subsequent 

Monitoring 

Exchanges would have additional 

surveillance costs and duties with 

respect to NEBFH that the Commission 

believes would be integrated with their 

existing self-regulatory organization 

surveillance activities as an exchange. 

e. Request for Comment 

RFC 42. The Commission requests 

comment on its considerations of the 

benefits of proposed § 150.9. Are there 

additional benefits that the Commission 

should consider? Has the Commission 

misidentified any benefits? Commenters 

are encouraged to include both 

quantitative and qualitative assessments 

of these benefits, as well as data or other 

information to support such 

assessments. 

RFC 43. The Commission requests 

comment on its considerations of the 

costs of proposed § 150.9. Are there 

additional costs that the Commission 

should consider? Has the Commission 

misidentified any costs? What other 

relevant cost information or data, 

including alternative cost estimates, 

should the Commission consider and 

why? Commenters are encouraged to 

include both quantitative and 

qualitative assessments of these 

benefits, as well as data or other 

information to support such 

assessments. 

RFC 44. The Commission requests 

comment on whether a Commission 

administered process promotes more 

consistent and efficient decisionmaking. Commenters are encouraged to 

include both quantitative and 

qualitative assessments, as well as data 

or other information to support such 

assessments. 

RFC 45. The Commission recognizes 

there exist alternatives to proposed 

§ 150.9. These include such alternatives 

as: (1) Not permitting exchanges to 

administer any process to recognize 

NEBFHs; or (2) maintaining the status 

quo. The Commission requests comment 

on whether an alternative to what is 

proposed would result in a superior 

cost-benefit profile, with support for any 

such position provided. 

RFC 46. The Commission requests 

comment on whether the options for 

recognizing NEBFHs outlined in the 

December 2013 position limits proposal 

are superior from a cost-benefit 

perspective to proposed § 150.9.226 If 

yes, please explain why. 

6. Section 150.10—Spread Exemptions 

As discussed in Section IID above, the 

Commission has the authority under 

CEA section 4a(a)(1) to exempt certain 

spreads from position limits. Before the 

Dodd-Frank Act, the Commission 

exempted certain spreads from position 

limits under current § 150.3. In the 

December 2013 position limits proposal, 

the Commission proposed changing 

current § 150.3 to eliminate exemptions 

for spreads outside the spot month, and 

placed limitations on inter- and 

intramarket spreads.227 After reviewing 

comments, the Commission has refined 

its spread exemption proposal to permit 

spread exemptions from federal position 

limits, and, combined with changes to 

the definitions of ‘‘intermarket spread 

position’’ and ‘‘intramarket spread 

position,’’ authorized such spreads to 

exceed position limits during spot and 

non-spot months. 

a. Rule Summary 

The Commission proposes to 

authorize exchanges to exempt spread 

positions from federal position limits. 

The proposed § 150.10 process lists four 

types of spreads as defined and 

proposed in § 150.1 of the December 

2013 positions limits proposal and 

modified in this supplemental proposal. 

Proposed § 150.10 works in concert with 

the following three proposed rules: 

• Proposed § 150.3(a)(1)(iv), with the 

effect that exempt spread positions may 

exceed federal position limits; 

• proposed § 150.5(a)(2), with the 

effect that exempt spread positions may 

exceed exchange-set position limits for 

contracts subject to federal position 

limits; and 

• proposed § 150.5(b)(5)(ii)(C), with 

the effect that exempt spread positions 

may exceed exchange-set position limits 

for contracts not subject to federal 

position limits. 

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The proposed § 150.10 process is 

analogous to the application process for 

recognition of NEBFHs under proposed 

§ 150.9. The proposed spread exemption 

process has six sub-parts: (a) Through 

(f). The first three sub-parts— 

§ 150.10(a), (b), and (c)—require 

exchanges that elect to have a spread 

exemption process, and market 

participants that seek relief under the 

spread exemption process, to carry out 

certain duties and obligations. The latter 

four sub-parts—§ 150.10(d), (e), and 

(f)—delineate the Commission’s role 

and obligations in reviewing requests 

for spread exemptions. 

i. Section 150.10(a)—ExchangeAdministered Spread Exemption 

In sub-part (a) of proposed § 150.10, 

the Commission identifies the process 

and information required for an 

exchange to grant a market participant’s 

request that its derivative position(s) be 

recognized as an exempt spread 

position. As an initial step under 

proposed § 150.10(a)(1), exchanges that 

voluntarily elect to process spread 

exemption applications are required to 

notify the Commission of their intention 

to do so by filing new rules or rule 

amendments with the Commission 

under part 40 of the Commission’s 

regulations. In proposed § 150.10(a)(2), 

the Commission identifies four types of 

spreads that an exchange may approve. 

Proposed § 150.10(a)(3) describes in 

general terms the type of information 

that exchanges should collect from 

applicants. Proposed § 150.10(a)(4) 

obliges applicants and exchanges to act 

timely in their submissions and 

notifications, respectively, and require 

exchanges to retain revocation 

authority. Proposed § 150.10(a)(6) 

instructs exchanges to have rules 

requiring applicants who receive spread 

exemptions to report those positions, 

including each component of the 

spread. Proposed § 150.10(a)(7) requires 

exchanges to publish on its Web site a 

summary describing the type of spread 

position and explaining why it was 

exempted. 

ii. Section 150.10(b)—Spread 

Exemption Recordkeeping 

Requirements 

Exchanges must maintain complete 

books and records of all activities 

relating to the processing and 

disposition of spread exemption 

applications under proposed 

§ 150.10(b). This is similar to the record 

retention obligations of exchanges for 

positions recognized as NEBFHs. 

iii. Section 150.10(c)—Spread 

Exemption Reporting Requirements 

Exchanges would have weekly and 

monthly reporting obligations for spread 

exemptions under proposed § 150.10(c). 

This is similar to the reporting 

obligations of exchanges for positions 

recognized as NEBFHs. 

b. Baseline 

For the proposed spread exemption 

process for positions subject to federal 

limits, the baseline is CEA section 

4a(a)(1). In that statutory section, the 

Commission is authorized to recognize 

certain spread positions. That statutory 

provision is currently implemented in a 

limited calendar-month spread 

exemption in § 150.3(a)(3). For 

exchange-set position limits, the 

baseline for spreads is the guidance in 

current § 150.5(a), which provides 

generally that exchanges may recognize 

exemptions for positions that are 

normally known to the trade as spreads. 

c. Benefits 

CEA section 4a(a)(1) authorizes the 

Commission to exempt certain spreads 

from speculative position limits. In 

exercising this authority, the 

Commission recognizes that spreads can 

have considerable benefits for market 

participants and markets. The 

Commission now proposes a spread 

exemption framework that utilizes 

existing exchanges-resources and 

exchanges-expertise so that fair access 

and liquidity are promoted at the same 

time market manipulations, squeezes, 

corners, and any other conduct that 

would disrupt markets are deterred and 

prevented. Building on existing 

exchange processes preserves the ability 

of the Commission and exchanges to 

monitor markets and trading strategies 

while reducing burdens on exchanges 

that will administer the process, and 

market participants, who will utilize the 

process. 

In addition to these benefits, there are 

other benefits related to proposed 

§ 150.10 that would inure to markets 

and market participant. Yet, there is 

difficulty in quantifying these benefits 

because benefits are dependent on the 

characteristics, such as operation size 

and needs, of the market participants 

that would seek spread exemptions, and 

the markets in which the participants 

trade. Accordingly, the Commission 

considers the qualitative benefits of 

proposed § 150.10. 

For both exchanges and market 

participants, proposed § 150.10 would 

likely alleviate compliance burdens to 

the status quo. Exchanges would be able 

to build on established procedures and 

infrastructure. As stated earlier, many 

exchanges already have rules in place to 

process and grant applications for 

spread exemptions from exchange-set 

position limits pursuant to Part 38 of the 

Commission’s regulations (in particular, 

current § 38.300 and § 38.301) and 

current § 150.5. In addition, exchanges 

may be able to use the same staff and 

electronic resources that would be used 

for proposed § 150.9 and § 150.11. 

Market participants also may benefit 

from spread-exemption reviews by 

exchanges that are familiar with the 

commercial needs and practices of 

market participants seeking exemptions. 

Market participants also might gain 

legal and regulatory clarity and 

consistency that would help in 

developing trading strategies. 

Proposed § 150.10 would authorize 

exchanges to approve spread 

exemptions that permit market 

participants to continue to enhance 

liquidity, rather than being restricted by 

a position limit. For example, by 

allowing speculators to execute 

intermarket and intramarket spreads in 

accordance with proposed 

§ 150.3(a)(1)(iv) and § 150.10, 

speculators would be able to hold a 

greater amount of open interest in 

underlying contract(s), and, therefore, 

bona fide hedgers may benefit from any 

increase in market liquidity. Spread 

exemptions might lead to better price 

continuity and price discovery if market 

participants who seek to provide 

liquidity (for example, through entry of 

resting orders for spread trades between 

different contracts) receive a spread 

exemption and, thus, would not 

otherwise be constrained by a position 

limit. 

Here are two examples of positions 

that could benefit from the spread 

exemption in proposed § 150.10: 

• Reverse crush spread in soybeans 

on the CBOT subject to an intermarket 

spread exemption. In the case where 

soybeans are processed into two 

different products, soybean meal and 

soybean oil, the crush spread is the 

difference between the combined value 

of the products and the value of 

soybeans. There are two actors in this 

scenario: The speculator and the 

soybean processor. The spread’s value 

approximates the profit margin from 

actually crushing (or mashing) soybeans 

into meal and oil. The soybean 

processor may want to lock in the 

spread value as part of its hedging 

strategy, establishing a long position in 

soybean futures and short positions in 

soybean oil futures and soybean meal 

futures, as substitutes for the processor’s 

expected cash market transactions 

(purchase of the anticipated inputs for 

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processing and sale of the anticipated 

products). On the other side of the 

processor’s crush spread, a speculator 

takes a short position in soybean futures 

against long positions in soybean meal 

futures and soybean oil futures. The 

soybean processor may be able to lock 

in a higher crush spread, because of 

liquidity provided by such a speculator 

who may need to rely upon a spread 

exemption. It is important to understand 

that the speculator is accepting basis 

risk represented by the crush spread, 

and the speculator is providing liquidity 

to the soybean processor. The crush 

spread positions may result in greater 

correlation between the futures prices of 

soybeans and those of soybean oil and 

soybean meal, which means that prices 

for all three products may move up or 

down together in a closer manner. 

• Wheat spread subject to intermarket 

spread exemptions. There are two actors 

in this scenario: The speculator and the 

wheat farmer. In this example, a farmer 

growing hard wheat would like to 

reduce the price risk of her crop by 

shorting a MGEX wheat futures. There, 

however, may be no hedger, such as a 

mill, that is immediately available to 

trade at a desirable price for the farmer. 

There may be a speculator willing to 

offer liquidity to the hedger; the 

speculator may wish to reduce the risk 

of an outright long position in MGEX 

wheat futures through establishing a 

short position in CBOT wheat futures 

(soft wheat). Such a speculator, who 

otherwise would have been constrained 

by a position limit at MGEX or CBOT, 

may seek exemptions from MGEX and 

CBOT for an intermarket spread, that is, 

for a long position in MGEX wheat 

futures and a short position in CBOT 

wheat futures of the same maturity. As 

a result of the exchanges granting an 

intermarket spread exemption to such a 

speculator, who otherwise may be 

constrained by limits, the farmer might 

be able to transact at a higher price for 

hard wheat than might have existed 

absent the intermarket spread 

exemptions. Under this example, the 

speculator is accepting basis risk 

between hard wheat and soft wheat, 

reducing the risk of a position on one 

exchange by establishing a position on 

another exchange, and potentially 

providing liquidity to a hedger. Further, 

spread transactions may aid in price 

discovery regarding the relative protein 

content for each of the hard and soft 

wheat contracts. 

Finally, the Commission is no longer 

proposing to prohibit recognizing and 

exempting spreads during the spot and 

non-spot month as explained in the 

preamble. There may be considerable 

benefits that evolve from spreads 

exempted during the spot month, in 

particular. Besides enhancing the 

opportunity for market participants to 

use strategies involving spread trades 

into the spot month, this proposed relief 

may improve price discovery in the spot 

month for market participants. And, as 

in the intermarket wheat example 

above, the proposed spread relief in the 

spot month may better link prices 

between two markets, e.g., the price of 

MGEX wheat futures and the price of 

CBOT wheat futures. Put another way, 

the prices in two different but related 

markets for substitute goods may be 

more highly correlated, which benefits 

market participants with a price 

exposure to the underlying protein 

content in wheat generally, rather than 

that of a particular commodity. 

d. Costs 

Similar to proposed § 150.9, 

exchanges and market participants may 

have made already many of the financial 

outlays for administering the 

application process and applying for 

spread exemptions, respectively. 

Because of that history, the Commission 

is able to quantify some of the costs that 

will arise from proposed § 150.10 in 

Tables A3 through E3, below. Like the 

costs for proposed § 150.9, the 

Commission estimates that six entities 

would elect to process spreadexemption applications and file new 

rules or rule amendments pursuant to 

part 40 of the Commission’s regulations, 

and the number of spread exemption 

applicants and applications will likely 

vary based on the referenced contract. 

Relying on its past experience, the 

Commission forecasts the number of 

applicants and breaks down the annual 

costs in the tables below. Most of the 

monetary costs are related to the time, 

effort, and materials spent for 

administering and retaining records for 

spread exemptions. 

Although the Commission is able to 

quantify some costs, other costs related 

to proposed § 150.10 are not easily 

quantifiable. As previously stated, other 

costs are more dependent on individual 

markets and market participants seeking 

a spread exemption, and are more 

readily considered qualitatively. 

Because costs, quantitative or 

qualitative, can be particular, the 

Commission believes that market 

participants will determine whether 

costs associated with seeking a 

proposed § 150.10 spread exemption are 

worth the benefits. If the costs are too 

high, then market participants may 

choose not to apply for a spread 

exemption and not to execute a spread 

transaction that would exceed position 

limits. For instance, speculators that 

execute exempted spreads would bear 

the risk of adverse price changes in the 

spread, but a speculator who does not 

receive an exemption may be unwilling 

to bear the higher risk of an outright 

position, if a position limit would 

restrict her ability to establish a risk 

reducing position in another contract. In 

general, the Commission believes that 

proposed § 150.10 should provide 

exchanges and market participants 

greater regulatory and administrative 

certainty and that costs will be small 

relative to the benefits of having an 

additional trading tool under proposed 

§ 150.10. 

Note: The activities that are priced in 

the following Tables A2 to G2 are 

similar, if not the same types of 

activities discussed in the section 

affiliated with Tables A1 through G1, for 

proposed § 150.9. Unless there is a 

significant difference in the anticipated 

acts to implement proposed § 150.10, 

the Commission will not re-describe the 

activities valued in Tables A2 through 

G2. 

TABLE A2—COSTS TO CREATE OR AMEND EXCHANGE RULES FOR SPREAD-EXEMPTION APPLICATION REVIEWS

Proposed regulation/ 

file or amend rules 

Total average labor 

hours 

Total average labor 

costs per hour 

Total average annual 

cost per exchange 

§ 150.10(a)(1) 5 $122 $610 

[5 × $122] 

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TABLE B2—COSTS TO REVIEW SPREAD-EXEMPTION APPLICATIONS

Proposed regulation/ 

review applications 

Total average 

applications 

processed 

per exchange 

Total average 

labor 

hours per 

application 

Average total 

hours for 

total 

applications 

reviewed 

per exchange 

Total average 

labor 

costs per hour 

Total average 

annual 

cost per 

exchange 

§ 150.10(a)(2) ....................................................................... 50 5 250 

[50 × 5] 

$122 $30,500 

[$122 × 250] 

TABLE C2—COST TO POST SPREAD-EXEMPTION SUMMARIES

Proposed regulation/web-posting 

Total average 

summaries 

per exchange 

Total average 

labor 

hours per 

application 

Average total 

hours for 

total 

applications 

reviewed 

per exchange 

Total average 

labor costs 

per hour 

Total average 

annual cost 

per exchange 

§ 150.10(a) ........................................................................... 10 5 50 

[10 × 5] 

$122 $6,100 

[50 × $122] 

Regarding the following Table D2, 

note that reports are also required to be 

sent to the Commission in the case of 

exempt spread positions under 

§ 150.10(a)(5). 

TABLE D2—COSTS TO MARKET PARTICIPANTS WHO WOULD SEEK SPREAD-EXEMPTION RELIEF FROM POSITION LIMITS

Proposed regulation/market participants 

seeking relief from position limits 

Number 

of market 

participants 

Total average 

applications 

per market 

participant 

Total average 

labor 

hours per 

application 

Average 

total hours 

for each 

application 

filed per 

exchange 

Total average 

labor costs 

per hour 

Total average 

annual cost 

per market 

participant 

§ 150.10(a)(3), (6) .................................... 25 2 3 6 

[2 × 3] 

$122 $732 

[6 × $122] 

TABLE E2—COSTS FOR SPREAD-EXEMPT RECORDKEEPING

Proposed 

regulation/ 

recordkeeping 

Number of 

DCMs 

Total average 

labor 

hours for 

recordkeeping 

Total average 

labor costs 

per hour 

Total average 

annual 

recordkeeping 

cost per 

exchange 

§ 150.10(b) ....................................................................................................... 6 30 $122 $3,660 

[30 × $122] 

TABLE F2—COSTS FOR WEEKLY SPREAD-EXEMPTION REPORTING

Proposed regulation/reporting 

Estimated 

number of 

DCMs 

Estimated 

number of 

hours per 

response 

Average 

reports 

annually by 

each 

exchange 

Total average 

labor costs 

per hour 

Total average 

annual 

reporting 

cost per 

exchange 

§ 150.10(c) [weekly] ............................................................. 6 3 52 $122 $19,032 

[3 × 52 × 

$122] 

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TABLE G2—COSTS FOR MONTHLY SPREAD-EXEMPTION REPORTING

Proposed regulation/monthly reporting 

Estimated 

number of 

DCMs 

Estimated 

number of 

hours per 

response 

Average 

reports 

annually by 

each 

exchange 

Total average 

labor costs 

per hour 

Total 

average 

annual 

reporting 

average cost 

per exchange 

§ 150.10(c) ........................................................................... 6 2 12 $122 $2,928 

[2 × 12 × 

$122] 

Exchanges would have additional 

surveillance costs and duties that the 

Commission believes would be 

integrated with their existing selfregulatory organization surveillance 

activities as an exchange. For example, 

exchanges that elect to grant spread 

exemptions will have to adapt and 

develop procedures to determine 

whether a particular spread exemption 

furthers the goals of CEA section 

4a(a)(3)(B) as well as monitor whether 

applicant speculators are, in fact, 

providing liquidity to other market 

participants. 

Other costs could arise from proposed 

§ 150.11 if the Commission disagrees 

with an exchanges’ disposition of a 

spread application, or costs from a 

Commission request or review under 

proposed § 150.11(d) or (e). These costs 

are not easily quantified because they 

depend on the specifics of the 

Commission’s request or review. 

e. Request for Comment 

RFC 47. The Commission requests 

comment on its considerations of the 

benefits of proposed § 150.10. Are there 

additional benefits that the Commission 

should consider? Has the Commission 

misidentified any benefits? Commenters 

are encouraged to include both 

quantitative and qualitative assessments 

of benefits as well as data or other 

information of support such 

assessments. 

RFC 48. The Commission requests 

comment on its considerations of the 

costs of proposed § 150.10. Are there 

additional costs that the Commission 

should consider? Has the Commission 

misidentified any costs? What other 

relevant cost information or data, 

including alternative cost estimates, 

should the Commission consider and 

why? Commenters are encouraged to 

include both quantitative and 

qualitative assessments of costs as well 

as data or other information of support 

such assessments. 

RFC 49. The Commission recognizes 

that there exist alternatives to proposed 

§ 150.10. These alternatives include: (i) 

Maintaining the status quo, or (ii) 

pursuing the changes in the December 

2013 position limits proposal. The 

Commission requests comment on 

whether retaining the framework for 

spread exemptions as proposed in the 

December 2013 position limits proposal 

is superior from a cost-benefit 

perspective to proposed § 150.10. If yes, 

please explain why. The Commission 

requests comment on whether any 

alternatives to proposed § 150.10 would 

result in a superior cost-benefit profile, 

with support for any such alternative 

provided. 

7. Section 150.11—Enumerated 

Anticipatory Bona Fide Hedges 

After reviewing comments in 

response to the December 2013 position 

limits proposal, the Commission is now 

proposing another method by which 

market participants may have 

enumerated anticipatory bona fide 

hedge positions recognized. As 

proposed in the December 2013 position 

limits proposal, § 150.7 would require 

market participants to file statements 

with the Commission regarding certain 

anticipatory hedges which would 

become effective absent Commission 

action or inquiry ten days after 

submission. The second method in 

proposed § 150.11 is an exchangeadministered process to determine 

whether certain enumerated 

anticipatory bona fide hedge positions, 

such as unfilled anticipated 

requirements, unsold anticipated 

production, anticipated royalties, 

anticipated service contract payments or 

receipts, or anticipatory crosscommodity hedges should be 

recognized as bona fide hedge positions. 

Proposed § 150.11 works in concert with 

the following three proposed rules: 

• Proposed § 150.3(a)(1)(i), with the 

effect that recognized anticipatory 

enumerated bona fide hedge positions 

may exceed federal position limits; 

• proposed § 150.5(a)(2), with the 

effect that recognized anticipatory 

enumerated bona fide hedge positions 

may exceed exchange-set position limits 

for contracts subject to federal position 

limits; and 

• proposed § 150.5(b)(5), with the 

effect that recognized anticipatory 

enumerated bona fide hedge positions 

may exceed exchange-set position limits 

for contracts not subject to federal 

position limits. 

a. Rule Summary 

The proposed § 150.11 process is 

somewhat analogous to the application 

process for recognition of NEBFHs 

under proposed § 150.9. The proposed 

§ 150.11 recognition process for 

enumerated anticipatory bona fide 

hedge positions has five sub-parts: (a) 

through (e). The first three sub-parts— 

§ 150.11(a), (b), and (c)—require 

exchanges that elect to have a process 

for recognizing enumerated anticipatory 

bona fide hedge positions, and market 

participants that seek position-limit 

relief for such positions, to carry out 

certain duties and obligations. The 

fourth and fifth sub-parts—§ 150.11(d), 

and (e)—delineate the Commission’s 

role and obligations in reviewing 

requests for recognition of enumerated 

anticipatory bona fide hedge positions. 

i. Section 150.11(a)—ExchangeAdministered Enumerated Anticipatory 

Bona Fide Hedge Process 

Under proposed § 150.11(a)(1), 

exchanges that voluntarily elect to 

process enumerated anticipatory bonafide hedge applications are required to 

notify the Commission of their intention 

to do so by filing new rules or rule 

amendments with the Commission 

under part 40 of the Commission’s 

regulations. In proposed § 150.11(a)(2), 

the Commission identifies certain types 

of information necessary for the 

application, including information 

required under proposed § 150.7(d). In 

proposed § 150.11(a)(3), the 

Commission states that applications 

must be updated annually and that the 

exchanges have ten days in which to 

recognize an enumerated anticipatory 

bona fide hedge. In addition, exchanges 

must retain authority to revoke 

recognitions. Proposed § 150.11(a)(4) 

states that once an enumerated 

anticipatory bona fide hedge has been 

recognized by an exchange, the position 

will be deemed to be recognized. 

Proposed § 150.11(a)(5) discusses 

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228See discussion in December 2013 position 

limits proposal at 75745–46. 

reports that must be filed by applicants 

holding exempted an enumerated 

anticipatory bona fide hedge positions. 

Proposed 150.11(a)(6) explains that 

exchanges may choose to seek 

Commission review of an application 

and the Commission has ten days in 

which to respond. 

ii. Section 150.11(b)—Enumerated 

Anticipatory Bona Fide Hedge 

Recordkeeping Requirements 

Exchanges must maintain complete 

books and records of all activities 

relating to the processing and 

disposition of spread-exemption 

applications under proposed 

§ 150.11(b). This is similar to the recordretention obligations of exchanges for 

positions recognized as NEBFHs under 

proposed § 150.9, and exempted as 

spreads under proposed § 150.10. 

iii. Section 150.11(c)—Enumerated 

Anticipatory Bona Fide Hedge 

Reporting Requirements 

Exchanges would have weekly 

reporting obligations under proposed 

§ 150.11(c). Unlike NEBFHs and 

spreads, exchanges would have no 

monthly reporting or web-posting 

obligations for enumerated anticipatory 

bona fide hedges. 

b. Baseline 

The baseline is the same as it was in 

the December 2013 position limits 

proposal: The current filing process 

detailed in current § 1.48. 

c. Benefits 

There are significant benefits that 

would likely accrue should proposed 

§ 150.11 be adopted. Similar to the 

benefits for recognizing positions as 

NEBFH positions under § 150.9, 

recognizing anticipatory positions as 

bona fide hedges under § 150.11 would 

provide market participants with 

potentially a more expeditious 

recognition process than the 

Commission proposal for a 10-day 

Commission recognition process under 

proposed 150.7. The benefit of prompter 

recognitions, though, is not readily 

quantifiable, and, in most 

circumstances, is subject to the 

characteristics and needs of markets as 

well as market participants. So while it 

is challenging to quantify the benefits 

that would likely be associated with 

proposed § 150.11, there are qualitative 

benefits that the Commission can 

discuss. 

For example, exchanges would be 

able to use existing resources and 

knowledge in the administration and 

assessment of enumerated anticipatory 

bona fide hedge positions. The 

Commission and exchanges have 

evaluated these types of positions for 

years (as discussed in the December 

position limits proposal). Utilizing this 

experience and familiarity would likely 

produce such benefits as prompt but 

reasoned decision making and 

streamlined procedures. In addition, 

proposed § 150.11 permits exchanges to 

act in less than ten days—a timeframe 

that would be less than the 

Commission’s process under current 

§ 1.48, or under § 150.7 as proposed in 

the December 2013 position limits 

proposal.228 This could potentially 

enable commercial market participants 

to pursue trading strategies in a more 

timely fashion to advance their 

commercial and hedging needs to 

reduce risk. 

Proposed § 150.11, similar to 

proposed § 150.9 and § 150.10, also 

would provide the benefit of enhanced 

record-retention and reporting of 

positions recognized as enumerated 

anticipatory bona fide hedges. As 

previously discussed, records retained 

for specified periods would enable 

exchanges to develop consistent 

practices and afford the Commission 

accessible information for review, 

surveillance, and enforcement efforts. 

Likewise, weekly reporting under 

§ 150.11 would facilitate the tracking of 

positions, provide transparency to the 

enumerated anticipatory bona fide 

hedge process to the public, and 

improve open access and administrative 

and legal certainty. 

d. Costs 

The costs for proposed § 150.11 are 

similar to the costs for proposed 

§§ 150.9 and 150.10, with many of the 

cost considerations not changing. The 

costs that can be quantified are in 

Tables A3 through G3. Other costs 

associated with proposed § 150.11, like 

those for proposed §§ 150.9 and 150.10, 

are more qualitative in nature and hinge 

on specific market and participant 

attributes. With this in mind, the 

Commission believes that exchanges 

and market participants will incur the 

costs related to § 150.11 if they believe 

that administering the process under 

proposed § 150.11, or applying for 

recognition under proposed § 150.11 

and establishing a recognized position, 

respectively, are less costly than not 

administering the process under 

proposed § 150.11 recognitions, or not 

executing such trades, respectively. 

Other costs could arise from proposed 

§ 150.11 if the Commission disagrees 

with an exchange’s disposition of an 

enumerated anticipatory bona fide 

hedge position application, or costs 

from a Commission request or review 

under proposed § 150.11(d) These costs 

would include time and effort spent by 

market participants associated with a 

Commission review. In addition, market 

participants would lose amounts that 

the Commission can neither predict nor 

quantify if it became necessary to 

unwind trades or reduce positions were 

the Commission to conclude that an 

exchange’s disposition of an 

enumerated anticipatory bona fide 

hedge application is not appropriate or 

is inconsistent with the Act. The 

Commission believes that such 

disagreements will be rare based on the 

Commission’s past experience and 

review of exchanges’ efforts. 

Nevertheless, the Commission notes that 

assessing whether a position is for the 

reduction of risk arising from 

anticipatory needs or excessive 

speculation is complicated. 

Note: For a general description of 

proposed rules identified in the 

following Tables A3 to E3, see Section 

IIIA5, above. 

TABLE A3—COSTS TO CREATE OR AMEND EXCHANGE RULES FOR ENUMERATED ANTICIPATORY BONA FIDE HEDGE

APPLICATIONS

Proposed regulation/file or amend rules Total average 

labor hours 

Total average 

labor costs per 

hour 

Total average 

annual cost 

per exchange 

§ 150.11(a)(1) ............................................................................................................................... 5 $122 $610 

[5 × $122] 

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229See December 2013 position limits proposal at 

75776–77. 

TABLE B3—COSTS TO REVIEW ENUMERATED ANTICIPATORY BONA FIDE HEDGE APPLICATIONS

Proposed regulation/review applications 

Total average 

applications 

processed per 

exchange 

Total average 

labor hours 

per application 

Average total 

hours for total 

applications 

reviewed 

per exchange 

Total average 

labor costs 

per hour 

Total average 

annual cost 

per exchange 

§ 150.11(a)(2) ....................................................................... 50 5 250 $122 $30,500 

[$122 × 250] 

TABLE C3—COSTS TO MARKET PARTICIPANTS WHO WOULD SEEK ENUMERATED ANTICIPATORY BONA FIDE HEDGE

RELIEF FROM POSITION LIMITS

Proposed regulation/market participants 

seeking relief from 

position limits 

Number of 

market 

participants 

Total average 

applications 

per market 

participant 

Total average 

labor hours 

per application 

Average total 

hours for each 

application 

filed per 

exchange 

Total average 

labor costs per 

hour 

Total average 

annual cost 

per market 

participant 

§ 150.11(a)(2), (6) .................................... 25 2 3 6 

[2 × 3] 

$122 $732 

[6 × $122] 

TABLE D3—COSTS FOR ENUMERATED ANTICIPATORY BONA FIDE HEDGE RECORDKEEPING

Proposed regulation/recordkeeping Number of 

DCMs 

Total average 

labor hours for 

recordkeeping 

Total average 

labor costs per 

hour 

Total average 

annual 

recordkeeping 

cost per 

exchange 

§ 150.11(b) ................................................................................................. 6 30 $122 $3,660 

[30 × $122] 

TABLE E3—COSTS FOR ENUMERATED ANTICIPATORY BONA FIDE HEDGE WEEKLY REPORTING

Proposed regulation/weekly reporting 

Estimated 

number of 

DCMs 

Estimated 

number of 

hours per 

response 

Average 

reports 

annually by 

each 

exchange 

Total average 

labor costs per 

hour 

Total average 

annual 

reporting cost 

per 

exchange 

§ 150.11(c) ........................................................................... 6 3 52 $122 $19,032 

[3 × 52 × 

$122] 

Exchanges would have additional 

surveillance costs and duties that the 

Commission believes would be 

integrated with their existing selfregulatory organization surveillance 

activities as an exchange. 

f. Request for Comment 

RFC 50. The Commission requests 

comment on its considerations of the 

benefits of proposed § 150.11. Are there 

additional benefits that the Commission 

should consider? Has the Commission 

misidentified any benefits? Commenters 

are encouraged to include both 

quantitative and qualitative assessments 

of these benefits, as well as data or other 

information to support such 

assessments. 

RFC 51. The Commission requests 

comment on its considerations of the 

costs of proposed § 150.11. Are there 

additional costs that the Commission 

should consider? Has the Commission 

misidentified any costs? What other 

relevant cost information or data, 

including alternative cost estimates, 

should the Commission consider and 

why? Commenters are encouraged to 

include both quantitative and 

qualitative assessments of these costs, as 

well as data or other information to 

support such assessments. 

RFC 52. The Commission recognizes 

that there may exist alternatives to 

proposed § 150.11, such as maintaining 

the status quo, or adopting only § 150.7 

as proposed in the December 2013 

position limits proposal.229 The 

Commission requests comment on 

whether alternatives to proposed 

§ 150.11 would result in a superior costbenefit profile, with support for any 

such alternative provided. The 

Commission requests comment on 

whether the framework for recognizing 

enumerated anticipatory bona fide 

hedging positions as proposed in the 

December 2013 position limits proposal 

would be superior from a cost-benefit 

perspective to proposed § 150.11. If yes, 

please explain why. 

8. CEA Section 15(a) Factors 

CEA section 15(a) requires the 

Commission to consider the costs and 

benefits of its actions in light of five 

factors, which it proposes to do below. 

The Commission welcomes comments 

on its discussion of the proposed rules 

in this supplemental proposal and the 

CEA 15(a) factors. 

i. Protection of Market Participants and 

the Public 

The imposition of position limits is 

intended to protect the markets and 

market participants from manipulation 

and excessive speculation. Yet, there are 

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circumstances where position limits 

may be exceeded by bona fide hedge 

positions or spread positions, as 

provided in the CEA. By proposing the 

rules in this supplemental proposal, the 

Commission is offering market 

participants several reasonable 

alternatives by which they may 

establish bona fide hedge positions or 

spread positions that exceed position 

limits. The proposed alternatives 

require, among other things, exchanges 

to document and record their decisions 

to recognize bona fide hedge positions 

or to exempt spread positions. The 

Commission believes that the discipline 

of having exchanges review and 

document such decisions protects 

hedgers, speculators, and markets from 

abuse of recognitions and exemptions. 

In general, exchanges have strong 

incentives, such as preserving the 

revenue from trading, maintaining 

credibility, and protecting markets and 

market participants from excessive 

speculation, manipulation, corners, and 

squeezes. In addition, the proposed 

rules would enable the Commission to 

protect markets and market participants 

because the Commission would be able 

to perform second-level reviews of 

exchange-administered processes 

regarding exemptions from speculative 

position limits, if necessary, and have 

available documentation for 

surveillance and enforcement actions. 

RFC 53: Does permitting the 

exchanges to administer application 

processes for NEBFHs, spread 

exemptions, and enumerated 

anticipatory bona fide hedges further 

the goals of CEA section 4a(a)(3)(B) and 

properly protect market participants and 

the public? Please explain. 

RFC 54: Does permitting the 

exchanges to administer application 

processes for NEBFHs, spread 

exemptions, and enumerated 

anticipatory bona fide hedges affect 

excess speculation? Please explain. 

RFC 55: Will the ability to assume 

larger positions by way of exemptions 

under this supplemental proposal 

facilitate effective market manipulation 

by market participants availing 

themselves of such exemptions? Are 

existing safeguards and deterrents to 

market manipulation sufficient to 

prevent manipulation or does the 

Commission need to impose position 

limits without exchange-granted 

exemptions to prevent manipulation, 

prophylactically? Please explain. 

ii. Efficiency, Competitiveness, and 

Financial Integrity of Futures Markets 

Market manipulation and excessive 

speculation harm the efficiency, 

competitiveness, and financial integrity 

of markets. Position limits are intended 

to prevent market manipulation and 

excessive speculation. There are, 

however, positions that may exceed 

position limits, such as those permitted 

by proposed §§ 150.9, 150.10, and 

150.11, that promote market efficiency 

and competitiveness. For example, the 

proposed rules require an exchange to 

consider the policy objectives of 

position limits, prior to granting a 

spread exemption. If a market 

participant exerts market power, it 

might adversely affect market integrity 

because other market participants might 

perceive the underlying pricing process 

to be unfair. The proposed rules are 

designed, in part, to give exchanges the 

ability and information to guard against 

accumulation and exercise of market 

power that may result from excessive 

speculation, and, therefore, promote 

financial integrity and confidence in the 

markets. 

RFC 56: Is market integrity adversely 

affected by the proposed rules in this 

supplemental proposal? If so, how 

might the Commission mitigate any 

harmful impact? 

RFC 57: Should the Commission 

provide more guidance to exchanges on 

how to assess recognitions under this 

supplemental proposal, for example, 

guidance on cash-and-carry spreads, or 

any other spreads involving the spotmonth contract? 

RFC 58: What costs and benefits 

would accrue to exchanges and market 

participants should the Commission 

provide additional guidance to 

exchanges on how to assess recognitions 

under this supplemental proposal? 

Please explain. 

RFC 59: Are there any anticompetitive effects between exchanges, 

or exchanges and SEFs, because the 

rules proposed in this supplemental 

proposal have the practical effect of 

allowing exchanges to recognize and 

grant exemptions from position limits? 

If so, what are they? Please explain. 

iii. Price Discovery 

The Commission believes that the 

recognition and exemption processes 

proposed to be administered by 

exchanges in this supplemental 

proposal will foster liquidity and 

potentially improve price discovery. 

Because exchanges possess knowledge 

about the commercial needs of market 

participants and the needs of markets, 

the proposed rules will enable 

exchanges to recognize and exempt 

positions in a timely and reasonable 

manner to help facilitate more stable 

prices. With more stable prices, market 

participants will have the ability to 

trade in and out of derivative positions 

more easily and with lower costs of 

execution. 

RFC 60: How might the rules 

proposed in this supplemental proposal 

affect price discovery? Please explain. 

RFC 61: How might the rules 

proposed in this supplement proposal 

affect liquidity? 

RFC 62: Will price discovery be 

improved on exchanges because of the 

exemptions outlined in this 

supplemental proposal? 

RFC 63: How might spread 

exemptions that go into the spot month 

affect price discovery? 

RFC 64: What price-discovery costs 

and benefits would accrue for spread 

exemptions that go into the spot month? 

Please explain. 

iv. Sound Risk Management Practices 

Under the proposed rules, market 

participants must explain and document 

the methods behind their hedging 

strategies to exchanges, and exchanges 

would have to evaluate them. As a 

result, the Commission believes that the 

exchange-administered processes 

discussed in this supplemental proposal 

should help market participants, 

exchanges, the Commission, and the 

public to understand better the risk 

management techniques and objectives 

of various market participants. 

RFC 65: How might the rules 

proposed in this supplemental proposal 

affect sound risk management practices? 

v. Other Public Interest Considerations 

Except as discussed above, the 

Commission has not identified any 

other public interest considerations. 

RFC 66: Are there any other public 

interest considerations that the 

Commission should consider? 

RFC 67: The Commission seeks 

comments on all aspects of its cost and 

benefit considerations. To the extent 

that any of the proposed rules in this 

supplemental proposal have an impact 

on activities outside the United States, 

the Commission requests comment on 

whether the associated costs and 

benefits are likely to be different from 

those associated with their impact on 

activities within the United States; and, 

if so, in what particular ways and to 

what extent. While at this point in time 

the Commission does not foresee any 

other costs or benefits that might be 

associated with the cross-border 

implications of this proposal, it seeks 

further any comment on this topic. For 

instance, would price discovery move to 

a foreign board of trade because of this 

proposed rulemaking? On all issues, 

commenters are encouraged to supply 

data and quantify where practical. 

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230Proposed rules §§ 150.9(a)(1), 150.10(a)(1), and 

150.11(a)(1). 

231 In the case of qualifications to exempt certain 

spread positions, the contract may be either a 

referenced contract or a component of the spread. 

See proposed rule § 150.10(a)(1)(i). 

232The Commission recognizes that in certain 

circumstances it might be in an exchange’s 

economic interest to deny processing a particular 

trader’s application for hedge recognition or a 

spread exemption. For example, this might occur in 

a circumstance in which a trader has reached the 

exchange-set limit and the exchange determines 

that liquidity is insufficient to maintain a fair and 

orderly contract market if the trader’s position 

increases. 

233See, e.g., Brown Shoe Co. v. U.S., 370 U.S. 294, 

324–25 (1962) (‘‘The outer boundaries of a product 

market are determined by the reasonable 

interchangeability of use or the cross-elasticity of 

demand between the product itself and the 

substitutes for it’’); U.S. v. E.I. du Pont de Nemours 

& Co., 353 U.S. 586, 593 (1957) (‘‘Determination of 

the relevant market is a necessary predicate to 

finding a violation’’); Rebel Oil v. Atl. Richfield Co., 

51 F. 3d 1421, 1434 (9th Cir. 1995) (‘‘A ‘market’ is 

any grouping of sales whose sellers, if unified by 

a monopolist or a hypothetical cartel would have 

market power in dealing with any group of buyers,’’ 

quoting Phillip Areeda & Herbert Hovenkamp, 

Antitrust Law ¶ 518.1b, at 534 (Supp. 1993)). 

RFC 68: The Commission requests 

comment on whether there will be any 

lost benefits related to position limits 

because of the recognitions and 

exemptions in the proposed rules in this 

supplemental proposal. 

9. CEA Section 15(b) Considerations 

Section 15(b) of the CEA requires the 

Commission to consider the public 

interest to be protected by the antitrust 

laws and to endeavor to take the least 

anticompetitive means of achieving the 

objectives, policies and purposes of the 

CEA, before promulgating a regulation 

under the CEA or issuing certain orders. 

The Commission preliminarily believes 

that the rules and guidance proposed in 

this supplemental notice of proposed 

rulemaking are consistent with the 

public interest protected by the antitrust 

laws. 

The Commission acknowledges that, 

with respect to exchange qualifications 

to recognize or grant NEBFHs, spread 

exemptions, and anticipatory bona fide 

hedges for federal position limit 

purposes, the threshold experience 

requirements that it proposes will 

advantage certain more-established 

incumbent DCMs (‘‘incumbent DCMs’’) 

over smaller DCMs seeking to expand or 

future entrant DCMs (collectively 

‘‘entrant DCMs’’) or SEFs.230

Specifically, incumbent DCMs—based 

on their past track records of listing 

actively traded reference contracts and 

setting and administering exchange-set 

limits applicable to those contracts for 

at least a year—will be immediately 

eligible to submit rules to the 

Commission under part 40 to process 

trader applications for recognition of 

NEBFHs, spread exemptions,231 and 

anticipatory bona fide hedges; in 

contrast, entrant DCMs and SEFs will be 

foreclosed until such time as they have 

met the eligibility criteria to do so. 

However, subject to consideration of 

any comments supporting a contrary 

view, the Commission does not perceive 

that an ability to process applications 

for NEBFHs, spread exemptions and/or 

anticipatory bona fide hedges is a 

necessary function for a DCM or SEF to 

compete effectively as a trading facility. 

In the event an incumbent DCM 

declines to process a trader’s request for 

hedging recognition or a spread 

exemption,232 the trader may seek the 

recognition or exemption directly from 

the Commission in order to trade on an 

entrant DCM or SEF. Accordingly, the 

Commission does not view the proposed 

threshold experience requirements as 

establishing a barrier to entry or 

competitive restraint likely to facilitate 

anticompetitive effects in any relevant 

antitrust market for contract trading.233

The Commission requests comment 

on any considerations related to the 

public interest to be protected by the 

antitrust laws and potential 

anticompetitive effects of the proposal, 

as well as data or other information to 

support such considerations. Is the 

Commission correct that the proposed 

threshold criteria for an exchange to 

qualify to process applications for 

recognition of NEBFHs, spread 

exemptions, and enumerated 

anticipatory bona fide hedges is 

unlikely to create a competitive barrier 

to entry or expansion that will insulate 

incumbent DCMs from competition for 

contract trading or otherwise contribute 

to anticompetitive effects in any 

relevant antitrust market(s) for contract 

trading? 

B. Regulatory Flexibility Act 

The Regulatory Flexibility Act 

(‘‘RFA’’) requires that agencies consider 

whether the rules they propose will 

have a significant economic impact on 

a substantial number of small entities 

and, if so, provide a regulatory 

flexibility analysis respecting the 

impact. A regulatory flexibility analysis 

or certification typically is required for 

‘‘any rule for which the agency 

publishes a general notice of proposed 

rulemaking pursuant to’’ the notice-andcomment provisions of the 

Administrative Procedure Act, 5 U.S.C. 

553(b). The requirements related to the 

proposed amendments fall mainly on 

registered entities, exchanges, FCMs, 

swap dealers, clearing members, foreign 

brokers, and large traders. The 

Commission has previously determined 

that registered DCMs, FCMs, swap 

dealers, major swap participants, 

eligible contract participants, SEFs, 

clearing members, foreign brokers and 

large traders are not small entities for 

purposes of the RFA. While the 

requirements under the proposed 

rulemaking may impact non-financial 

end users, the Commission notes that 

position limits levels apply only to large 

traders. Accordingly, the Chairman, on 

behalf of the Commission, hereby 

certifies, on behalf of the Commission, 

pursuant to 5 U.S.C. 605(b), that the 

actions proposed to be taken herein 

would not have a significant economic 

impact on a substantial number of small 

entities. The Chairman made the same 

certification in the 2013 Position Limits 

Proposal. 

C. Paperwork Reduction Act 

1. Overview 

The Paperwork Reduction Act 

(‘‘PRA’’), 44 U.S.C. 3501 et seq., imposes 

certain requirements on Federal 

agencies in connection with their 

conducting or sponsoring any collection 

of information as defined by the PRA. 

An agency may not conduct or sponsor, 

and a person is not required to respond 

to, a collection of information unless it 

displays a currently valid control 

number issued by the Office of 

Management and Budget (‘‘OMB’’). 

Certain provisions of the proposed rules 

would result in amendments to 

previously-approved collection of 

information requirements within the 

meaning of the PRA. Therefore, the 

Commission is submitting to OMB for 

review in accordance with 44 U.S.C. 

3507(d) and 5 CFR 1320.11 the 

information collection requirements 

proposed in this rulemaking proposal as 

an amendment to the previouslyapproved collection associated with 

OMB control number 3038–0013. 

If adopted, responses to this 

collection of information would be 

mandatory. The Commission will 

protect proprietary information 

according to the Freedom of Information 

Act and 17 CFR part 145, titled 

‘‘Commission Records and 

Information.’’ In addition, the 

Commission emphasizes that section 

8(a)(1) of the Act strictly prohibits the 

Commission, unless specifically 

authorized by the Act, from making 

public ‘‘data and information that 

would separately disclose the business 

transactions or market positions of any 

person and trade secrets or names of 

customers.’’ The Commission also is 

required to protect certain information 

contained in a government system of 

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38500 Federal Register / Vol. 81, No. 113 / Monday, June 13, 2016 / Proposed Rules 

records pursuant to the Privacy Act of 

1974. 

On December 12, 2013, the 

Commission published in the Federal 

Register a notice of proposed 

modifications to parts 1, 15, 17, 19, 32, 

37, 38, 140, and 150 of the 

Commission’s regulations (as defined 

above, the ‘‘December 2013 position 

limits proposal’’). The modifications 

addressed, among other things, 

speculative position limits for 28 

exempt and agricultural commodity 

futures and options contracts and the 

physical commodity swaps that are 

‘‘economically equivalent’’ to such 

contracts. The Commission is now 

proposing revisions to the December 

2013 position limits proposal. 

Specifically, the Commission is now 

proposing that the position limits set 

forth in § 150.2 may be exceeded to the 

extent that a commodity derivative 

position is recognized, as an NEBFH, 

exempt spread position, or enumerated 

anticipatory bona fide hedge, by a 

derivatives contract market or swap 

execution facility. A designated contract 

market or swap execution facility that 

elects to process applications pursuant 

to the proposed rules must file new 

rules or rule amendments with the 

Commission pursuant to Part 40. Such 

new rules or rule amendments must 

comply with certain conditions set forth 

in proposed §§ 150.9(a), 150.10(a), and/ 

or 150.11(a), as applicable. Further, 

such rules must state that in order to 

apply for an exemption with a particular 

designated contract market or swap 

execution facility, a person would need 

to meet certain criteria and file an 

application with the relevant derivatives 

contract market or swap execution 

facility in accordance with proposed 

§§ 150.9(a), 150.10(a), or 150.11(a), as 

applicable. 

2. Methodology and Assumptions 

It is not possible at this time to 

accurately determine the number of 

respondents affected by the proposed 

revisions to the December 2013 position 

limits proposal. This current proposal 

permits designated contract markets and 

swap execution facilities to elect to 

process applications for recognition of 

NEBFHs, exempt spread positions, or 

enumerated anticipatory bona fide 

hedges. Accordingly, the Commission 

does not know which, or how many, 

designated contract markets and swap 

execution facilities may elect to offer 

such recognition processes, or which, or 

how many market participants may 

submit applications. Further, the 

Commission is unsure of how many 

designated contract markets, swap 

execution facilities, and market 

participants not currently active in the 

market may elect to incur the estimated 

burdens in the future. 

These limitations notwithstanding, 

the Commission has made best-effort 

estimations regarding the likely number 

of affected entities for the purposes of 

calculating burdens under the PRA. The 

Commission used data currently 

provided by designated contract markets 

to estimate the number of respondents 

for each of the proposed obligations 

subject to the PRA. The Commission 

estimated the number of exchanges that 

may elect to process applications for 

recognition of NEBFHs, exempt spread 

positions, or enumerated anticipatory 

bona fide hedges, and the number of 

market participants who may file for 

relief from position limit requirements 

under the proposed processes. The 

Commission also used information from 

testimony given at Commission advisory 

committee meetings. Further, the 

Commission asked several questions of 

the five exchanges that, in the 

Commission’s knowledge, currently 

process applications for exemptions to 

exchange-set position limits, to 

ascertain the burdens on the exchanges 

that may arise should such exchanges 

elect to process applications under 

proposed §§ 150.9, 150.10, and/or 

150.11. The Commission received 

responses to its questions regarding the 

administration of current exchange 

processes for approving exemptions 

from position limits from 

representatives of four exchanges. The 

Commission preliminarily believes that 

the burden estimates provided by these 

four exchanges are sufficiently 

representative of all potentially affected 

entities, and is providing average 

estimates in order to estimate the 

potential impact on all entities, 

particularly those which do not 

currently process exemption 

applications. Thus, the Commission 

proposes to use these estimates, as well 

as figures provided in testimony from 

the Energy and Environmental Markets 

Advisory Committee and Agricultural 

Advisory Committee meetings, to 

calculate burdens for the purposes of 

the Paperwork Reduction Act. The 

Commission welcomes comment on its 

estimates and the methodology 

described above. 

The Commission’s estimates 

concerning wage rates are based on 2013 

salary information for the securities 

industry compiled by the Securities 

Industry and Financial Markets 

Association (‘‘SIFMA’’). The 

Commission is using a figure of $122 

per hour, which is derived from a 

weighted average of salaries across 

different professions from the SIFMA 

Report on Management & Professional 

Earnings in the Securities Industry 

2013, modified to account for an 1800- 

hour work-year, adjusted to account for 

the average rate of inflation in 2013. 

This figure was then multiplied by 1.33 

to account for benefits, and further by 

1.5 to account for overhead and 

administrative expenses. The 

Commission anticipates that compliance 

with the provisions would require the 

work of an information technology 

professional; a compliance manager; an 

accounting professional; and an 

associate general counsel. Thus, the 

wage rate is a weighted national average 

of salary for professionals with the 

following titles (and their relative 

weight); ‘‘programmer (average of senior 

and non-senior)’’ (15% weight), ‘‘senior 

accountant’’ (15%) ‘‘compliance 

manager’’ (30%), and ‘‘assistant/

associate general counsel’’ (40%). All 

monetary estimates below have been 

rounded to the dollar. 

The Commission welcomes comment 

on its assumptions and estimates. 

3. Collections of Information— 

Information Provided by Reporting 

Entities and Recordkeeping Duties 

(a) Requirements for Designated 

Contract Markets and Swaps Execution 

Facilities Filing New or Amended Rules 

Pursuant to Part 40 

Proposed §§ 150.9(a), 150.10(a), and 

150.11(a) require that designated 

contract markets and swap execution 

facilities file new rules or rule 

amendments pursuant to Part 40 of this 

chapter, establishing or amending its 

application process for recognition of 

NEBFHs, exempt spread positions, or 

enumerated anticipatory bona fide 

hedges, respectively, consistent with the 

requirements of proposed §§ 150.9, 

150.10, and 150.11. Further, proposed 

§§ 150.9(a), 150.10(a), and 150.11(a) 

require that designated contract markets 

and swap execution facilities post to 

their Web sites a summary describing 

the type of derivative positions that are 

recognized as exempt non-enumerated 

hedge positions. 

The Commission estimates that, at 

most, 6 entities will file new rules or 

rule amendments pursuant to Part 40 to 

elect to process NEBFH applications. 

The Commission determined this 

estimate by analyzing how many 

exchanges currently list actively traded 

contracts for the 28 commodities for 

which federal position limits will be set, 

because proposed §§ 150.9(a), 150.10(a), 

and 150.11(a) require a referenced 

contract to be listed by and actively 

traded on any exchange that elects to 

process NEBHF applications for 

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recognition of positions in such 

referenced contract. The Commission 

anticipates that the exchanges that elect 

to process NEBFH applications under 

proposed § 150.9(a) are likely to have 

processes for recognizing such 

exemptions currently, and so would 

need to file amendments to existing 

exchange rules rather than adopt new 

rules. This filing would be required only 

once. Thus, the Commission 

approximates an average per entity 

burden of 5 labor hours. At an estimated 

labor cost of $122, the Commission 

estimates an average cost of 

approximately $610 per entity for filings 

under proposed § 150.9(a). 

Similarly, the Commission anticipates 

that the exchanges that elect to process 

spread exemption applications under 

proposed § 150.10(a) are likely to have 

processes for recognizing such 

exemptions currently, and so would 

need to file amendments to existing 

exchange rules rather than adopt new 

rules. This filing would be required only 

once. Thus, the Commission 

approximates an average per entity 

burden of 5 labor hours. At an estimated 

labor cost of $122, the Commission 

estimates an average cost of 

approximately $610 per entity for filings 

under proposed § 150.10(a). 

In addition, the Commission 

anticipates that the exchanges that elect 

to process enumerated anticipatory bona 

fide hedge applications under proposed 

§ 150.11(a) are likely to have processes 

for recognizing such exemptions 

currently, and so would need to file 

amendments to existing exchange rules 

rather than adopt new rules. This filing 

would be required only once. Thus, the 

Commission approximates an average 

per entity burden of 5 labor hours. At 

an estimated labor cost of $122, the 

Commission estimates an average cost of 

approximately $610 per entity for filings 

under proposed § 150.11(a). 

Review and Disposition of Applications 

An exchange that elects to process 

applications may incur a burden related 

to the review and disposition of such 

applications pursuant to proposed 

§§ 150.9(a), 150.10(a), and 150.11(a). 

The review of an application is required 

to include analysis of the facts and 

circumstances of such application to 

determine whether the application 

meets the standards established by the 

Commission. Exchanges are required to 

notify the applicant regarding the 

disposition of the application, including 

whether the application was approved, 

denied, referred to the Commission, or 

requires additional information. 

The Commission anticipates that the 

exchanges that elect to process NEBFH 

applications under proposed § 150.9(a) 

are likely to have processes for the 

review and disposition of such 

applications currently in place. The 

Commission preliminarily believes that 

in such cases, complying with the 

proposed rules is likely to be less 

burdensome because the exchange 

would already have staff, policies, and 

procedures established to accomplish its 

duties under the proposed rules. Thus, 

the Commission estimates that each 

exchange would process an average of 

185 NEBFH applications per year and 

that each application would require 5 

hours to process, for an average per 

entity burden of 925 labor hours 

annually. At an estimated labor cost of 

$122, the Commission estimates an 

average cost of approximately $112,850 

per entity under proposed § 150.9(a). 

The Commission anticipates that the 

exchanges that elect to process spread 

exemption applications under proposed 

§ 150.10(a) are likely to have processes 

for the review and disposition of such 

applications currently in place. The 

Commission preliminarily believes that 

in such cases, complying with the 

proposed rules is likely to be less 

burdensome because the exchange 

would already have staff, policies, and 

procedures established to accomplish its 

duties under the proposed rules. Thus, 

the Commission estimates that each 

exchange would process about 50 

spread exemption applications per year 

and that each application would require 

5 hours to process, for an average per 

entity burden of 250 labor hours 

annually. At an estimated labor cost of 

$122, the Commission estimates an 

average cost of approximately $30,500 

per entity under proposed § 150.10(a). 

The Commission anticipates that the 

exchanges that elect to process 

enumerated anticipatory bona fide 

hedge applications under proposed 

§ 150.11(a) are likely to have processes 

for the review and disposition of such 

applications currently in place. The 

Commission preliminarily believes that 

in such cases, complying with the 

proposed rules is likely to be less 

burdensome because the exchange 

would already have staff, policies, and 

procedures established to accomplish its 

duties under the proposed rules. Thus, 

the Commission estimates that each 

entity would process about 50 

anticipatory hedging applications per 

year and that each application would 

require 5 hours to process, for an 

average per entity burden of 250 labor 

hours annually. At an estimated labor 

cost of $122, the Commission estimates 

an average cost of approximately 

$30,500 per entity under proposed 

§ 150.11(a). 

Publication of Summaries 

Further, exchanges that elect to 

process the applications under proposed 

§§ 150.9 and 150.10 may incur burdens 

to publish on their Web sites summaries 

of the unique types of NEBFH positions 

and spread positions, respectively. 

Although this requirement is new even 

for exchanges that already have a 

similar process under exchange-set 

limits, the Commission preliminarily 

believes that the proposed summaries 

will not be overly burdensome in part 

because they are anticipated to be 

concise. 

The Commission preliminarily 

believes that complying with the 

requirements under proposed § 150.9(a) 

for summaries of recognized NEBFHs 

would require the work of an analyst to 

write and a supervisor to approve a 

summary. The summary would also 

need to be published on the exchange’s 

Web site. The Commission estimates 

that a single summary would require 5 

hours to write, approve, and post. The 

Commission notes that exchanges likely 

would need to post more summaries in 

the first year of the process, as over time 

the applications may become more 

routine. The Commission thus estimates 

that each exchange would post 

approximately 30 summaries per year, 

for an average per entity burden of 5 

labor hours annually. At an estimated 

labor cost of $122, the Commission 

estimates an average cost of 

approximately $18,300 per entity under 

proposed § 150.9(a). 

The Commission preliminarily 

believes that complying with the 

requirements under proposed 

§ 150.10(a) for summaries of recognized 

spread exemptions would require the 

work of an analyst to write and a 

supervisor to approve the summary. The 

summary would also need to be 

published on the exchange’s Web site. 

The Commission estimates that a single 

summary would require 5 hours to 

write, approve, and post. The 

Commission notes that exchanges likely 

would need to post more summaries in 

the first year of the process, as over time 

the applications may become more 

routine. The Commission thus estimates 

that each entity would post 

approximately 10 summaries per year, 

for an average per entity burden of 50 

labor hours annually. At an estimated 

labor cost of $122, the Commission 

estimates an average cost of 

approximately $6,100 per entity under 

proposed § 150.10(a). 

(b) Requirements for Market Participants 

Proposed §§ 150.9(a)(3), 150.10(a)(3), 

and 150.11(a)(2), would require electing 

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designated contract markets and swap 

execution facilities to establish an 

application process that elicits sufficient 

information to allow the designated 

contract market or swap execution 

facility to determine, and the 

Commission to verify, whether it is 

appropriate to recognize a commodity 

derivative position as an NEBFH, 

exempt spread position or enumerated 

anticipatory bona fide hedge. Pursuant 

to §§ 150.9(a)(4)(i), 150.10(a)(4), and 

150.11(a)(3), an applicant would be 

required to update an application at 

least on an annual basis. Further, 

§§ 150.9(a)(6), 150.10(a)(6), and 

150.11(a)(5) require that any such 

applicant file a report with the 

designated contract market or swap 

execution facility (and with the 

Commission in the case of 150.10(a)(5)) 

when such applicant owns or controls a 

derivative position that such has been 

recognized as an NEBFH, exempt 

spread, or enumerated anticipatory bona 

fide hedge, respectively. 

The Commission anticipates that 

market participants would be mostly 

familiar with the NEBFH application 

provided by exchanges that currently 

process such applications, and thus 

preliminarily believes that the burden 

for applying to an exchange would be 

minimal. Information included in the 

application is required to be sufficient 

to allow the exchange to determine, and 

the Commission to verify, whether the 

position meets the requirements of CEA 

section 4a(c), but specific data fields are 

left to the exchanges to determine. The 

Commission believes that there would 

be a slight additional burden for market 

participants to submit the notice that 

must be filed when such participant 

owns or controls the position that has 

been recognized as a NEBFH. 

The Commission estimates that 222 

entities will file an average of 5 

applications each year to obtain 

recognition of certain positions as 

NEBFHs and that each application, 

including the notice filing when the 

participant owns or controls such 

positions, would require approximately 

4 burden hours to complete and file. 

Thus, the Commission estimates an 

average per entity burden of 20 labor 

hours annually. At an estimated labor 

cost of $122, the Commission estimates 

an average cost of approximately $2,440 

per entity for applications under 

proposed § 150.9(a)(3). 

The Commission anticipates that 

market participants would be mostly 

familiar with the spread exemption 

application provided by exchanges that 

currently process such applications, and 

thus preliminarily believes that the 

burden for applying to an exchange 

would be minimal. Information 

included in the application is required 

to be sufficient to allow the exchange to 

determine, and the Commission to 

verify, whether the position fulfills the 

objectives of CEA section 4a(a)(3)(B), 

but specific data fields are left to the 

exchanges to determine. The 

Commission believes that there would 

be a slight additional burden for market 

participants to submit the notice that 

must be filed when such participant 

owns or controls the spread position 

that has been exempted from position 

limits. The Commission estimates that 

25 entities will file an average of 2 

applications each year to obtain an 

exemption for certain spread positions 

and that each application, including the 

notice filing when the participant owns 

or controls such positions, would 

require approximately 3 burden hours to 

complete and file. Thus, the 

Commission approximates an average 

per entity burden of 6 labor hours 

annually. At an estimated labor cost of 

$122, the Commission estimates an 

average cost of approximately $732 per 

entity for applications under proposed 

§ 150.10(a)(2). 

The Commission anticipates that 

market participants would be mostly 

familiar with the enumerated 

anticipatory bona fide hedge application 

provided by exchanges that currently 

process such applications, and thus 

preliminarily believes that the burden 

for applying to an exchange would be 

minimal. The application is required to 

include, at minimum, the information 

required under proposed § 150.7(d). The 

Commission estimates that 25 entities 

will file an average of 2 applications 

each year to obtain recognition that 

certain positions are enumerated 

anticipatory bona fide hedges and that 

each application would require 

approximately 3 burden hours to 

complete and file. Thus, the 

Commission estimates an average per 

entity burden of 6 labor hours annually. 

At an estimated labor cost of $122, the 

Commission estimates an average cost of 

approximately $732 per entity for 

applications under proposed 

§ 150.11(a)(2). 

(c) Recordkeeping and Reporting 

Proposed §§ 150.9(b), 150.10(b), and 

150.11(b), would require electing 

designated contract markets and swap 

execution facilities to keep full, 

complete, and systematic records, 

which include all pertinent data and 

memoranda, of all activities relating to 

the processing and disposition of 

applications for recognition of NEBFHs, 

exempt spread positions, and 

enumerated anticipatory bona fide 

hedges. Further, proposed §§ 150.9(c), 

150.10(c), and 150.11(c), would require 

designated contract markets and swap 

execution facilities that elect to process 

NEBFH applications to submit to the 

Commission a report for each week as 

of the close of business on Friday 

showing various information concerning 

the derivative positions that have been 

recognized by the designated contract 

market or swap execution facility as an 

NEBFH, exempt spread position, or 

enumerated anticipatory bona fide 

hedge position, and for any revocation, 

modification or rejection of such 

recognition. Finally, proposed 

§§ 150.9(c) and 150.10(c) also require a 

designated contract market or swap 

execution facility that elects to process 

applications for NEBFHs and exempt 

spread positions to submit to the 

Commission (i) a summary of any 

NEBFH and exempt spread position 

newly published on the designated 

contract market or swap execution 

facility’s Web site; and (ii) no less 

frequently than monthly, any report 

submitted by an applicant to such 

designated contract market or swap 

execution facility pursuant to rules 

required under proposed 

§§ 150.9(a)(6)and 150.10(a)(6), 

respectively. 

The Commission preliminarily 

believes that exchanges that currently 

process applications for recognition of 

NEBFHs, exempt spread positions, and 

enumerated anticipatory bona fide 

hedges maintain records of such 

applications as required pursuant to 

other Commission regulations, 

including § 1.31. However, the 

Commission also believes that the 

proposed rules may confer additional 

recordkeeping obligations on exchanges 

that elect to process applications for 

recognition of NEBFHs, exempt spread 

positions, and enumerated anticipatory 

bona fide hedges. The Commission 

estimates that 6 entities will have 

recordkeeping obligations pursuant to 

proposed § 150.9. Thus, the Commission 

approximates an average per entity 

burden of 30 labor hours annually. At 

an estimated labor cost of $122, the 

Commission estimates an average cost of 

approximately $3,660 per entity for 

records and filings under proposed 

§ 150.9. 

The Commission estimates that 6 

entities will have recordkeeping 

obligations pursuant to proposed 

§ 150.10. Thus, the Commission 

estimates an average per entity burden 

of 30 labor hours annually. At an 

estimated labor cost of $122, the 

Commission estimates an average cost of 

approximately $3,660 per entity for 

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records and filings under proposed 

§ 150.10. 

The Commission estimates that 6 

entities will have recordkeeping 

obligations pursuant to proposed 

§ 150.11. Thus, the Commission 

estimates an average per entity burden 

of 30 labor hours annually. At an 

estimated labor cost of $122, the 

Commission estimates an average cost of 

approximately $3,660 per entity for 

records and filings under proposed 

§ 150.11. 

Finally, the Commission anticipates 

that exchanges that elect to process 

applications for recognition of NEBFHs, 

spread exemptions, and enumerated 

anticipatory bona fide hedges will be 

required to file two types of reports, as 

stated above. The Commission 

understands that 5 exchanges currently 

submit reports, on a voluntary basis 

each month, which provide information 

regarding exchange-recognized 

exemptions of all types. The 

Commission preliminarily believes that 

the content of such reports is similar to 

the information required of the reports 

in proposed §§ 150.9(c), 150.10(c), and 

150.11(c), but the frequency of such 

reports would increase under the 

proposed rules. 

The Commission estimates that 6 

entities will have weekly reporting 

obligations pursuant to proposed 

§ 150.9(c). The Commission also 

estimates that the weekly report will 

require a burden of approximately 3 

hours to complete and submit. Thus, the 

Commission estimates an average per 

entity burden of 156 labor hours 

annually. At an estimated labor cost of 

$122, the Commission estimates an 

average cost of approximately $19,032 

per entity for weekly reports under 

proposed rules 150.9(c). 

The Commission estimates that 6 

entities will have weekly reporting 

obligations pursuant to proposed 

§ 150.10(c). The Commission also 

estimates that the weekly report will 

require a burden of approximately 3 

hours to complete and submit. Thus, the 

Commission estimates an average per 

entity burden of 156 labor hours 

annually. At an estimated labor cost of 

$122, the Commission estimates an 

average cost of approximately $19,032 

per entity for weekly reports under 

proposed § 150.10(c). 

The Commission estimates that 6 

entities will have weekly reporting 

obligations pursuant to proposed 

§ 150.11(c). The Commission also 

estimates that the weekly report will 

require a burden of approximately 3 

hours to complete and submit. Thus, the 

Commission approximates an average 

per entity burden of 156 labor hours 

annually. At an estimated labor cost of 

$122, the Commission estimates an 

average cost of approximately $19,032 

per entity for weekly reports under 

proposed § 150.11(c). 

For the monthly report, the 

Commission anticipates a minor burden 

for exchanges because the proposed 

rules require exchanges essentially to 

forward to the Commission notices 

received from applicants who own or 

control the positions that have been 

recognized or exempted. 

The Commission estimates that 6 

entities will have monthly reporting 

obligations pursuant to proposed 

§ 150.9(c). The Commission also 

estimates that the monthly report will 

require a burden of approximately 2 

hours to complete and submit. Thus, the 

Commission approximates an average 

per entity burden of 24 labor hours 

annually. At an estimated labor cost of 

$122, the Commission estimates an 

average cost of approximately $2,928 

per entity for monthly reports under 

proposed § 150.9(c). 

The Commission estimates that 6 

entities will have monthly reporting 

obligations pursuant to proposed 

§ 150.10(c). The Commission also 

estimates that the monthly report will 

require a burden of approximately 2 

hours to complete and submit. Thus, the 

Commission approximates an average 

per entity burden of 24 labor hours 

annually. At an estimated labor cost of 

$122, the Commission estimates an 

average cost of approximately $2,928 

per entity for monthly reports under 

proposed § 150.10(c). The above 

estimates are summarized in the 

following table: 

Type of respondent Estimated number of 

respondents Report or record 

Average 

reports annually by each 

respondent 

Total annual 

responses 

Estimated number of 

hours per response 

Annual burden 

in fiscal year 

a b c d e 234 f g 235

Exchanges ......................... 6 ....................................... § 150.9(a) Rule Filing ....... 1 6 5 ....................................... 30 

6 ....................................... § 150.10(a) Rule Filing ..... 1 6 5 ....................................... 30 

6 ....................................... § 150.11(a) Rule Filing ..... 1 6 5 ....................................... 30 

6 ....................................... § 150.9(a) Review ............ 185 1,110 5 ....................................... 5,550 

6 ....................................... § 150.10(a) Review .......... 50 300 5 ....................................... 1,500 

6 ....................................... § 150.11(a) Review .......... 50 300 5 ....................................... 1,500 

6 ....................................... § 150.9(a) Summaries ...... 30 180 5 ....................................... 900 

6 ....................................... § 150.10(a) Summaries .... 10 60 5 ....................................... 300 

6 ....................................... § 150.9(a) Recordkeeping 1 6 30 ..................................... 180 

6 ....................................... § 150.10(a) Recordkeeping.1 6 30 ..................................... 180 

6 ....................................... § 150.11(a) Recordkeeping.1 6 30 ..................................... 180 

6 ....................................... § 150.9(a) Weekly Report 52 312 3 ....................................... 936 

6 ....................................... § 150.10(a) Weekly Report.52 312 3 ....................................... 936 

6 ....................................... § 150.11(a) Weekly Report.52 312 3 ....................................... 936 

6 ....................................... § 150.9(a) Monthly Report 12 72 2 ....................................... 144 

6 ....................................... § 150.10(a) Monthly Report.12 72 2 ....................................... 144 

Market Participants ............ 222 ................................... § 150.9(a)(3) Application & 

Notice.

5 1,110 4 ....................................... 4,440 

25 ..................................... § 150.10(a)(3) Application 

& Notice.

2 50 3 ....................................... 150 

25 ..................................... § 150.11(a)(2) Application 

& Notice.

2 50 3 ....................................... 150 

Total ........................... 278 (distinct entities or 

persons).

.......................................... ........................ 4,276 4.26 (average number of 

hours per response).

18216 

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38504 Federal Register / Vol. 81, No. 113 / Monday, June 13, 2016 / Proposed Rules 

234Column b times column d. 

235Column e times column f. Burdens have been 

rounded to the nearest whole number where 

appropriate. 

4. Information Collection Comments 

The Commission invites the public 

and other federal agencies to comment 

on any aspect of the reporting and 

recordkeeping burdens discussed above. 

Pursuant to 44 U.S.C. 3506(c)(2)(B), the 

Commission solicits comments in order 

to: (1) Evaluate whether the proposed 

collections of information are necessary 

for the proper performance of the 

functions of the Commission, including 

whether the information will have 

practical utility; (2) evaluate the 

accuracy of the Commission’s estimate 

of the burden of the proposed 

collections of information; (3) determine 

whether there are ways to enhance the 

quality, utility, and clarity of the 

information to be collected; and (4) 

minimize the burden of the collections 

of information on those who are to 

respond, including through the use of 

automated collection techniques or 

other forms of information technology. 

Comments may be submitted directly 

to the Office of Information and 

Regulatory Affairs, by fax at (202) 395– 

6566 or by email at OIRA-submissions@

omb.eop.gov. Please provide the 

Commission with a copy of comments 

submitted so that all comments can be 

summarized and addressed in the final 

regulation preamble. Refer to the 

Addresses section of this notice for 

comment submission instructions to the 

Commission. A copy of the supporting 

statements for the collection of 

information discussed above may be 

obtained by visiting RegInfo.gov. OMB 

is required to make a decision 

concerning the collection of information 

between 30 and 60 days after 

publication of this release. 

Consequently, a comment to OMB is 

most assured of being fully considered 

if received by OMB (and the 

Commission) within 30 days after the 

publication of this notice of proposed 

rulemaking. 

List of Subjects 

17 CFR Part 37 

Registered entities, Registration 

application, Reporting and 

recordkeeping requirements, Swaps, 

Swap execution facilities. 

17 CFR Part 38 

Block transaction, Commodity 

futures, Designated contract markets, 

Reporting and recordkeeping 

requirements, Transactions off the 

centralized market. 

17 CFR Part 150 

Bona fide hedging, Commodity 

futures, Cotton, Grains, Position limits, 

Referenced Contracts, Swaps. 

For the reasons stated in the 

preamble, the Commodity Futures 

Trading Commission proposes to amend 

17 CFR chapter I as follows: 

PART 37—SWAP EXECUTION 

FACILITIES 

■ 1. The authority citation for part 37 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6c, 7, 7a– 

2, 7b–3, and 12a, as amended by Titles VII 

and VIII of the Dodd-Frank Wall Street 

Reform and Consumer Protection Act, Pub. L. 

111–203, 124 Stat. 1376. 

■ 2. In Appendix B to part 37, under the 

heading Core Principle 6 of Section 5h 

of the Act—Position Limits or 

Accountability, revise paragraphs (A) 

and (B) to read as follows: 

Appendix B to Part 37—Guidance on, 

and Acceptable Practices in, 

Compliance With Core Principles 

* * * * * 

Core Principle 6 of Section 5h of the Act— 

Position Limits or Accountability 

(A) In general. To reduce the potential 

threat of market manipulation or congestion, 

especially during trading in the delivery 

month, a swap execution facility that is a 

trading facility shall adopt for each of the 

contracts of the facility, as is necessary and 

appropriate, position limitations or position 

accountability for speculators. 

(B) Position limits. For any contract that is 

subject to a position limitation established by 

the Commission pursuant to section 4a(a), 

the swap execution facility shall: 

(1) Set its position limitation at a level not 

higher than the Commission limitation; and 

(2) Monitor positions established on or 

through the swap execution facility for 

compliance with the limit set by the 

Commission and the limit, if any, set by the 

swap execution facility. 

(a) Guidance. (1) Until a swap execution 

facility has access to sufficient swap position 

information, a swap execution facility that is 

a trading facility need not demonstrate 

compliance with Core Principle 6(B). A swap 

execution facility has access to sufficient 

swap position information if, for example: 

(i) It has access to daily information about 

its market participants’ open swap positions; 

or 

(ii) It knows, including through knowledge 

gained in surveillance of heavy trading 

activity occurring on or pursuant to the rules 

of the swap execution facility, that its market 

participants regularly engage in large 

volumes of speculative trading activity that 

would cause reasonable surveillance 

personnel at a swap execution facility to 

inquire further about a market participant’s 

intentions or open swap positions. 

(2) When a swap execution facility has 

access to sufficient swap position 

information, this guidance is no longer 

applicable. At such time, a swap execution 

facility is required to demonstrate 

compliance with Core Principle 6(B). 

(b) Acceptable practices. [Reserved] 

* * * * * 

PART 38—DESIGNATED CONTRACT 

MARKETS 

■ 3. The authority citation for part 38 

continues to read as follows: 

Authority: 7 U.S.C. 1a, 2, 6, 6a, 6c, 6d, 6e, 

6f, 6g, 6i, 6j, 6k, 6l, 6m, 6n, 7, 7a–2, 7b, 7b– 

1, 7b–3, 8, 9, 15, and 21, as amended by the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376. 

■ 4. In Appendix B to part 38, under the 

heading Core Principle 5 of section 5(d) 

of the Act: Position Limitations or 

Accountability, revise paragraphs (A) 

and (B) to read as follows: 

Appendix B to Part 38—Guidance on, 

and Acceptable Practices in, 

Compliance With Core Principles 

* * * * * 

Core Principle 5 of section 5(d) of the Act: 

POSITION LIMITATIONS OR 

ACCOUNTABILITY 

(A) IN GENERAL.—To reduce the potential 

threat of market manipulation or congestion 

(especially during trading in the delivery 

month), the board of trade shall adopt for 

each contract of the board of trade, as is 

necessary and appropriate, position 

limitations or position accountability for 

speculators. 

(B) MAXIMUM ALLOWABLE POSITION 

LIMITATION.—For any contract that is 

subject to a position limitation established by 

the Commission pursuant to section 4a(a), 

the board of trade shall set the position 

limitation of the board of trade at a level not 

higher than the position limitation 

established by the Commission. 

(a) Guidance. (1) Until a board of trade has 

access to sufficient swap position 

information, a board of trade need not 

demonstrate compliance with Core Principle 

5(B) with respect to swaps. A board of trade 

has access to sufficient swap position 

information if, for example: 

(i) It has access to daily information about 

its market participants’ open swap positions; 

or 

(ii) It knows, including through knowledge 

gained in surveillance of heavy trading 

activity occurring on or pursuant to the rules 

of the designated contract market, that its 

market participants regularly engage in large 

volumes of speculative trading activity that 

would cause reasonable surveillance 

personnel at a board of trade to inquire 

further about a market participant’s 

intentions or open swap positions. 

(2) When a board of trade has access to 

sufficient swap position information, this 

guidance is no longer applicable. At such 

time, a board of trade is required to 

demonstrate compliance with Core Principle 

5(B) with respect to swaps. 

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Federal Register / Vol. 81, No. 113 / Monday, June 13, 2016 / Proposed Rules 38505 

(b) Acceptable Practices. [Reserved] 

* * * * * 

PART 150—LIMITS ON POSITIONS 

■ 5. The authority citation for part 150 

is revised to read as follows: 

Authority: 7 U.S.C. 1a, 2, 5, 6, 6a, 6c, 6f, 

6g, 6t, 12a, 19, as amended by Title VII of the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act, Pub. L. 111–203, 

124 Stat. 1376 (2010). 

■ 6. Revise § 150.1 to read as follows: 

§ 150.1 Definitions. 

As used in this part— 

Bona fide hedging position means— 

(1) Hedges of an excluded commodity. 

For a position in commodity derivative 

contracts in an excluded commodity, as 

that term is defined in section 1a(19) of 

the Act: 

(i) Such position is economically 

appropriate to the reduction of risks in 

the conduct and management of a 

commercial enterprise; and 

(ii)(A) Is enumerated in paragraph (3), 

(4) or (5) of this definition; or 

(B) Is recognized as a bona fide 

hedging position by the designated 

contract market or swap execution 

facility that is a trading facility, 

pursuant to such market’s rules 

submitted to the Commission, which 

rules may include risk management 

exemptions consistent with Appendix A 

of this part; and 

(2) Hedges of a physical commodity. 

For a position in commodity derivative 

contracts in a physical commodity: 

(i) Such position: 

(A) Represents a substitute for 

transactions made or to be made, or 

positions taken or to be taken, at a later 

time in a physical marketing channel; 

(B) Is economically appropriate to the 

reduction of risks in the conduct and 

management of a commercial enterprise; 

(C) Arises from the potential change 

in the value of— 

(1) Assets which a person owns, 

produces, manufactures, processes, or 

merchandises or anticipates owning, 

producing, manufacturing, processing, 

or merchandising; 

(2) Liabilities which a person owes or 

anticipates incurring; or 

(3) Services that a person provides, 

purchases, or anticipates providing or 

purchasing; and 

(D) Is— 

(1) Enumerated in paragraph (3), (4) or 

(5) of this definition; or 

(2) Recognized as shown to be a nonenumerated bona fide hedges by either 

a designated contract market or swap 

execution facility, each in accordance 

with § 150.9(a); or by the Commission; 

or 

(ii)(A) Pass-through swap offsets. 

Such position reduces risks attendant to 

a position resulting from a swap in the 

same physical commodity that was 

executed opposite a counterparty for 

which the position at the time of the 

transaction would qualify as a bona fide 

hedging position pursuant to paragraph 

(2)(i) of this definition (a pass-through 

swap counterparty), provided that no 

such risk-reducing position is 

maintained in any physical-delivery 

commodity derivative contract during 

the lesser of the last five days of trading 

or the time period for the spot month in 

such physical-delivery commodity 

derivative contract; and 

(B) Pass-through swaps. Such swap 

position was executed opposite a passthrough swap counterparty and to the 

extent such swap position has been 

offset pursuant to paragraph (2)(ii)(A) of 

this definition. 

(3) Enumerated hedging positions. A 

bona fide hedging position includes any 

of the following specific positions: 

(i) Hedges of inventory and cash 

commodity purchase contracts. Short 

positions in commodity derivative 

contracts that do not exceed in quantity 

ownership or fixed-price purchase 

contracts in the contract’s underlying 

cash commodity by the same person. 

(ii) Hedges of cash commodity sales 

contracts. Long positions in commodity 

derivative contracts that do not exceed 

in quantity the fixed-price sales 

contracts in the contract’s underlying 

cash commodity by the same person and 

the quantity equivalent of fixed-price 

sales contracts of the cash products and 

by-products of such commodity by the 

same person. 

(iii) Hedges of unfilled anticipated 

requirements. Provided that such 

positions in a physical-delivery 

commodity derivative contract, during 

the lesser of the last five days of trading 

or the time period for the spot month in 

such physical-delivery contract, do not 

exceed the person’s unfilled anticipated 

requirements of the same cash 

commodity for that month and for the 

next succeeding month: 

(A) Long positions in commodity 

derivative contracts that do not exceed 

in quantity unfilled anticipated 

requirements of the same cash 

commodity, and that do not exceed 

twelve months for an agricultural 

commodity, for processing, 

manufacturing, or use by the same 

person; and 

(B) Long positions in commodity 

derivative contracts that do not exceed 

in quantity unfilled anticipated 

requirements of the same cash 

commodity for resale by a utility that is 

required or encouraged to hedge by its 

public utility commission on behalf of 

its customers’ anticipated use. 

(iv) Hedges by agents. Long or short 

positions in commodity derivative 

contracts by an agent who does not own 

or has not contracted to sell or purchase 

the offsetting cash commodity at a fixed 

price, provided that the agent is 

responsible for merchandising the cash 

positions that are being offset in 

commodity derivative contracts and the 

agent has a contractual arrangement 

with the person who owns the 

commodity or holds the cash market 

commitment being offset. 

(4) Other enumerated hedging 

positions. A bona fide hedging position 

also includes the following specific 

positions, provided that no such 

position is maintained in any physicaldelivery commodity derivative contract 

during the lesser of the last five days of 

trading or the time period for the spot 

month in such physical-delivery 

contract: 

(i) Hedges of unsold anticipated 

production. Short positions in 

commodity derivative contracts that do 

not exceed in quantity unsold 

anticipated production of the same 

commodity, and that do not exceed 

twelve months of production for an 

agricultural commodity, by the same 

person. 

(ii) Hedges of offsetting unfixed-price 

cash commodity sales and purchases. 

Short and long positions in commodity 

derivative contracts that do not exceed 

in quantity that amount of the same 

cash commodity that has been bought 

and sold by the same person at unfixed 

prices: 

(A) Basis different delivery months in 

the same commodity derivative 

contract; or 

(B) Basis different commodity 

derivative contracts in the same 

commodity, regardless of whether the 

commodity derivative contracts are in 

the same calendar month. 

(iii) Hedges of anticipated royalties. 

Short positions in commodity derivative 

contracts offset by the anticipated 

change in value of mineral royalty rights 

that are owned by the same person, 

provided that the royalty rights arise out 

of the production of the commodity 

underlying the commodity derivative 

contract. 

(iv) Hedges of services. Short or long 

positions in commodity derivative 

contracts offset by the anticipated 

change in value of receipts or payments 

due or expected to be due under an 

executed contract for services held by 

the same person, provided that the 

contract for services arises out of the 

production, manufacturing, processing, 

use, or transportation of the commodity 

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underlying the commodity derivative 

contract, and which may not exceed one 

year for agricultural commodities. 

(5) Cross-commodity hedges. 

Positions in commodity derivative 

contracts described in paragraphs (2)(ii), 

(3)(i) through (iv), and (4)(i) through (iv) 

of this definition may also be used to 

offset the risks arising from a 

commodity other than the same cash 

commodity underlying a commodity 

derivative contract, provided that the 

fluctuations in value of the position in 

the commodity derivative contract, or 

the commodity underlying the 

commodity derivative contract, are 

substantially related to the fluctuations 

in value of the actual or anticipated cash 

position or pass-through swap and no 

such position is maintained in any 

physical-delivery commodity derivative 

contract during the lesser of the last five 

days of trading or the time period for the 

spot month in such physical-delivery 

contract. 

Futures-equivalent means— 

(1) An option contract, whether an 

option on a future or an option that is 

a swap, which has been adjusted by an 

economically reasonable and 

analytically supported risk factor, or 

delta coefficient, for that option 

computed as of the previous day’s close 

or the current day’s close or 

contemporaneously during the trading 

day, and converted to an economically 

equivalent amount of an open position 

in a core referenced futures contract; 

(2) A futures contract which has been 

converted to an economically equivalent 

amount of an open position in a core 

referenced futures contract; and 

(3) A swap which has been converted 

to an economically equivalent amount 

of an open position in a core referenced 

futures contract. 

Intermarket spread position means a 

long (short) position in one or more 

commodity derivative contracts in a 

particular commodity, or its products or 

its by-products, at a particular 

designated contract market or swap 

execution facility, and a short (long) 

position in one or more commodity 

derivative contracts in that same, or 

similar, commodity, or its products or 

its by-products, away from that 

particular designated contract market or 

swap execution facility. 

Intramarket spread position means a 

long position in one or more commodity 

derivative contracts in a particular 

commodity, or its products or its byproducts, and a short position in one or 

more commodity derivative contracts in 

the same, or similar, commodity, or its 

products or its by-products, on the same 

designated contract market or swap 

execution facility. 

■ 7. Revise § 150.3 to read as follows: 

§ 150.3 Exemptions. 

(a) Positions which may exceed limits. 

The position limits set forth in § 150.2 

may be exceeded to the extent that: 

(1) Such positions are: 

(i) Bona fide hedging positions that 

either: 

(A) Comply with the definition in 

§ 150.1; or 

(B) Are recognized by a designated 

contract market or swap execution 

facility as: 

(1) Non-enumerated bona fide hedges 

in accordance with the general 

definition in § 150.1 and the process in 

§ 150.9(a), provided that the person has 

not otherwise been notified by the 

Commission under § 150.9(d)(4) or by 

the designated contract market or swap 

execution facility under rules adopted 

pursuant to § 150.9(a)(4)(iv)(B); or 

(2) Anticipatory bona fide hedge 

positions under paragraphs (3)(iii), 

(4)(i), (4)(iii), (4)(iv) and (5) of the bona 

fide hedging position definition in 

§ 150.1, provided that for anticipatory 

bona fide hedge positions under this 

paragraph the person complies with the 

filing requirements found in § 150.7 or 

the filing requirements adopted by a 

designated contract market or swap 

execution facility in accordance with 

§ 150.11(a)(3), as applicable; 

(ii) [Reserved]; 

(iii) [Reserved]; 

(iv) Spread positions recognized by a 

designated contract market or swap 

execution facility in accordance with 

§ 150.10(a), provided that the person has 

not otherwise been notified by the 

Commission under § 150.10(d)(4) or by 

the designated contract market or swap 

execution facility under rules adopted 

pursuant to § 150.10(a)(4)(iv)(B); or 

(v) Other positions exempted under 

paragraph (e) of this section; and that 

(2) [Reserved] 

(3) [Reserved] 

(b) through (j) [Reserved] 

■ 8. Revise § 150.5 to read as follows: 

§ 150.5 Exchange-set speculative position 

limits. 

(a) Requirements and acceptable 

practices for futures and futures option 

contracts subject to federal position 

limits. (1) For any commodity derivative 

contract that is subject to a speculative 

position limit under § 150.2, a 

designated contract market or swap 

execution facility that is a trading 

facility shall set a speculative position 

limit that is no higher than the level 

specified in § 150.2. 

(2) Exemptions under § 150.3—(i) 

Grant of exemption. Any designated 

contract market or swap execution 

facility that is a trading facility may 

grant exemptions from any speculative 

position limits it sets under paragraph 

(a)(1) of this section, provided that such 

exemptions conform to the requirements 

specified in § 150.3. 

(ii) Application for exemption. Any 

designated contract market or swap 

execution facility that grants 

exemptions under paragraph (a)(2)(i) of 

this section: 

(A) Must require traders to file an 

application requesting such exemption; 

(B) Must require, for any exemption 

granted, that the trader reapply for the 

exemption at least on an annual basis; 

and 

(C) May deny any such application, or 

limit, condition, or revoke any such 

exemption, at any time, including if it 

determines such positions would not be 

in accord with sound commercial 

practices, or would exceed an amount 

that may be established and liquidated 

in an orderly fashion. 

(3) through (6) [Reserved] 

(b) Requirements and acceptable 

practices for futures and future option 

contracts that are not subject to the 

limits set forth in § 150.2, including 

derivative contracts in a physical 

commodity as defined in § 150.1 and in 

an excluded commodity as defined in 

section 1a(19) of the Act— 

(1) through (4) [Reserved] 

(5) Exemptions—(i) Hedge exemption. 

Any hedge exemption rules adopted by 

a designated contract market or swap 

execution facility that is a trading 

facility must conform to the definition 

of bona fide hedging position in § 150.1 

or provide for recognition as a nonenumerated bona fide hedge in a 

manner consistent with the process 

described in § 150.9(a). 

(ii) Other exemptions. A designated 

contract market or swap execution 

facility may grant exemptions for: 

(A) [Reserved]; 

(B) [Reserved]. 

(C) Intramarket spread positions and 

intermarket spread positions, each as 

defined in § 150.1, provided that the 

designated contract market or swap 

execution facility, in considering 

whether to grant an application for such 

exemption, should take into account 

whether exempting the spread position 

from position limits would, to the 

maximum extent practicable, ensure 

sufficient market liquidity for bona fide 

hedgers, and not unreasonably reduce 

the effectiveness of position limits to: 

(1) Diminish, eliminate, or prevent 

excessive speculation; 

(2) Deter and prevent market 

manipulation, squeezes, and corners; 

and 

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(3) Ensure that the price discovery 

function of the underlying market is not 

disrupted. 

(D) For excluded commodities, a 

designated contract market or swap 

execution facility may grant, in addition 

to the exemptions under paragraphs 

(b)(5)(i) and (b)(5)(ii)(A) through (C) of 

this section, a limited risk management 

exemption pursuant to rules submitted 

to the Commission, consistent with the 

guidance in Appendix A of this part. 

(iii) [Reserved] 

(6) through (9) [Reserved] 

(c) [Reserved] 

■ 9. Add § 150.9 to read as follows: 

§ 150.9 Process for recognition of 

positions as non-enumerated bona fide 

hedges. 

(a) Requirements for a designated 

contract market or swap execution 

facility to recognize non-enumerated 

bona fide hedge positions. (1) A 

designated contract market or swap 

execution facility that elects to process 

non-enumerated bona fide hedge 

applications to demonstrate why a 

derivative position satisfies the 

requirements of section 4a(c) of the Act 

shall maintain rules, submitted to the 

Commission pursuant to part 40 of this 

chapter, establishing an application 

process for recognition of nonenumerated bona fide hedges consistent 

with the requirements of this section 

and the general definition of bona fide 

hedging position in § 150.1. A 

designated contract market or swap 

execution facility may elect to process 

non-enumerated bona fide hedge 

applications for positions in commodity 

derivative contracts only if, in each 

case: 

(i) The commodity derivative contract 

is a referenced contract; 

(ii) Such designated contract market 

or swap execution facility lists such 

commodity derivative contract for 

trading; 

(iii) Such commodity derivative 

contract is actively traded on such 

designated contract market or swap 

execution facility; 

(iv) Such designated contract market 

or swap execution facility has 

established position limits for such 

commodity derivative contract; and 

(v) Such designated contract market 

or swap execution facility has at least 

one year of experience and expertise 

administering position limits for such 

commodity derivative contract. A 

designated contract market or swap 

execution facility shall not recognize a 

non-enumerated bona fide hedge 

involving a commodity index contract 

and one or more referenced contracts. 

(2) A designated contract market or 

swap execution facility may establish 

different application processes for 

persons to demonstrate why a derivative 

position constitutes a non-enumerated 

bona fide hedge under novel facts and 

circumstances and under facts and 

circumstances substantially similar to a 

position for which a summary has been 

published on such designated contract 

market’s or swap execution facility’s 

Web site, pursuant to paragraph (a)(7) of 

this section. 

(3) Any application process that is 

established by a designated contract 

market or swap execution facility shall 

elicit sufficient information to allow the 

designated contract market or swap 

execution facility to determine, and the 

Commission to verify, whether the facts 

and circumstances in respect of a 

derivative position satisfy the 

requirements of section 4a(c) of the Act 

and the general definition of bona fide 

hedging position in § 150.1, and 

whether it is appropriate to recognize 

such position as a non-enumerated bona 

fide hedge, including at a minimum: 

(i) A description of the position in the 

commodity derivative contract for 

which the application is submitted and 

the offsetting cash positions; 

(ii) Detailed information to 

demonstrate why the position satisfies 

the requirements of section 4a(c) of the 

Act and the general definition of bona 

fide hedging position in § 150.1; 

(iii) A statement concerning the 

maximum size of all gross positions in 

derivative contracts to be acquired by 

the applicant during the year after the 

application is submitted; 

(iv) Detailed information regarding 

the applicant’s activity in the cash 

markets for the commodity underlying 

the position for which the application is 

submitted during the past three years; 

and 

(v) Any other information necessary 

to enable the designated contract market 

or swap execution facility to determine, 

and the Commission to verify, whether 

it is appropriate to recognize such 

position as a non-enumerated bona fide 

hedge. 

(4) Under any application process 

established under this section, a 

designated contract market or swap 

execution facility shall: 

(i) Require each person intending to 

exceed position limits to submit an 

application, to reapply at least on an 

annual basis by updating that 

application, and to receive notice of 

recognition from the designated contract 

market or swap execution facility of a 

position as a non-enumerated bona fide 

hedge in advance of the date that such 

position would be in excess of the limits 

then in effect pursuant to section 4a of 

the Act; 

(ii) Notify an applicant in a timely 

manner if a submitted application is not 

complete. If an applicant does not 

amend or resubmit such application 

within a reasonable amount of time after 

such notice, a designated contract 

market or swap execution facility may 

reject the application; 

(iii) Determine in a timely manner 

whether a derivative position for which 

a complete application has been 

submitted satisfies the requirements of 

section 4a(c) of the Act and the general 

definition of bona fide hedging position 

in § 150.1, and whether it is appropriate 

to recognize such position as a nonenumerated bona fide hedge; 

(iv) Have the authority to revoke, at 

any time, any recognition issued 

pursuant to this section if it determines 

the recognition is no longer in accord 

with section 4a(c) of the Act and the 

general definition of bona fide hedging 

position in § 150.1; and 

(v) Notify an applicant in a timely 

manner: 

(A) That the derivative position for 

which a complete application has been 

submitted has been recognized by the 

designated contract market or swap 

execution facility as a non-enumerated 

bona fide hedge under this section, and 

the details and all conditions of such 

recognition; 

(B) That its application is rejected, 

including the reasons for such rejection; 

or 

(C) That the designated contract 

market or swap execution facility has 

asked the Commission to consider the 

application under paragraph (a)(8) of 

this section. 

(5) An applicant’s derivatives position 

shall be deemed to be recognized as a 

non-enumerated bona fide hedge 

exempt from federal position limits at 

the time that a designated contract 

market or swap execution facility 

notifies an applicant that such 

designated contract market or swap 

execution facility will recognize such 

position as a non-enumerated bona fide 

hedge. 

(6) A designated contract market or 

swap execution facility that elects to 

process non-enumerated bona fide 

hedge applications shall file new rules 

or rule amendments pursuant to part 40 

of this chapter, establishing or 

amending requirements for an applicant 

to file a report with such designated 

contract market or swap execution 

facility when such applicant owns or 

controls a derivative position that such 

designated contract market or swap 

execution facility has recognized as a 

non-enumerated bona fide hedge, and 

for such applicant to report the 

offsetting cash positions. Such rules 

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shall require an applicant to update and 

maintain the accuracy of any such 

report. 

(7) After recognition of each unique 

type of derivative position as a nonenumerated bona fide hedge, based on 

novel facts and circumstances, a 

designated contract market or swap 

execution facility shall publish on its 

Web site, on at least a quarterly basis, 

a summary describing the type of 

derivative position and explaining why 

it was recognized as a non-enumerated 

bona fide hedge. 

(8) If a non-enumerated bona fide 

hedge application presents novel or 

complex issues or is potentially 

inconsistent with section 4a(c) of the 

Act and the general definition of bona 

fide hedging position in § 150.1, a 

designated contract market or swap 

execution facility may ask the 

Commission to consider the application 

under the process set forth in paragraph 

(d) of this section. The Commission 

may, in its discretion, agree to or reject 

any such request by a designated 

contract market or swap execution 

facility. 

(b) Recordkeeping. (1) A designated 

contract market or swap execution 

facility that elects to process nonenumerated bona fide hedge 

applications shall keep full, complete, 

and systematic records, which include 

all pertinent data and memoranda, of all 

activities relating to the processing of 

such applications and the disposition 

thereof, including the recognition by the 

designated contract market or swap 

execution facility of any derivative 

position as a non-enumerated bona fide 

hedge, the revocation or modification of 

any such recognition, the rejection by 

the designated contract market or swap 

execution facility of an application, or 

the withdrawal, supplementation or 

updating of an application by the 

applicant. Included among such records 

shall be: 

(i) All information and documents 

submitted by an applicant in connection 

with its application; 

(ii) Records of oral and written 

communications between such 

designated contract market or swap 

execution facility and such applicant in 

connection with such application; and 

(iii) All information and documents in 

connection with such designated 

contract market’s or swap execution 

facility’s analysis of and action on such 

application. 

(2) All books and records required to 

be kept pursuant to this section shall be 

kept in accordance with the 

requirements of § 1.31 of this chapter. 

(c) Reports to the Commission. (1) A 

designated contract market or swap 

execution facility that elects to process 

non-enumerated bona fide hedge 

applications shall submit to the 

Commission a report for each week as 

of the close of business on Friday 

showing the following information: 

(i) For each commodity derivative 

position that has been recognized by the 

designated contract market or swap 

execution facility as a non-enumerated 

bona fide hedge, and for any revocation 

or modification of such a recognition: 

(A) The date of disposition, 

(B) The effective date of the 

disposition, 

(C) The expiration date of any 

recognition, 

(D) Any unique identifier assigned by 

the designated contract market or swap 

execution facility to track the 

application, 

(E) Any unique identifier assigned by 

the designated contract market or swap 

execution facility to a type of recognized 

non-enumerated bona fide hedge, 

(F) The identity of the applicant, 

(G) The listed commodity derivative 

contract to which the application 

pertains, 

(H) The underlying cash commodity, 

(I) The maximum size of the 

commodity derivative position that is 

recognized by the designated contract 

market or swap execution facility as a 

non-enumerated bona fide hedge, 

(J) Any size limitation established for 

such commodity derivative position on 

the designated contract market or swap 

execution facility, and 

(K) A concise summary of the 

applicant’s activity in the cash markets 

for the commodity underlying the 

commodity derivative position; and 

(ii) The summary of any nonenumerated bona fide hedge published 

pursuant to paragraph (a)(7) of this 

section, or revised, since the last 

summary submitted to the Commission. 

(2) Unless otherwise instructed by the 

Commission, a designated contract 

market or swap execution facility that 

elects to process non-enumerated bona 

fide hedge applications shall submit to 

the Commission, no less frequently than 

monthly, any report submitted by an 

applicant to such designated contract 

market or swap execution facility 

pursuant to rules required under 

paragraph (a)(6) of this section. 

(3) Unless otherwise instructed by the 

Commission, a designated contract 

market or swap execution facility that 

elects to process non-enumerated bona 

fide hedge applications shall submit to 

the Commission the information 

required by paragraphs (c)(1) and (2) of 

this section, as follows: 

(i) As specified by the Commission on 

the Forms and Submissions page at 

www.cftc.gov; 

(ii) Using the format, coding structure, 

and electronic data transmission 

procedures approved in writing by the 

Commission; and 

(iii) Not later than 9:00 a.m. Eastern 

time on the third business day following 

the date of the report. 

(d) Review of applications by the 

Commission. (1) The Commission may 

in its discretion at any time review any 

non-enumerated bona fide hedge 

application submitted to a designated 

contract market or swap execution 

facility, and all records required to be 

kept by such designated contract market 

or swap execution facility pursuant to 

paragraph (b) of this section in 

connection with such application, for 

any purpose, including to evaluate 

whether the disposition of the 

application is consistent with section 

4a(c) of the Act and the general 

definition of bona fide hedging position 

in § 150.1. 

(i) The Commission may request from 

such designated contract market or 

swap execution facility records required 

to be kept by such designated contract 

market or swap execution facility 

pursuant to paragraph (b) of this section 

in connection with such application. 

(ii) The Commission may request 

additional information in connection 

with such application from such 

designated contract market or swap 

execution facility or from the applicant. 

(2) If the Commission preliminarily 

determines that any non-enumerated 

bona fide hedge application or the 

disposition thereof by a designated 

contract market or swap execution 

facility presents novel or complex issues 

that require additional time to analyze, 

or that an application or the disposition 

thereof by such designated contract 

market or swap execution facility is 

potentially inconsistent with section 

4a(c) of the Act and the general 

definition of bona fide hedging position 

in § 150.1, the Commission shall: 

(i) Notify such designated contract 

market or swap execution facility and 

the applicable applicant of the issues 

identified by the Commission; and 

(ii) Provide them with 10 business 

days in which to provide the 

Commission with any supplemental 

information. 

(3) The Commission shall determine 

whether it is appropriate to recognize 

the derivative position for which such 

application has been submitted as a 

non-enumerated bona fide hedge, or 

whether the disposition of such 

application by such designated contract 

market or swap execution facility is 

consistent with section 4a(c) the Act 

and the general definition of bona fide 

hedging position in § 150.1. 

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(4) If the Commission determines that 

the disposition of such application is 

inconsistent with section 4a(c) of the 

Act and the general definition of bona 

fide hedging position in § 150.1, the 

Commission shall notify the applicant 

and grant the applicant a commercially 

reasonable amount of time to liquidate 

the derivative position or otherwise 

come into compliance. This notification 

will briefly specify the nature of the 

issues raised and the specific provisions 

of the Act or the Commission’s 

regulations with which the application 

is, or appears to be, inconsistent. 

(e) Review of summaries by the 

Commission. The Commission may in 

its discretion at any time review any 

summary of a type of non-enumerated 

bona fide hedge required to be 

published on a designated contract 

market’s or swap execution facility’s 

Web site pursuant to paragraph (a)(7) of 

this section for any purpose, including 

to evaluate whether the summary 

promotes transparency and fair and 

open access by all market participants to 

information regarding bona fide hedges. 

If the Commission determines that a 

summary is deficient in any way, the 

Commission shall notify such 

designated contract market or swap 

execution facility, and grant to the 

designated contract market or swap 

execution facility a reasonable amount 

of time to revise the summary. 

(f) Delegation of authority to the 

Director of the Division of Market 

Oversight. (1) The Commission hereby 

delegates, until it orders otherwise, to 

the Director of the Division of Market 

Oversight or such other employee or 

employees as the Director may designate 

from time to time, the authority: 

(i) In paragraph (a)(8) of this section 

to agree to or reject a request by a 

designated contract market or swap 

execution facility to consider a nonenumerated bona fide hedge 

application; 

(ii) In paragraph (c) of this section to 

provide instructions regarding the 

submission to the Commission of 

information required to be reported by 

a designated contract market or swap 

execution facility, to specify the manner 

for submitting such information on the 

Forms and Submissions page at 

www.cftc.gov, and to determine the 

format, coding structure, and electronic 

data transmission procedures for 

submitting such information; 

(iii) In paragraph (d)(1) of this section 

to review any non-enumerated bona fide 

hedge application and all records 

required to be kept by a designated 

contract market or swap execution 

facility in connection with such 

application, to request such records 

from such designated contract market or 

swap execution facility, and to request 

additional information in connection 

with such application from such 

designated contract market or swap 

execution facility or from the applicant; 

(iv) In paragraph (d)(2) of this section 

to preliminarily determine that a nonenumerated bona fide hedge application 

or the disposition thereof by a 

designated contract market or swap 

execution facility presents novel or 

complex issues that require additional 

time to analyze, or that such application 

or the disposition thereof is potentially 

inconsistent with section 4a(c) of the 

Act and the general definition of bona 

fide hedging position in § 150.1, to 

notify the designated contract market or 

swap execution facility and the 

applicable applicant of the issues 

identified, and to provide them with 10 

business days in which to file 

supplemental information; and 

(v) In paragraph (e) of this section to 

review any summary of a type of nonenumerated bona fide hedge required to 

be published on a designated contract 

market’s or swap execution facility’s 

Web site, to determine that any such 

summary is deficient, to notify a 

designated contract market or swap 

execution facility of a deficient 

summary, and to grant such designated 

contract market or swap execution 

facility a reasonable amount of time to 

revise such summary. 

(2) The Director of the Division of 

Market Oversight may submit to the 

Commission for its consideration any 

matter which has been delegated in this 

section. 

(3) Nothing in this section prohibits 

the Commission, at its election, from 

exercising the authority delegated in 

this section. 

■ 10. Add § 150.10 to read as follows: 

§ 150.10 Process for designated contract 

market or swap execution facility exemption 

from position limits for certain spread 

positions. 

(a) Requirements for a designated 

contract market or swap execution 

facility to exempt from position limits 

certain positions normally known to the 

trade as spreads. (1) A designated 

contract market or swap execution 

facility that elects to process 

applications for exemptions from 

position limits for certain positions 

normally known to the trade as spreads 

shall maintain rules, submitted to the 

Commission pursuant to part 40 of this 

chapter, establishing an application 

process for exempting positions 

normally known to the trade as spreads 

consistent with the requirements of this 

section. A designated contract market or 

swap execution facility may elect to 

process applications for such spread 

exemptions only if, in each case: 

(i) Such designated contract market or 

swap execution facility lists for trading 

at least one contract that is either a 

component of the spread or a referenced 

contract that is a component of the 

spread; and 

(ii) The contract in paragraph (a)(1)(i) 

of this section is actively traded and has 

been subject to position limits of the 

designated contract market or swap 

execution facility for at least one year. 

A designated contract market or swap 

execution facility shall not approve a 

spread exemption involving a 

commodity index contract and one or 

more referenced contracts. 

(2) Spreads that a designated contract 

market or swap execution facility may 

approve under this section include: 

(i) Calendar spreads; 

(ii) Quality differential spreads; 

(iii) Processing spreads; and 

(iv) Product or by-product differential 

spreads. 

(3) Any application process that is 

established by a designated contract 

market or swap execution facility under 

this section shall elicit sufficient 

information to allow the designated 

contract market or swap execution 

facility to determine, and the 

Commission to verify, whether the facts 

and circumstances demonstrate that it is 

appropriate to exempt a spread position 

from position limits, including at a 

minimum: 

(i) A description of the spread 

position for which the application is 

submitted; 

(ii) Detailed information to 

demonstrate why the spread position 

should be exempted from position 

limits, including how the exemption 

would further the purposes of section 

4a(a)(3)(B) of the Act; 

(iii) A statement concerning the 

maximum size of all gross positions in 

derivative contracts to be acquired by 

the applicant during the year after the 

application is submitted; and 

(iv) Any other information necessary 

to enable the designated contract market 

or swap execution facility to determine, 

and the Commission to verify, whether 

it is appropriate to exempt such spread 

position from position limits. 

(4) Under any application process 

established under this section, a 

designated contract market or swap 

execution facility shall: 

(i) Require each person requesting an 

exemption from position limits for its 

spread position to submit an 

application, to reapply at least on an 

annual basis by updating that 

application, and to receive approval in 

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advance of the date that such position 

would be in excess of the limits then in 

effect pursuant to section 4a of the Act; 

(ii) Notify an applicant in a timely 

manner if a submitted application is not 

complete. If an applicant does not 

amend or resubmit such application 

within a reasonable amount of time after 

such notice, a designated contract 

market or swap execution facility may 

reject the application; 

(iii) Determine in a timely manner 

whether a spread position for which a 

complete application has been 

submitted satisfies the requirements of 

paragraph (a)(4)(vi) of this section, and 

whether it is appropriate to exempt such 

spread position from position limits; 

(iv) Have the authority to revoke, at 

any time, any spread exemption issued 

pursuant to this section if it determines 

the spread exemption no longer satisfies 

the requirements of paragraph (a)(4)(vi) 

of this section and it is no longer 

appropriate to exempt the spread from 

position limits; 

(v) Notify an applicant in a timely 

manner: 

(A) That a spread position for which 

a complete application has been 

submitted has been exempted by the 

designated contract market or swap 

execution facility from position limits, 

and the details and all conditions of 

such exemption; 

(B) That its application is rejected, 

including the reasons for such rejection; 

or 

(C) That the designated contract 

market or swap execution facility has 

asked the Commission to consider the 

application under paragraph (a)(8) of 

this section; and 

(vi) Determine whether exempting the 

spread position from position limits 

would, to the maximum extent 

practicable, ensure sufficient market 

liquidity for bona fide hedgers, and not 

unreasonably reduce the effectiveness of 

position limits to: 

(A) Diminish, eliminate or prevent 

excessive speculation; 

(B) Deter and prevent market 

manipulation, squeezes, and corners; 

and 

(C) Ensure that the price discovery 

function of the underlying market is not 

disrupted. 

(5) An applicant’s derivatives position 

shall be deemed to be recognized as a 

spread position exempt from federal 

position limits at the time that a 

designated contract market or swap 

execution facility notifies an applicant 

that such designated contract market or 

swap execution facility will exempt 

such spread position. 

(6) A designated contract market or 

swap execution facility that elects to 

process applications to exempt spread 

positions from position limits shall file 

new rules or rule amendments pursuant 

to part 40 of this chapter, establishing or 

amending requirements for an applicant 

to file a report with such designated 

contract market or swap execution 

facility when such applicant owns, 

holds, or controls a spread position that 

such designated contract market or 

swap execution facility has exempted 

from position limits, including for such 

applicant to report each component of 

the spread. Such rules shall require 

such applicant to update and maintain 

the accuracy of any such report. 

(7) After exemption of each unique 

type of spread position, a designated 

contract market or swap execution 

facility shall publish on its Web site, on 

at least a quarterly basis, a summary 

describing the type of spread position 

and explaining why it was exempted. 

(8) If a spread exemption application 

presents complex issues or is potentially 

inconsistent with the purposes of 

section 4a(a)(3)(B) of the Act, a 

designated contract market or swap 

execution facility may ask the 

Commission to consider the application 

under the process set forth in paragraph 

(d) of this section. The Commission 

may, in its discretion, agree to or reject 

any such request by a designated 

contract market or swap execution 

facility. 

(b) Recordkeeping. (1) A designated 

contract market or swap execution 

facility that elects to process spread 

exemption applications shall keep full, 

complete, and systematic records, 

which include all pertinent data and 

memoranda, of all activities relating to 

the processing of such applications and 

the disposition thereof, including the 

exemption of any spread position, the 

revocation or modification of any 

exemption, the rejection by the 

designated contract market or swap 

execution facility of an application, or 

the withdrawal, supplementation or 

updating of an application by the 

applicant. Included among such records 

shall be: 

(i) All information and documents 

submitted by an applicant in connection 

with its application: 

(ii) Records of oral and written 

communications between such 

designated contract market or swap 

execution facility and such applicant in 

connection with such application; and 

(iii) All information and documents in 

connection with such designated 

contract market’s or swap execution 

facility’s analysis of and action on such 

application. 

(2) All books and records required to 

be kept pursuant to this section shall be 

kept in accordance with the 

requirements of § 1.31 of this chapter. 

(c) Reports to the Commission. (1) A 

designated contract market or swap 

execution facility that elects to process 

spread exemption applications shall 

submit to the Commission a report for 

each week as of the close of business on 

Friday showing the following 

information: 

(i) The disposition of any spread 

exemption application, including the 

exemption of any spread position, the 

revocation or modification of any 

exemption, or the rejection of any 

application, as well as the following 

details: 

(A) The date of disposition, 

(B) The effective date of the 

disposition, 

(C) The expiration date of any 

exemption, 

(D) Any unique identifier assigned by 

the designated contract market or swap 

execution facility to track the 

application, 

(E) Any unique identifier assigned by 

the designated contract market or swap 

execution facility to a type of exempt 

spread position, 

(F) The identity of the applicant, 

(G) The listed commodity derivative 

contract to which the application 

pertains, 

(H) The underlying cash commodity, 

(I) The size limitations on any exempt 

spread position, specified by contract 

month if applicable, and 

(J) Any conditions on the exemption; 

and 

(ii) The summary of any exempt 

spread position newly published 

pursuant to paragraph (a)(7) of this 

section, or revised, since the last 

summary submitted to the Commission. 

(2) Unless otherwise instructed by the 

Commission, a designated contract 

market or swap execution facility that 

elects to process applications to exempt 

spread positions from position limits 

shall submit to the Commission, no less 

frequently than monthly, any report 

submitted by an applicant to such 

designated contract market or swap 

execution facility pursuant to rules 

required by paragraph (a)(6) of this 

section. 

(3) Unless otherwise instructed by the 

Commission, a designated contract 

market or swap execution facility that 

elects to process applications to exempt 

spread positions from position limits 

shall submit to the Commission the 

information required by paragraphs 

(c)(1) and (2) of this section, as follows: 

(i) As specified by the Commission on 

the Forms and Submissions page at 

www.cftc.gov; 

(ii) Using the format, coding structure, 

and electronic data transmission 

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procedures approved in writing by the 

Commission; and 

(iii) Not later than 9:00 a.m. Eastern 

time on the third business day following 

the date of the report. 

(d) Review of applications by the 

Commission. (1) The Commission may 

in its discretion at any time review any 

spread exemption application submitted 

to a designated contract market or swap 

execution facility, and all records 

required to be kept by such designated 

contract market or swap execution 

facility pursuant to paragraph (b) of this 

section in connection with such 

application, for any purpose, including 

to evaluate whether the disposition of 

the application is consistent with the 

purposes of section 4a(a)(3)(B) of the 

Act. 

(i) The Commission may request from 

such designated contract market or 

swap execution facility records required 

to be kept by such designated contract 

market or swap execution facility 

pursuant to paragraph (b) of this section 

in connection with such application. 

(ii) The Commission may request 

additional information in connection 

with such application from such 

designated contract market or swap 

execution facility or from the applicant. 

(2) If the Commission preliminarily 

determines that any application to 

exempt a spread position from position 

limits, or the disposition thereof by a 

designated contract market or swap 

execution facility, presents novel or 

complex issues that require additional 

time to analyze, or that an application 

or the disposition thereof by such 

designated contract market or swap 

execution facility is potentially 

inconsistent with the Act, the 

Commission shall: 

(i) Notify such designated contract 

market or swap execution facility and 

the applicable applicant of the issues 

identified by the Commission; and 

(ii) Provide them with 10 business 

days in which to provide the 

Commission with any supplemental 

information. 

(3) The Commission shall determine 

whether it is appropriate to exempt the 

spread position for which such 

application has been submitted from 

position limits, or whether the 

disposition of such application by such 

designated contract market or swap 

execution facility is consistent with the 

purposes of section 4a(a)(3)(B) of the 

Act. 

(4) If the Commission determines that 

it is not appropriate to exempt the 

spread position for which such 

application has been submitted from 

position limits, or that the disposition of 

such application is inconsistent with 

the Act, the Commission shall notify the 

applicant and grant the applicant a 

commercially reasonable amount of 

time to liquidate the spread position or 

otherwise come into compliance. This 

notification will briefly specify the 

nature of the issues raised and the 

specific provisions of the Act or the 

Commission’s regulations with which 

the application is, or appears to be, 

inconsistent. 

(e) Review of summaries by the 

Commission. The Commission may in 

its discretion at any time review any 

summary of a type of spread position 

required to be published on a 

designated contract market’s or swap 

execution facility’s Web site pursuant to 

paragraph (a)(7) of this section for any 

purpose, including to evaluate whether 

the summary promotes transparency 

and fair and open access by all market 

participants to information regarding 

spread exemptions. If the Commission 

determines that a summary is deficient 

in any way, the Commission shall notify 

such designated contract market or 

swap execution facility, and grant to the 

designated contract market or swap 

execution facility a reasonable amount 

of time to revise the summary. 

(f) Delegation of authority to the 

Director of the Division of Market 

Oversight. (1) The Commission hereby 

delegates, until it orders otherwise, to 

the Director of the Division of Market 

Oversight or such other employee or 

employees as the Director may designate 

from time to time, the authority: 

(i) In paragraph (a)(8) of this section 

to agree to or reject a request by a 

designated contract market or swap 

execution facility to consider a spread 

exemption application; 

(ii) In paragraph (c) of this section to 

provide instructions regarding the 

submission to the Commission of 

information required to be reported by 

a designated contract market or swap 

execution facility, to specify the manner 

for submitting such information on the 

Forms and Submissions page at 

www.cftc.gov, and to determine the 

format, coding structure, and electronic 

data transmission procedures for 

submitting such information; 

(iii) In paragraph (d)(1) of this section 

to review any spread exemption 

application and all records required to 

be kept by a designated contract market 

or swap execution facility in connection 

with such application, to request such 

records from such designated contract 

market or swap execution facility, and 

to request additional information in 

connection with such application from 

such designated contract market or 

swap execution facility, or from the 

applicant; 

(iv) In paragraph (d)(2) of this section 

to preliminarily determine that a spread 

exemption application or the 

disposition thereof by a designated 

contract market or swap execution 

facility presents complex issues that 

require additional time to analyze, or 

that such application or the disposition 

thereof is potentially inconsistent with 

the Act, to notify the designated 

contract market or swap execution 

facility and the applicable applicant of 

the issues identified, and to provide 

them with 10 business days in which to 

file supplemental information; and 

(v) In paragraph (e) of this section to 

review any summary of a type of spread 

exemption required to be published on 

a designated contract market’s or swap 

execution facility’s Web site, to 

determine that any such summary is 

deficient, to notify a designated contract 

market or swap execution facility of a 

deficient summary, and to grant such 

designated contract market or swap 

execution facility a reasonable amount 

of time to revise such summary. 

(2) The Director of the Division of 

Market Oversight may submit to the 

Commission for its consideration any 

matter which has been delegated in this 

section. 

(3) Nothing in this section prohibits 

the Commission, at its election, from 

exercising the authority delegated in 

this section. 

■ 11. Add § 150.11 to read as follows: 

§ 150.11 Process for recognition of 

positions as bona fide hedges for unfilled 

anticipated requirements, unsold 

anticipated production, anticipated 

royalties, anticipated service contract 

payments or receipts, or anticipatory crosscommodity hedge positions. 

(a) Requirements for a designated 

contract market or swap execution 

facility to recognize certain enumerated 

anticipatory bona fide hedge positions. 

(1) A designated contract market or 

swap execution facility that elects to 

process applications for recognition of 

positions as hedges of unfilled 

anticipated requirements, unsold 

anticipated production, anticipated 

royalties, anticipated service contract 

payments or receipts, or anticipatory 

cross-commodity hedges under the 

provisions of paragraphs (3)(iii), (4)(i), 

(iii), (iv), or (5), respectively, of the 

definition of bona fide hedging position 

in § 150.1 shall maintain rules, 

submitted to the Commission pursuant 

to part 40 of this chapter, establishing 

an application process for such 

anticipatory bona fide hedges consistent 

with the requirements of this section. A 

designated contract market or swap 

execution facility may elect to process 

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38512 Federal Register / Vol. 81, No. 113 / Monday, June 13, 2016 / Proposed Rules 

such anticipatory hedge applications for 

positions in commodity derivative 

contracts only if, in each case: 

(i) The commodity derivative contract 

is a referenced contract; 

(ii) Such designated contract market 

or swap execution facility lists such 

commodity derivative contract for 

trading; 

(iii) Such commodity derivative 

contract is actively traded on such 

derivative contract market; 

(iv) Such designated contract market 

or swap execution facility has 

established position limits for such 

commodity derivative contract; and 

(v) Such designated contract market 

or swap execution facility has at least 

one year of experience and expertise 

administering position limits for such 

commodity derivative contract. 

(2) Any application process that is 

established by a designated contract 

market or swap execution facility shall 

require, at a minimum, the information 

required under § 150.7(d). 

(3) Under any application process 

established under this section, a 

designated contract market or swap 

execution facility shall: 

(i) Require each person intending to 

exceed position limits to submit an 

application, and to reapply at least on 

an annual basis by updating that 

application, to file the supplemental 

reports required under § 150.7(e), and to 

receive notice of recognition from the 

designated contract market or swap 

execution facility of a position as a bona 

fide hedge in advance of the date that 

such position would be in excess of the 

limits then in effect pursuant to section 

4a of the Act; 

(ii) Notify an applicant in a timely 

manner if a submitted application is not 

complete. If the applicant does not 

amend or resubmit such application 

within a reasonable amount of time after 

notification from the designated 

contract market or swap execution 

facility, the designated contract market 

or swap execution facility may reject the 

application; 

(iii) Inform an applicant within ten 

days of receipt of such application by 

the designated contract market or swap 

execution facility that: 

(A) The derivative position for which 

a complete application has been 

submitted has been recognized by the 

designated contract market or swap 

execution facility as a bona fide hedge, 

and the details and all conditions of 

such recognition; 

(B) The application is rejected, 

including the reasons for such rejection; 

or 

(C) The designated contract market or 

swap execution facility has asked the 

Commission to consider the application 

under paragraph (a)(6) of this section; 

and 

(iv) Have the authority to revoke, at 

any time, any recognition issued 

pursuant to this section if it determines 

the position no longer complies with the 

filing requirements under paragraph 

(a)(2) of this section. 

(4) An applicant’s derivatives position 

shall be deemed to be recognized as a 

bona fide hedge at the time that a 

designated contract market or swap 

execution facility notifies an applicant 

that such designated contract market or 

swap execution facility will recognize 

such position as a bona fide hedge. 

(5) A designated contract market or 

swap execution facility that elects to 

process bona fide hedge applications 

shall file new rules or rule amendments 

pursuant to part 40 of this chapter, 

establishing or amending requirements 

for an applicant to file a report with the 

Commission pursuant to § 150.7, and 

file a copy of such report with such 

designated contract market or swap 

execution facility when such applicant 

owns or controls a derivative position 

that such designated contract market or 

swap execution facility has recognized 

as a bona fide hedge, and for such 

applicant to report the offsetting cash 

positions. Such rules shall require an 

applicant to update and maintain the 

accuracy of any such report. 

(6) A designated contract market or 

swap execution facility may ask the 

Commission to consider any application 

made under this section. The 

Commission may, in its discretion, agree 

to or reject any such request by a 

designated contract market or swap 

execution facility; provided that, if the 

Commission agrees to the request, it will 

have 10 business days from the time of 

the request to carry out its review. 

(b) Recordkeeping. (1) A designated 

contract market or swap execution 

facility that elects to process bona fide 

hedge applications under this section 

shall keep full, complete, and 

systematic records, which include all 

pertinent data and memoranda, of all 

activities relating to the processing of 

such applications and the disposition 

thereof, including the recognition of any 

derivative position as a bona fide hedge, 

the revocation or modification of any 

recognition, the rejection by the 

designated contract market or swap 

execution facility of an application, or 

withdrawal, supplementation or 

updating of an application. Included 

among such records shall be: 

(i) All information and documents 

submitted by an applicant in connection 

with its application; 

(ii) Records of oral and written 

communications between such 

designated contract market or swap 

execution facility and such applicant in 

connection with such application; and 

(iii) All information and documents in 

connection with such designated 

contract market’s or swap execution 

facility’s analysis of and action on such 

application. 

(2) All books and records required to 

be kept pursuant to this section shall be 

kept in accordance with the 

requirements of § 1.31 of this chapter. 

(c) Reports to the Commission. (1) A 

designated contract market or swap 

execution facility that elects to process 

bona fide hedge applications under this 

section shall submit to the Commission 

a report for each week as of the close of 

business on Friday showing the 

following information: 

(i) The disposition of any application, 

including the recognition of any 

position as a bona fide hedge, the 

revocation or modification of any 

recognition, as well as the following 

details: 

(A) The date of disposition, 

(B) The effective date of the 

disposition, 

(C) The expiration date of any 

recognition, 

(D) Any unique identifier assigned by 

the designated contract market or swap 

execution facility to track the 

application, 

(E) Any unique identifier assigned by 

the designated contract market or swap 

execution facility to a bona fide hedge 

recognized under this section; 

(F) The identity of the applicant, 

(G) The listed commodity derivative 

contract to which the application 

pertains, 

(H) The underlying cash commodity, 

(I) The maximum size of the 

commodity derivative position that is 

recognized by the designated contract 

market or swap execution facility as a 

bona fide hedge, 

(J) Any size limitation established for 

such commodity derivative position on 

the designated contract market or swap 

execution facility, and 

(K) A concise summary of the 

applicant’s activity in the cash market 

for the commodity underlying the 

position for which the application was 

submitted. 

(2) Unless otherwise instructed by the 

Commission, a designated contract 

market or swap execution facility that 

elects to process bona fide hedge 

applications shall submit to the 

Commission the information required 

by paragraph (c)(1) of this section, as 

follows: 

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Federal Register / Vol. 81, No. 113 / Monday, June 13, 2016 / Proposed Rules 38513 

(i) As specified by the Commission on 

the Forms and Submissions page at 

www.cftc.gov; 

(ii) Using the format, coding structure, 

and electronic data transmission 

procedures approved in writing by the 

Commission; and 

(iii) Not later than 9:00 a.m. Eastern 

time on the third business day following 

the date of the report. 

(d) Review of applications by the 

Commission. (1) The Commission may 

in its discretion at any time review any 

bona fide hedge application submitted 

to a designated contract market or swap 

execution facility under this section, 

and all records required to be kept by 

such designated contract market or 

swap execution facility pursuant to 

paragraph (b) of this section in 

connection with such application, for 

any purpose, including to evaluate 

whether the disposition of the 

application is consistent with the Act. 

(i) The Commission may request from 

such designated contract market or 

swap execution facility records required 

to be kept by such designated contract 

market or swap execution facility 

pursuant to paragraph (b) of this section 

in connection with such application. 

(ii) The Commission may request 

additional information in connection 

with such application from such 

designated contract market or swap 

execution facility or from the applicant. 

(2) If the Commission preliminarily 

determines that any anticipatory hedge 

application is inconsistent with the 

filing requirements of § 150.11(a)(2), the 

Commission shall: 

(i) Notify such designated contract 

market or swap execution facility and 

the applicable applicant of the 

deficiencies identified by the 

Commission; and 

(ii) Provide them with 10 business 

days in which to provide the 

Commission with any supplemental 

information. 

(3) If the Commission determines that 

the anticipatory hedge application is 

inconsistent with the filing 

requirements of § 150.11(a)(2), the 

Commission shall notify the applicant 

and grant the applicant a commercially 

reasonable amount of time to liquidate 

the derivative position or otherwise 

come into compliance. This notification 

will briefly specify the specific 

provisions of the filing requirements of 

§ 150.11(a)(2), with which the 

application is, or appears to be, 

inconsistent. 

(e) Delegation of authority to the 

Director of the Division of Market 

Oversight. (1) The Commission hereby 

delegates, until it orders otherwise, to 

the Director of the Division of Market 

Oversight or such other employee or 

employees as the Director may designate 

from time to time, the authority: 

(i) In paragraph (a)(6) of this section 

to agree to or reject a request by a 

designated contract market or swap 

execution facility to consider a bona 

fide hedge application; 

(ii) In paragraph (c) of this section to 

provide instructions regarding the 

submission to the Commission of 

information required to be reported by 

a designated contract market or swap 

execution facility, to specify the manner 

for submitting such information on the 

Forms and Submissions page at 

www.cftc.gov, and to determine the 

format, coding structure, and electronic 

data transmission procedures for 

submitting such information; 

(iii) In paragraph (d)(1) of this section 

to review any bona fide hedge 

application and all records required to 

be kept by a designated contract market 

or swap execution facility in connection 

with such application, to request such 

records from such designated contract 

market or swap execution facility, and 

to request additional information in 

connection with such application from 

such designated contract market or 

swap execution facility or from the 

applicant; and 

(iv) In paragraph (d)(2) of this section 

to determine that it is not appropriate to 

recognize a derivative position for 

which an application for recognition has 

been submitted as a bona fide hedge, or 

that the disposition of such application 

by a designated contract market or swap 

execution facility is inconsistent with 

the Act, and, in connection with such a 

determination, to grant the applicant a 

reasonable amount of time to liquidate 

the derivative position or otherwise 

come into compliance. 

(2) The Director of the Division of 

Market Oversight may submit to the 

Commission for its consideration any 

matter which has been delegated in this 

section. 

(3) Nothing in this section prohibits 

the Commission, at its election, from 

exercising the authority delegated in 

this section. 

Appendices A Through D to Part 150 

[Reserved] 

■ 12. Add reserved appendices A 

through D to part 150. 

■ 13. Add appendix E to part 150 to 

read as follows: 

Appendix E to Part 150—Guidance 

Regarding Exchange-Set Speculative 

Position Limits 

This appendix provides guidance 

regarding § 150.5, as follows: 

Guidance for designated contract 

markets. (1) Until a board of trade has 

access to sufficient swap position 

information, a board of trade need not 

demonstrate compliance with Core 

Principle 5(B) with respect to swaps. A 

board of trade has access to sufficient 

swap position information if, for 

example: 

(i) It has access to daily information 

about its market participants’ open swap 

positions; or 

(ii) It knows, including through 

knowledge gained in surveillance of 

heavy trading activity occurring on or 

pursuant to the rules of the designated 

contract market, that its market 

participants regularly engage in large 

volumes of speculative trading activity, 

that would cause reasonable 

surveillance personnel at an exchange to 

inquire further about a market 

participant’s intentions or open swap 

positions. 

(2) When a board of trade has access 

to sufficient swap position information, 

this guidance is no longer applicable. At 

such time, a board of trade is required 

to demonstrate compliance with Core 

Principle 5(B) with respect to swaps. 

Guidance for swap execution 

facilities. (1) Until a swap execution 

facility that is a trading facility has 

access to sufficient swap position 

information, the swap execution facility 

need not demonstrate compliance with 

Core Principle 6(B). A swap execution 

facility has access to sufficient swap 

position information if, for example: 

(i) It has access to daily information 

about its market participants’ open swap 

positions; or 

(ii) If it knows, including through 

knowledge gained in surveillance of 

heavy trading activity occurring on or 

pursuant to the rules of the swap 

execution facility, that its market 

participants regularly engage in large 

volumes of speculative trading activity 

that would cause reasonable 

surveillance personnel at an exchange to 

inquire further about a market 

participant’s intentions or open swap 

positions. 

(2) When a swap execution facility 

has access to sufficient swap position 

information, this guidance is no longer 

applicable. At such time, a swap 

execution facility that is a trading 

facility is required to file rules with the 

Commission to demonstrate compliance 

with Core Principle 6 (B). 

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38514 Federal Register / Vol. 81, No. 113 / Monday, June 13, 2016 / Proposed Rules 

1See CEA sections 4c(a)(5) and 4c(a)(6). 

2As noted in footnote 127 of the preamble, from 

June 15, 2011 to June 15, 2012 ICE Futures U.S. 

received 142 exemption applications, 92 of which 

were granted. From November 1, 2010 to October 

31, 2011 the Market Surveillance Group from the 

Chicago Mercantile Exchange (CME) Regulation 

Department approved 420 exemption applications 

for products traded on the CME and the Chicago 

Board of Trade. This is old data, but one could 

reasonably predict that the number of applications 

have increased over time and will continue to 

increase in the future as trading levels increase. 

Given its current resources, the CFTC is not in a 

position to timely process the hundreds of 

applications that likely will be filed with the 

exchanges each year. 

Issued in Washington, DC, on May 27, 

2016, by the Commission. 

Christopher J. Kirkpatrick, 

Secretary of the Commission. 

Note: The following appendices will 

not appear in the Code of Federal 

Regulations. 

Appendices To Position Limits for 

Derivatives: Certain Exemptions and 

Guidance—Commission Voting 

Summary, Chairman’s Statement, and 

Commissioner’s Statement 

Appendix 1—Commission Voting Summary 

On this matter, Chairman Massad and 

Commissioners Bowen and Giancarlo voted 

in the affirmative. No Commissioner voted in 

the negative. 

Appendix 2—Statement of Chairman 

Timothy G. Massad 

Today, the CFTC has taken a significant 

step toward finalizing its rules on position 

limits this year. 

The supplemental rule we have 

unanimously proposed today would ensure 

that commercial end-users can continue to 

engage in bona fide hedging efficiently for 

risk management and price discovery. It 

would permit the exchanges to recognize 

certain positions as bona fide hedges, subject 

to CFTC oversight. 

For years, exchanges have worked with the 

CFTC’s general definition of a ‘‘bona fide 

hedging position’’ to grant these exemptions 

to exchange-set limits. Under this 

supplemental proposal, they would do so for 

federal limits, subject to strict oversight by 

the CFTC. Today’s action comes after 

listening closely to the concerns of market 

participants, and in particular commercialend users, who use these markets every day 

to hedge commercial risk. Today’s proposal 

would also make some helpful clarifications 

to definitions used in our earlier proposal, 

including the definition of ‘‘bona fide 

hedging position,’’ to conform it to the 

statutory language. 

This proposal is a critical piece of our 

effort to complete the position limits rule this 

year. Another key piece of that effort was the 

Commission’s 2015 proposal to streamline 

the process for waiving aggregation 

requirements when one entity does not 

control another’s trading, even if they are 

under common ownership. We are also 

working to review exchange estimates of 

deliverable supply so that spot month limits 

may be set based on current data. 

Federal position limits for agricultural 

contracts have been in place in our markets 

for decades, and exchange-set position limits 

for most other physical commodity contracts 

have been in place for years. It is critical that 

we fulfill our statutory responsibility to 

adopt a position limits rule. As I have said 

previously, we appreciate the importance 

and complexity of the issues surrounding the 

position limits rule. No current 

Commissioner was in office when these rules 

were proposed, and therefore we have taken 

the time to listen to market participants and 

consider the proposals very carefully. 

I thank our staff for their excellent work on 

this proposal. I also thank my fellow 

Commissioners Bowen and Giancarlo for 

their input and support. And I look forward 

to hearing the views of market participants 

and to completing a position limits rule this 

year. 

Appendix 3—Statement of Commissioner J. 

Christopher Giancarlo 

I support issuing for public comment 

today’s proposal to supplement and revise 

the Commission’s 2013 proposed rule to 

establish federal position limits for certain 

core referenced futures, options and swaps 

contracts. The supplemental proposal 

appears responsive to a broad range of public 

comments. I believe it is a positive step 

forward in devising a final rule that will take 

into account certain practical realities 

associated with administering a workable 

position limits regime. 

The proposal appropriately recognizes that 

most exchanges do not have access to 

sufficient swap positon information to 

effectively monitor swap position limits. If 

adopted, it would seem to relieve designated 

contract markets (DCMs) and swap execution 

facilities (SEFs) from setting and monitoring 

exchange limits on swaps until such time as 

DCMs and SEFs have access to data that is 

necessary to be able to do so. Position limits 

for swaps would still be set and monitored 

by the CFTC. The proposal simply 

acknowledges that the Commission cannot 

require exchanges to do the impossible. 

The proposal also recommends changes to 

the definitions of ‘‘bona fide hedging 

position,’’ ‘‘futures equivalent,’’ ‘‘intermarket 

spread position’’ and ‘‘intramarket spread 

position.’’ The elimination of the incidental 

test and the orderly trading requirement from 

the general definition of bona fide hedging 

position makes sense as the incidental test is 

already included in the economically 

appropriate test and the orderly trading 

requirement is addressed in other provisions 

of the Commodity Exchange Act (CEA).1

Further, as discussed in the preamble, 

because the meaning of the orderly trading 

requirement in the context of over-thecounter swaps markets is unclear, those 

markets will benefit from greater precision by 

its removal. The proposed amendments to 

the definitions of ‘‘futures equivalent,’’ 

‘‘intermarket spread positon’’ and 

‘‘intramarket spread position’’ appear to be 

helpful clarifications. I look forward to 

public comment on whether the proposed 

changes are appropriate. 

Importantly, the proposal would also allow 

certain spread exemptions from federal 

position limits. It would establish a process 

to permit exchanges to recognize exemptions 

from exchange and federal position limits for 

non-enumerated bona fide hedging positions 

(NEBFH) and spread positions. The proposal 

would also provide an expedited process for 

exchange recognition of enumerated 

anticipatory bona fide hedges. 

Exchanges are in the best position to 

initially recognize the foregoing exemptions 

from position limits. They have both the 

expertise and the resources 2 to perform this 

task in a responsible way as demonstrated by 

the long history of DCMs analyzing and 

granting requests for NEBFH exemptions in 

the context of exchange-set limits. Moreover, 

the CFTC has a long history of overseeing the 

performance of DCMs in doing so. In 

addition, DCMs already have a long-existing 

framework in place for recognizing 

exemptions from exchange-set limits with 

which market participants are well familiar. 

The supplemental proposal, when 

incorporated into a final rule, would build 

upon the existing framework for exchange-set 

limits. It also would lower unreasonable 

burdens on market participants under the 

Commission’s 2013 proposal, including 

provisions that would have required hedge 

exemption applicants to file duplicative 

requests with both the CFTC and the 

exchanges. 

In short, the supplemental proposal 

leverages exchange expertise and resources to 

enable exemptions to be granted in an 

efficient and timely manner without 

sacrificing market integrity. The Commission 

would remain the ultimate arbiter of 

exemptions from position limits by retaining 

the authority to review and reverse any 

exchange-granted exemption. 

I commend Commission staff for their 

responsiveness to broad-based concerns of 

market participants. I appreciate the 

professionalism of my fellow commissioners 

in persevering to make this rule more 

workable. I look forward to taking additional 

steps to ensure that the practical issues raised 

by the agricultural and end-user communities 

are addressed in the final rule. 

Now and always, prosperity requires 

durable and vibrant markets. We must 

balance regulatory burdens with clear 

economic benefits if we are to maintain 

liquid commodity hedging markets that 

support our American way of life. 

[FR Doc. 2016–12964 Filed 6–10–16; 8:45 am] 

BILLING CODE 6351–01–P 

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